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1 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
INTRODUCTION
Chapter 2
The Data of Macroeconomics
September 11, 2012
2 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
THERE ARE THREE KEY AGGREGATES
1. Measures of economic activity or income:
GDP and GNP
2. Price level
3. Unemployment
3 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
1. MEASURES OF ECONOMIC ACTIVITY OR INCOME: GDP AND GNP
Gross Domestic Product (GDP) – measures what is
produced domestically (irrespective of ownership);
domestic economic activity
Gross National Product (GNP) — measures total
income earned by nationals domestically or abroad;
relates to a country’s standard of living (but ignores
inequality; quality of life)
GNP = GDP - Net Income of Foreigners
4 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Nominal vs. Real GDP
Nominal GDP — in current dollars; changes due to
changes in real production/income and price levels.
Nominal
where, is a final good or service produced
domestically and is its price. All at time t.
Real GDP — in constant dollars; should only reflect
changes in real production.
Real
Base year 0
5 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Exercise
Calculating Real and Nominal GDP
2007 2008 2009 P Q P Q P Q
Good A $30 900 $31 1000 $36 1050 Good B $100 192 $102 200 $100 205
a) Calculate nominal GDP for each year
b) Compute real GDP in each year using 2006 as the base year
6 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
GDP Deflator
Methods to calculate GDP
Value Added Method
Income method
Expenditure method
Ex. Circular flow diagram
An Identity:
Income = Expenditure components of GDP
7 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Circular Flow Diagram
Expenditure equals Income because every dollar spent by a
buyer becomes income to the seller
8 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Calculating Real GDP
a)
b) Chain-Weighted Real GDP
Over time, relative prices change, so the base year
should be updated periodically.
Chain-weighted real GDP updates the base year
every year, so it is more accurate than constant-
price GDP.
9 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Identifications
Nominal GDP measures the current $ value of the
output of the economy.
Real GDP measures output valued at constant prices.
The GDP deflator measures the price of output
relative to its price in the base year
GDP or GNP is a flow variable
10 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Other Measures
GNP=GDP-Net Income of Foreigners NNP =GNP-Depreciation National Income (NI)=NNP-Indirect business taxes
Personal Income = National Income - Corporate Profits - Social Insurance Contributions - Net Interest + Dividends + Govt. Transfer to Individuals + Personal Interest Income Personal Disposable Income = Personal Income - Personal Tax
Payments
11 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Expenditure Components of GDP
Consumption (C)
The value of all goods and services bought by
households.
Includes: durable goods, nondurable goods, services
Investment (I)
Spending on [the factor of production] capital.
Spending on goods bought for future use
Includes: business fixed investment; residential fixed
investment; inventory investment
12 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Government Spending (G)
Includes: all government spending on goods and
services.
But excludes: transfer payments (e.g., unemployment
insurance payments). Because they do not represent
spending on goods and services.
Net Export (NX: X-M)
Export (X)
Import (M)
13 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Example: Components of GDP
Components Billion $ % of GDP
Consumption 762.0 55.7%
Investment 254.4 18.6%
Government 297.5 21.7%
Net Export 54.8 4%
GDP $1,368.7 100
14 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
2. PRICE LEVEL AND INFLATION
Price level
Stabilizing of the monetary system - Indirectly important.
There is no single measure of the price level.
Consumer Price Index (CPI)
an index measure of a the price of a bundle of
consumption goods
where, x represents goods in a typical consumer’s
basket. It changes from time to time.
16 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
GDP Deflator
Where, q is a domestically produced good or service
Inflation
It is the rate of change in the price level
17 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Difference between CPI and GDP Deflator
18 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Difference between CPI and GDP Deflator
CPI GDP Deflator
Based on prices of a basket of
goods and services
Based on prices of all goods and
services produced
Includes imported goods as
well as domestic ones
Based only on domestically
produced goods
Uses fixed weights of the
prices of goods (quantities are
fixed)
Uses changing weights of the
prices of goods (quantities
change w/ time)
21 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
3. UNEMPLOYMENT
Important policy issue — wasted resources (hence
lower aggregate standard of living); socially costly.
Each adult is categorized as either:
In Labor Force
Employed (E) — in paid work
Unemployed (U) — actively looking for
work
Not in labour force — none of the above
including discouraged workers
22 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Definitions
Labour force:
where E is the employment and U is the
unemployment
Unemployment Rate:
Participation Rate:
25 Chapter 2: The Data of Macroeconomics. ECON204. Fall 2012
Okun’s Law
Negative relationship between cyclical unemployment
and GDP
Change in the Unemployment rate
Any real GDP growth rate below 4% (for Canada) will
cause unemployment to increase
Notes:
Different countries, different definitions of E, U, and L
U may not be a good measure of wasted resources or
social costs
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