Download - Measuring the US Economy FIN 30220: Macroeconomics

Measuring the US Economy

FIN 30220: Macroeconomics

U.S. GDP of $17 Trillion represents approximately one fifth of total worldwide production ($108 Trillion) and makes the United States the largest single country economy on the planet!!

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* Source: CIA FactbookNote: 2014 GDP estimates measured on a Purchasing Power Parity Basis

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GDP is the standard benchmark for economic well being. Is it a good indicator of well being?

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GDP Real GDP Real Per CapitaGDP

Real MedianHousehold Income

1950: $275B

2014: $17,555B

1950: $2,200B

2014: $16,200B

1950: $15,000

2014: $50,000

1950: $27,000

2014: $52,000

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2009 Dollars 2012 Dollars2009 Dollars

GDP is the standard benchmark for economic well being. Is it a good indicator of well being?

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Annual defense spending has grown from $35B in 1950 to $795B in 2009. Should this be subtracted out?

The service industry has grown from 30M employees in 1950 to 113M in 2009. Is this really “new activity”?

Should we count things like pollution as economic “bads”? How do we account for the added quality and convenience of new products and technologies?

*Source: Rethinking Progress

The Genuine progress indicator, or GPI, is a metric that has been suggested to replace, or supplement, gross domestic product (GDP) as a measure of economic growth. GPI is designed to take fuller account of the health of a nation's economy by incorporating environmental and social factors which are not measured by GDP.

The Satisfaction with Life Index was created by Adrian G. White, an analytic social psychologist at the University of Leicester, using data from a metastudy. It is an attempt to show life satisfaction in different nations.

Country SWL

#1 Denmark 273.33

#1 Switzerland 273.33

#3 Austria 260

#3 Iceland 260

#5 Bahamas 256.67

The US is ranked #23 with a score of 246.67 (tied with the United Arab Emirates and Venezuela)

China is ranked #82

Firms Households

Product Markets

Factor Markets

The Basic circular flow – real goods and services

Firms supply households with final goods

Households supply labor and capital to firms

To understand the US economy, we need to visualize how goods, services, and payments flow between sectors of the economy.

Firms Households

Product Markets

Factor Markets

Every flow of real goods and services is matched by an equal flow of payments in the opposite direction

Households Pay for goods and services

Firms pay wages, interest, profits

Households supply labor and capital to firms

Firms supply households with final goods

Firms Households

Factor Markets

Product Markets

Let’s leave out the flow of real goods for simplicity…the basic circular flow is payments from households to firms (payment for final goods and services) and from firms to households (payment for factor services). However, keep in mind that there has to be an equal flow in the opposite direction of real goods and services.

Firms Households

Factor Markets

Product Markets

Financial Markets

Now, we can add the financial sector (acting as a middleman between businesses and firms)

Net Household savings

Borrowing and stock issues by firms

Investment spending

Firms Households

Factor Markets

Product Markets

Financial Markets

Government

Now, add the public sector

Government Borrowing

Government Spending

Taxes

Transfers

Firms Households

Factor Markets

Product Markets

Financial Markets

Rest of WorldGovernment

Foreign Borrowing

Foreign Lending

Exports Imports

Now, add rest of the world

Firms Households

Product Markets


Exports Imports

Gross domestic product (GDP) measures the current market value of all goods and services produced within the borders of a country over a given time period.

For the US, GDP (on an annual basis) for the first quarter of 2015 was $17,655B

Therefore, in measuring GDP, we are concentrating on the product markets

Farmer A produces 1,000 bushels of Apples (Apples cost $10/bushel)

Farmer B produces 2,000 bushels of Oranges (Oranges costs $15/bushel)

Calculating GDP – a simple example. GDP Calculation

Farmer A:

1,000 Bushels@ $10/Bushel $10,000

Farmer B:

2,000 Bushels@ $15/Bushel $30,000

GDP $40,000

Suppose that Intel produces 1,000 computer chips (P = $100)

1000 Chips sold to Dell

Dell produces 1000 computers (P = $2,000)

Calculating GDP – the problem with intermediate goods.

