The GDP deflator

• Definition:– GDP deflator = nominal GDP/real GDP

• A by-product of measuring real GDP

• Provides a measure of “average” prices in the economy

• Sometimes called implicit price deflator

Example:Calculating the GDP Deflator

2nd Qtr 1998 3rd Qtr 1998

Nominal GDP 8,440.6 8,526.5

(2) Real GDP 7,498.6 7,559.5

GDP Deflator(1)/(2)

1.126 1.128

A measure of the inflation rate

• Inflation rate: the percent change in the deflator from one period to the next

• (Pt - Pt-1)/Pt-1 stated in percent

• (1.128 - 1.126)/1.126 = .002 or .2 percent

• At an annual rate this is .8 percent as stated in the WSJ news story

Recap of our discussion of GDP

• Enough now to read and do “critical thinking” about the typical news story

• But remember that GDP is not perfect• misses things: Home Work (two words),

underground economy

• not the only measure of well-being

• For international comparisons, we must take account of exchange rates and “purchasing power” differences in different countries

Consumer price index (CPI)

• based on a fixed market basket of goods and services that a “typical” person purchases

• How much more does that market basket cost this year than last year?– Answer (in percentage terms) is the inflation rate using the

CPI

– Example 50 cartons of milk, 300 cookies

– 1998: 2.00x50 + 1x300 = 400

– 1997: 1.50x50 + .5x300 = 225

– 400/225 = 1.78: inflation rate would be 78%

CPI Inflation Bias

• Many complain that the CPI gives an upward biased measure of inflation – misses quality improvements– market basket changes

• indexing social security makes this an important public policy issue– commission chaired by Michael Boskin of Stanford

found the bias was about 1 percent (maybe larger)

How do inflation rates based on the CPI and GDP deflator compare?

20_07

INFLATION RATE

(PERCENT PER YEAR)

1960 1970 1980 1990 20001965 1975 1985 1995

12.5

10.0

7.5

5.0

2.5

15.0

CPI

GDPdeflator

Unemployment Rate

• A major economy-wide labor market indicator

• cyclical

• frictional and structural

• concept of natural unemployment rate– natural does not mean “good”

As stated in this WSJ article, the October unemployment rate is to

be released tomorrow

Other Economy-Wide Labor Market Indicators

• Employment (total number of jobs)

• Labor Force Participation Rate

• Employment-To-Population Ratio

21_2

Employed (126.7)

Labor force (133.9)

Working age population (200.5)

Total population (265.5)

Three Labor Market Indicators

UnemployedUnemployment rate =

Labor force

Employed

Labor force

(7.2)7.2

(7.2) + (126.7)133.9

(7.2) + (126.7)FPO

Unemployed(7.2)

Working age but notin labor force (66.6)(in school, retired, or

performing unpaid workat home)

Too young to workor institutionalized

(65.0)

= 5.4 percent

Labor force participation rate = 133.9

(7.2) + (126.7) +200.5

(66.6)

= 67 percent

(126.7)

Employment-to-population ratio = 126.7

(7.2) + (126.7) +200.5

(66.6)

= 63 percent

Working age population

Working age population

= =

= =

= =

Unemployment data are collected by the U.S. Department of Labor

• Let’s take a look at the DOL web page to see what’s happening

• You can enter through Econ1 web page

Employment to Population Ratios21_3

PERCENT

90

80

70

60

50

40

301950 1975 19901970 198519651960 1980 19951955

Men

Total

Women

unemployment 21_4

1987 Normal

Job losers Job leavers Entrants

1992 Cyclical

high

1989 Cyclical

low

7

6

5

4

3

2

1

0

PERCENT OF LABOR FORCE

Three types of unemployment

Duration of Unemployment21_5

1987 Normal

More than 26 weeks

5 to 26 weeks

Less than 5 weeks

1992 Cyclical high

1989 Cyclical low

7

6

5

4

3

2

1

0

PERCENT OF LABOR FORCE

International Comparisons of Unemployment Rates (1996)

21A

U.S. France U.K.Germany Italy CanadaJapan

12

10

8

6

4

2

0

PERCENT

Preview of Coming Attractions

• Next Four Lectures: Long Run Fundamentals and Economic Growth– Labor (Ch 21) partly covered already– Capital (Ch 22) try to read for next lecture– Technology (Ch 23)– Money (Ch 24)

• Then Economic Fluctuations• Then Economic Policy

End of Lecture