GDP Calculation

1,000 computer chips @ $100

1,000 computers @ $2,000

$100,000

$2,000,000

GDP $2,100,000

Houston, we have a problem!




The problem with intermediate goods is that they create a “double counting” problem.

Intel reports the value of the computer chips they produced Dell also reports the value of the computer

chips (as a part of the computers they produced)

We have counted the computer chips twice!




Value added measures the value of the final product minus the value of all the materials that went into that final product

GDP Calculation (Value Added)


1,000 computers @ $2,000

$100,000

$2,000,000

GDP $2,000,000

- $100,000Materials Expense




Lets change the example up a bit… GDP Calculation (Value Added)


500 computers @ $2,000

$100,000

$1,000,000

GDP $1,000,000


Dell has 500 chips remaining in inventories

Is this correct?




Any materials purchased that haven’t been used need to be added back in as an investment expense GDP Calculation

(Value Added)


500 computers @ $2,000

$100,000

$1,000,000

GDP $1,050,000


Dell has 500 chips remaining in inventories

Inventory Investment $50,000

Suppose that Xerox produces 50 copiers (P = $5000)

50 Copiers sold to Dell


Lets change things up again…. GDP Calculation (Value Added)

50 copiers @ $5000

1,000 computers @ $2,000

$250,000

$2,000,000

GDP $2,000,000

- $250,000Equipment expense

Is this right?


50 Copiers sold to Dell


Dell now owns an asset (the copier) which needs to be added back in GDP Calculation

(Value Added)

50 copiers @ $5000

1,000 computers @ $2,000

$250,000

$2,000,000

GDP $2,250,000


Equipment Investment $250,000

Gross Domestic Product vs. Net Domestic ProductGross of depreciation expense

Net of depreciation expense

50 copiers @ $5000

1,000 computers @ $2,000

$250,000

$2,000,000

GDP $2,250,000


Equipment Investment (full value)

$250,000

50 copiers @ $5000

1,000 computers @ $2,000

$250,000

$2,000,000

NDP $2,225,000


Equipment Investment (depreciated value)

$225,000

Gross Domestic Product vs. Net Domestic ProductGross of depreciation expense

Net of depreciation expense

50 copiers @ $5000

1,000 computers @ $2,000

$250,000

$2,000,000

GDP $2,250,000


Equipment Investment (full value)

$250,000

GDP $2,250,000Depreciation -$25,000

NDP $2,225,000

For the US• GDP = $17.6T• NNP = $15.1T• Capital Stock = $41T

Depreciation = $2.5T (6%)

Lets put is all together…



200 Chips bought by households

1,300 Chips Bought by Dell45 Copiers Bought by DellDell Produces 1,000 Computers (P = $2,000) – sold to consumersLeaves 300 Chips in inventories

5 Copiers bought by households

GDP Calculation1,500 computer chips @ $100

$150,000

50 copiers @ $5000 $250,000

1,000 computers @ $2,000

$2,000,000

- $355,000Expenses

Equipment Investment $225,000


GDP $2,300,000

Firms Households

Product Markets


Exports Imports

We could go about this a different way…each good or service produced must be matched by an equal expenditure

GDP

GGDP C I G NX

Let’s recalculate using expenditures



200 Chips bought by households

1,300 Chips Bought by Dell45 Copiers Bought by DellDell Produces 1,000 Computers (P = $2,000) – sold to consumersLeaves 300 Chips in inventories

5 Copiers bought by households

GDP CalculationEquipment Investment $225,000


GDP $2,300,000

1,000 Computers @ $2,000

$2,000,000

$20,000

$25,0005 Copiers @$5,000

200 Chips @$100

Category Amount (B) % of Total

Consumption $11,973 68%

Gross Investment $2,890 16%

Government $3,207 18%

Net Exports -$515 -2%

GDP $17,555 100%

GDP: 2014Q3

The GDP report comes out during the last week of every month and gives a breakdown by expenditure category

Problem: What about foreign companies producing in the US or US companies located abroad? What defines an “American Good”?

In 1992, BMW built a production facility in Spartanburg, South Carolina – it employs 10,000 people and produced 297,326 units in 2013 (approx. $13B).

Nike began manufacturing sport shoes and apparel in Thailand in 1980. Currently Nike has 84 contract factories employing 75,000 people and producing $500M annually.

http://images.google.com/imgres?imgurl=http://dailygameplan.typepad.com/photos/uncategorized/bmw_logo_1.jpg&imgrefurl=http://dailygameplan.typepad.com/dgp/2005/06/bmw_sells_more_.html&h=380&w=380&sz=63&hl=en&start=2&tbnid=a0ifSOvUS61XeM:&tbnh=119&tbnw=119&prev=/images?q=bmw&svnum=10&hl=en&lr=&rls=GGLG,GGLG:2005-30,GGLG:en&sa=N

http://images.google.com/imgres?imgurl=http://mandatemedia.typepad.com/photos/uncategorized/nike.gif&imgrefurl=http://www.blueoregon.com/2005/07/just_do_it_call.html&h=152&w=300&sz=3&hl=en&start=1&tbnid=cDVj255S0S5fkM:&tbnh=56&tbnw=111&prev=/images?q=nike&dnum=20&svnum=10&hl=en&lr=&rls=GGLG,GGLG:2005-30,GGLG:en&sa=N

Gross Domestic Product vs. Gross National Product

Current market value of all goods and services produces within the borders of the US, regardless of ownership of the company

Current market value of all goods and services produces by citizens of the US, regardless of location of the company

If its produced in America, its an American good!

If its produced by an American, its an American good!

What defines an “American Good”?

BMW• Sales: $13B• Value Added: $5B

$3B paid to American labor $1B paid to Foreign labor $400M paid to US investors $600M Paid to foreign investors

Nike• Sales: $500M• Value Added: $200M

$50M Paid to Foreign labor $10M paid to American labor $40M paid to foreign investors $100M paid to American investors

GDP $5B

$0

GDP $5B

Nike’s output was produced outside the US

BMW’s output was produced inside the US





Problem: What about foreign companies producing in the US or US companies located abroad? What defines an “American Good”?





GNP $3B

$10M

GDP $3.51B

Paid as wages to US citizens

$400M Paid as profits to US investors

Paid as wages to US citizens

Paid as profits to US investors$100M





Alternatively….





GDP

$5B

$0

GDP $5B

Nike’s output was produced outside the US

BMW’s output was produced inside the US

+ $10M paid to American labor

$100M paid to American investors +

Income earned by Americans abroad

- $1B paid to Foreign labor

$600M paid to Foreign investors -

Income earned by foreigners in the US

GNP $3.51B

We could begin with GDP and add in Net Factor Payments (Income earned by Americans abroad minus income earned by foreigners in the US)





Firms Households

Factor Markets

GDP

A third way to approach this would be to realize that every dollar of value added will generate an equal dollars worth of income.

National Income

$17,599

+ Net Factor Payments- Depreciation

National Income

GDP$ 213

$14,845

$ 2,967

National Income by Source: 2014Q3

Category Amount(B) % of Total

Wages $9,241 62%

Proprietor’s Income $1,387 9%

Rental Income $647 4%

Income on Assets $2,178 14%

Transfer receipts $2,553 17%

Less Contributions - $1,161 6%

National Income $14,845 100%

Labor Share of Income

Capital Share of Income

Firms Households

Product Markets

Financial Markets

Rest of World

Government

National Income

Note that every dollar that’s earned in the US gets allocated to some purpose

NNI C I G CA

Firms Households

Financial Markets


Foreign Borrowing

Foreign Lending

Lastly, we have an accounting identity for the financial markets known as the flow of funds

NS I G T CA

Note that the accounting identities work together…that is, one identity implies another

GGDP C I G NX NFP NFP

GGNP C I G CA

Output equals expenditures

CA NX NFP

DEP DEPNNI C I G CA

N GI I DEP

Income equals Outlays

Note that the accounting identities work together…that is, one identity implies another

NNI C I G CA T T

NNI T C I G T CA

Income Equals Outlays

C C

NNI T C I G T CA

NI T C S

Flow of Funds

Government Deficit

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Last year, the US current account was -$380B. What does this mean?

In other words, the US is borrowing $1B per day from abroad! Should we be worried about this?

NCA NI C I G Total US Income Total US Spending

We can analyze this using the “Income Equals Outlays” Identity….

Or, we can analyze this using the “Flow of Funds” Identity….

CATGIS N

Domestic Saving

Public Borrowing

Private Borrowing

We are living beyond our means!

We are borrowing more that we are saving!

Lets take a look at the US economy from 1947 to 2008 …

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$243.1B(1947Q1)

$17,044B(2014Q1)

Average Annual Growth

ln 17,044 ln 243.1*100 6.34%

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However, remember the problem we ran into with the movie grosses. GDP (current market value of goods and services produced) isn’t really the same in 1947 as it is in 2014 because the dollar has lost a lot of its value (i.e. prices have gone up)

1947

Car: $1,500Gasoline: 23 cents/galHouse: $13,000Bread: 12 cents/loafMilk: 80 cents/galPostage Stamp: 3 cents

Car: $30,303Gasoline: 3.48 dollars/galHouse: $215,000Bread: $2.00 dollars/loafMilk: 3.50 dollars/galPostage Stamp: 49 cents

2014

We need to construct a “price index” to represent and average of prices over a wide variety of products. How do we do this?

The objective of a price index is to measure cost of living. To state this precisely, a price index measures the dollar cost of obtaining a fixed level of utility (happiness). Suppose at the current prices, you elect to buy 3 slices of pizza and 2 beers

Example:

$3.50 $2.00

The absolute dollar cost of your current happiness is (2)($3.50) + (3)($2.00) = $13

(2)($4.50) + (3)($2.20) = $15.60 ln 15.60 ln 13 *100 18%

Good Base Year Price (BY)

Base Year Quantity

Current Year Price (CY)

Inflation

Beer $3.50 2 $4.50 25%

Pizza $2 3 $2.20 10%

As prices change, we keep the quantities of each good constant (guaranteeing a constant level of utility)


Base Year Quantity


Inflation

Beer $3.50 2 $4.50 25%

Pizza $2 3 $2.20 10%

Base Year Expenditure: (2)($3.50) + (3)($2.00) = $13

Beer Expenditure Share: (2)($3.50)/$13 =.54Pizza Expenditure Share: (3)($2)/$13 = .46

Alternatively, we could write the price index in terms of relative dollars (relative to a base year) instead of absolute dollars (this is how its actually calculated).

4.50 2.20.54 .46 1.2

3.50 2.00CYP

3.50 2.00.54 .46 1.0

3.50 2.00BYP

(Or, 100)

(Or, 120)

ln 120 ln 100 *100 18%

The CPI is calculated by the Bureau of Labor Statistics (BLS) on a monthly basis

Education & Communication

5%

Tobacco & Smoking Products

1%

Recreation6%

Medical6%

Housing40%

Food & Beverage16%

Apparel5%

Personal Care4%

Transportation17%

The CPI is composed of 211 individual products over 38 geographic areas (8,018 total prices).

Consumer Price Index

When Calculating the Consumer Price Index, the expenditure shares remain constant!!!

Good Base Year Price (1983) Year 2013 Price Year 2014 Price

Housing $200 $780 $800

Transportation $90 $280 $300

Food $40 $190 $200

Apparel $30 $245 $250

Household Budget

2013

780 280 190 245.40 .30 .20 .10 4.25

200 90 40 30CPI

CPI inflation (2013 – 2014)

ln 4.43 ln 4.25 *100 4.15%

Or, 425

2014

800 300 200 250.40 .30 .20 .10 4.43

200 90 40 30CPI

( or, 443 )

Average CPI inflation

ln 443 ln 100*100 4.80%

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1983

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200 90 40 30CPI

( or, 100 )

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The Consumer Price Index (1948 – 2014)

Average Inflation = 3.54%

Note That expenditure shares do change over time, so the weights need to be updated periodically

Potential problem #1: Products change over time. Suppose you observe the following TV Prices

Price: $250Features: 27 inch

Cathode Ray TubeEnhanced Definition TVS-Video InputUniversal Remote

Price: $1,250Features: 42 inch

PlasmaHigh Definition TVS-Video InputUniversal Remote

$1,250 $250*100 400%

$250

2003

Note: The first plasma TV was released by Fijitsu 1n 1995. The 42’’ TV cost $14,999

2004

Is this a fair assessment of inflation?

Solution: Hedonic Price Adjusting

Price: $250Features: 27 inch

Cathode Ray TubeEnhanced Definition TVS-Video InputUniversal Remote

Price: $1,250Features: 42 inch

PlasmaHigh Definition TVS-Video InputUniversal Remote These three featured

are estimated to be worth $1000

These three featured are estimated to be worth $100

Hedonically Adjusted price = $1,250 – ($1,000 -$100) = $350

Potential Problem #2: What about housing? Consider the following examples

Option #1: Rent a $240,000 house

Option #2: Buy a $240,000 house with an interest only mortgage (5% per year)

Option #3: Buy a $240,000 house with a 30 year mortgage (5% per year)

$240,000(.05) = $12,000/yr. = $1,000/mo.

$1,288/mo.$1,000/mo.

One of these things is not like the other!





$1,288/mo.

$1,000/mo.

Difference = $288/mo.

OR

What if you put $288/mo. and put it in a savings account that earns 5% per year?

$240,000




$1,000/mo.OR

(This is pure cost of living)


$1,288/mo.

(This is cost of living plus investment in an asset)

Solution: In 1983, the BLS decided to focus entirely on rental markets for housing.

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Housing Prices

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Housing Inflation

Average Inflation Rate

Home Price Index: 4.40%Rental Index: 4.01%

Can you spot the housing bubble?

Potential Problem #3: Substitution

$3.50 $2.00

Recall that at the original prices, you elected to buy 3 slices of pizza and 2 beers

The cost of your happiness was (2)($3.50) + (3)($2.00) = $13

If beer increases in price to $4.50 (25% increase) and pizza increases to $2.20 (10% increase), suppose you alter your decision and buy 1 beer and 4 slices of pizza

(1)($4.50) + (4)($2.20) = $13.30

ln 13.30 ln 13 *100 2.2%



Inflation

Beer $3.50 $4.50 25%

Pizza $2 $2.20 10%



Inflation

Beer $3.50 $4.50 25%

Pizza $2 $2.20 10%

No Substitution:

Original Expenditure:

(2)($3.50) + (3)($2.00) = $13

(1)($4.50) + (4)($2.20) = $13.30

ln 13.30 ln 13 *100 2.2%

Substitution:

(2)($4.50) + (3)($2.20) = $15.60

Which measure of inflation is more realistic?

ln 15.60 ln 13 *100 18%

Solution: In 2000, the BLS introduced a “chain weighted CPI” that allows for this substitution between different goods. It’s thought to be a better gauge of inflation

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It is, however, very controversial…

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Average Inflation Rate

CPI: 2.31%CCPI: 2.06%

CPI Inflation Rate (2.31% per year)

CCPI Inflation Rate (2.06% Per Year)

Example: Suppose that you are a social security recipient. Let’s calculate your total payments received in social security payments under the different inflation measures from 2000 to 2014. (Assume you received $1,000 per month in 2000)

2 14$12,000 $12,000 1.0231 $12,000 1.0231 ... $12, 000 1.0231 $212,232

2 14$12,000 $12,000 1.0206 $12,000 1.0206 ... $12, 000 1.0206 $208,442

Difference = $3,790 ($270/yr.)

Now, consider that there are approximately 65 million social security recipients:

$3,790*65M = $246B ($18B/yr.)

An alternative to the consumer price index is the GDP Deflator.

Good Production (2014) Current Price (2014) Current Value

Housing 300 $550 $165,000

Transportation 500 $350 $175,000

Food 100 $260 $26,000

Apparel 200 $220 $44,000

Total = GDP (Current Dollars) $410,000

Suppose we have the following Data

Now, Suppose we revalue current GDP at, say, prices in 2009 (Call this the base year)

Good Production (2014) 2009 Price 2009 Value

Housing 300 $500 $150,000

Transportation 500 $300 $150,000

Food 100 $200 $20,000

Apparel 200 $200 $40,000

Total = GDP (2009 Dollars) $360,000

Current value of current production (2014)

$410,000 (Current Dollars)

Base year value of current production (Base year = 2009)

$360,000 (2009 Dollars)

We can use these two numbers to construct an implied relative price

$410,000 (Current Dollars)

$360,000 (2009 Dollars)= 1.14 (or, 114)

Note that the base year (2009) is 1 (or, 100) by definition

ln 114 ln 100*100 2.62%

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Note that the price index is still a weighted average of individual relative prices

Good Production (2014) 2009 Price 2009 Value 2014 Price

Housing 300 $500 $150,000 $550

Transportation 500 $300 $150,000 $350

Food 100 $200 $20,000 $260

Apparel 200 $200 $40,000 $220

Total = GDP (2009 Prices) $360,000

$150,000.41

$360,000

Housing Share of Real GDP

$150,000.41

$360,000

Transp. Share of Real GDP

$20,000.06

$360,000

Food Share of Real GDP

$40,000.12

$360,000

Apparel Share of Real GDP

$550 $350 $260 $220.41 .41 .06 .12 1.14

$500 $300 $200 $200P

(Or, 114)

With the implied weights, you can calculate the GDP deflator in a similar fashion as the CPI

Good Production (2013) 2009 Price 2013 Price

Housing 280 $500 $535

Transportation 490 $300 $310

Food 105 $200 $240

Apparel 170 $200 $216

$363,620

$342,000= 1.06 (or, 106)

Suppose we repeat for a different year to calculate an inflation rate

$140,000.41

$342,000


$147,000.43

$342,000


$21,000.06

$342,000


$34,000.10

$342,000


$535 $310 $240 $216.41 .41 .06 .12 1.06

$500 $300 $200 $200P

(Or, 106)

ln 114 ln 106 *100 7.27% Index Inflation

Value of GDP at 2013 Prices

Value of GDP at 2009 Prices

Good 2013 Price 2014 Price Inflation

Housing $535 $550 2.76%

Transportation $310 $350 12.10%

Food $240 $260 8.00%

Apparel $216 $220 1.83%

Now, the inflation rate incorporates price changes as well as expenditure share changes – a lot like the chained CPI!

$140,000.41

$342,000


$147,000.43

$342,000


$21,000.06

$342,000


$34,000.10

$342,000


2013

2014

$150,000.41

$360,000


$150,000.41

$360,000


$20,000.06

$360,000


$40,000.12

$360,000


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The GDP Deflator: 1948 - 2014

Infla

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Inflation with the GDP Deflator versus the CPI

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Average Inflation

CPI: 3.55%GDP Def.: 3.20%

Let’s enlarge this area

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What’s going on here?

Average Inflation

CPI: 2.30%GDP Deflator: 2.01%

Inflation with the GDP Deflator versus the CPI

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80

Oil Price Inflation

Recall that a large portion of our oil is imported and is therefore not a part of GDP. Which means its not a part of the GDP deflator!

The “core CPI” removes food and energy prices due to their excessive volatility.

Average Inflation

CPI: 2.30%Chain CPI: 2.06%GDP Deflator: 2.01%Core CPI: 1.95%

Lets get back to the US economy from 1947 to 2008 …

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 20120

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Billi

ons

of D

olla

rs

$243.1B(1947Q1)

$17,044B(2014Q1)

Average Annual Growth

ln 17,044 ln 243.1*100 6.34%

67

Lets use the consumer price index to adjust these nominal values to reflect year 2000 prices

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 20120

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

Billi

ons

of D

olla

rs

$17,044B2014Q1

Average Annual Real Growth

ln 12,129 ln 1,938*100 2.73%

67

$243.1B(1947Q1)

173$243.1 $1,938

21.7B B

173$17,044 $12,129

243.1B B

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 20120

2000

4000

6000

8000

10000

12000

14000Bi

llion

s of

200

0 D

olla

rs

$12,129B2014Q1

$1,938B(1947Q1)

Now, looking at real GDP over the last 67 years, we should see two basic features in the data

1) The US economy grows over time

2) The US doesn’t grow at a constant rate

GDP

Time

Trend (Average growth)

“Business Cycle” (deviations from average growth)

Here’s an exaggerated view of what we are talking about

GDP

Time


The business cycle is a repeated pattern of recessions followed by recoveries

Recession (Below Trend Growth)

Recovery (Above Trend Growth)

Peak

Trough

Peak

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 20120

2000

4000

6000

8000

10000

12000

14000

Billi

ons

of 2

000

Dol

lars

How can we best describe long run growth in the US? A linear trend describes growth as Dollars per year

1042 41.5GDP x

1,042

X=0 (Quarters)1947Q1


1042 41.5 180 8,512GDP

8,512

Quarterly Inflation Adjusted Dollar Growth

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 20120

2000

4000

6000

8000

10000

12000

14000Bi

llion

s of

200

0 D

olla

rs

How can we best describe long run growth in the US?An exponential trend describes growth as Dollars per year

.0072246 xGDP e

Quarterly Inflation Adjusted percentage growth


2,246


.007 1602246 6,883GDP e

6,883

Annu

al G

row

th R

ate

1950's 1960's 1970's 1980's 1990's 2000's1

2

3

4

5

Average Real Growth = 3%

Current Real Growth

An exponential trend assumes that the US has some constant annual rate of real economic growth (~3% per year). Note that actual growth varies even over long time periods.

0

1

2

3

4

5

6

Annu

al G

row

th R

ate

Actually, it looks like long term growth in the US actually has its own cycle...again, an exponential trend can’t capture this

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 20120

2000

4000

6000

8000

10000

12000

14000Bi

llion

s of

200

0 D

olla

rs

$12,129B2014Q1

$1,938B(1947Q1)

The HP trend allows trend growth to vary over time

The HP Trend solves this minimization problem

Here we have annualized growth rates of the HP trend and the Exponential trend

0

1

2

3

4

5

6

1957 1962 1967 1972 1977 1982 1987 1992 1997 2002

Exponential Trend Growth HP Trend Growth

Once we have identified the trend, we can subtract it out to leave the cycle component all by itself.

GDP

Time


Actual GDP

Trend GDP

*100Actual Trend

DeviationTrend

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 20120

2000

4000

6000

8000

10000

12000

14000Bi

llion

s of

200

0 D

olla

rs

.0072246 xGDP e

Quarterly Inflation Adjusted percentage growth


2,246


.007 1602246 6,883GDP e

6,883

7,328Actual

7,3286,883

7,328 6,883*100 6.5%

6,883Deviation

6.5%

We end up with a series that looks like this

% Deviation From Trend

Time

0

Trough

Peak Peak

Recession Recovery

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

-8

-6

-4

-2

0

2

4

6

Perc

enta

ge D

evia

tion

from

HP

Tren

d

Let’s look at the cycle component for the US

The US has had 11 Cycles since the World War II

1 2 3 4 5 6 7 8 9 10 11

Business Cycle Dates Duration (In Months)

Peak Trough Contraction (peak to trough)

Expansion (Previous trough to this peak)

Cycle (Peak from previous peak)

Nov 1948 Oct 1949 11 37 45

July 1953 May 1954 10 45 56

Aug 1957 April 1958 8 39 49

April 1960 Feb 1961 10 24 32

Dec 1969 Nov 1970 11 106 116

Nov 1973 March 1975 16 36 47

Jan 1980 July 1980 6 58 74

July 1981 Nov 1982 16 12 18

July 1990 March 1991 8 92 108

March 2001 Nov 2001 8 120 128

December 2007 June 2009 18 73 81

Average 13 55 68

The US has had 11 Cycles since the World War II

When we talk about “business cycle frequency, we are referring to cycles between 2 and 8 yrs.

Average (Months) Recession (Peak to Trough)

Expansion (Trough to peak)

Cycle ( Peak to Peak)

1854 – 2009 (33 cycles) 17.5 38.7 56.2

1854 – 1919 (16 cycles) 21.6 26.6 48.2

1919 – 1945 (6 cycles) 18.2 35.0 53.2

1945 – 2009 (11 cycles) 11.1 58.4 69.5

When we talk about “business cycle frequency, we are referring to cycles between 2 and 8 yrs.

The US has had 33 Cycles since the Civil War. On averages, in recent years, the recessions are getting shorter and the recoveries longer

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

-8

-6

-4

-2

0

2

4

6Pe

rcen

tage

Dev

iatio

n fr

om T

rend

It also seems that recently, the business cycle has become less severe in recent years.

1 2 3 4 5 6 7 8 9 10 11

1/1/1919 1/1/1939 1/1/1959 1/1/1979 1/1/1999

-40

-30

-20

-10

0

10

20

30

Great Depression WWII

In fact, look at the cycle now relative to the great depression era%

Dev

iatio

n fr

om tr

end

Indu

stria

l Pro

ducti

on

2007-01-01 2009-01-01 2011-01-01 2013-01-0112500

13000

13500

14000

14500

15000

15500

16000

16500

Nominal GDP Real GDP (2005 $s)

$13,326B

$14,253B$13,952B

$12,746B

$16,101B

$13,750B

Nominal GDP: -2%Real GDP: -4.5%Price: 2.5%

Nominal GDP: 15%Real GDP: 7.5%Price: 7.5%

Lets look at the last few years

2006-07-01 2008-07-01 2010-07-01 2012-07-01

-10

-8

-6

-4

-2

0

2

4

6

Average (Since 2000): 1.7%Average (Since 1947): 2.7%

1.7%

Recession Recovery

Growth rate below long run average Growth rate above long run average

2.7%

2007-01-01 2009-01-01 2011-01-01 2013-01-0112500.0

12700.0

12900.0

13100.0

13300.0

13500.0

13700.0

13900.0

Real GDP Trend Real GDP

% Deviation from Trend (Cycle)

GD

P

$13,326B

$12,994B

13,326 12,994*100 2.5%

12,994

% Deviation from Trend (Cycle)

$13,118B

$12,746B

Trend

12,746 13,118*100 2.8%

13,118

Actual

2007-01-01 2009-01-01 2011-01-01 2013-01-01

-4

-3

-2

-1

0

1

2

3

Recession Recovery

% D

evia

tion

from

tren

d G

DP

Dec. 2007“Peak”

June 2009“Trough”

2.5%

-2.8%

Download - Measuring the US Economy FIN 30220: Macroeconomics

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