Aggregate Output. Aggregate Output. Topics. Aggregate Output. Aggregate Output. Aggregate Output

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1 Topics (Sandard Measure) GDP vs GPI discussion Macroeconomic Variables (Unemploymen and Inflaion Rae) (naional income and produc accouns, or NIPA) Gross Domesic Produc (GDP) The value of he final goods and services produced in an economy during a given period Defining GDP: Three Approaches Defining GDP: Three Approaches 1) Final good 2) Value added 3) Income GDP: The final goods approach Firm 1: Seel Company Revenues from sales $100 Expenses (wages) $80 Profi Wha is GDP? $20 $310 or $210 Firm 2: Car Company Revenues from sales $210 Expenses $170 Wages $70 Seel purchases $100 Profi $40 Defining GDP Defining GDP Answer: $210 If boh firms are summed ($100 + $210) he $100 in seel is couned wice Couning only he final good (cars) includes he inermediae good (seel) Quesion for Discussion Quesion for Discussion Wha would GDP be if he firms merged? 1

2 Defining GDP: Three Approaches Defining GDP: Three Approaches 2) Value Added Approach Value added = value of producion - value of inermediae goods Seel No inermediae goods Value added = $100 Cars Inermediae goods (seel) = $100 Value added = $210 - $100 = $110 GDP ($210) = Value added seel ($100) + value added cars ($110) Defining GDP Final goods approach Sum of he value of final goods Sum of he value added along he producion chain Value added approach Defining GDP Approach 1 & 2 define GDP from he producion side 2

3 Defining GDP 3) GDP from he income side Consider Revenues afer paymen for inermediae goods Some pay indirec axes (sales axes) Some pay workers (labor income) Remainder o he firm (capial income) Defining GDP Defining GDP GDP from he income side GDP (income) = indirec axes + labor income + capial income GDP: Income Approach Firm 1: Seel Company Revenues from sales $100 Expenses (wages) $80 Profi $20 Firm 2: Car Company Revenues from sales $210 Expenses $170 Wages $70 Seel purchases $100 Profi $40 Income (seel) Labor = $80 Capial = $20 $100 Income (car) Labor = $70 Capial = $40 $110 GDP (income) = $100 + $110 = $210 The Composiion of GDP by Type of Income In Percen Labor income 66% Capial income 26% Indirec axes 8% Compared o: GDP(valueadded--$210) = valueaddedseel($100) + valueaddedcar ($110) 3

4 Defining GDP A Summary Defining GDP A Summary Oupu Approach = Income Approach Final goods & value added = sum of indirec axes + labor income + capial income Nominal & Real GDP Nominal & Real GDP Recall GDP = he value of final goods and services produced Value is he price of he final good Nominal & Real GDP Nominal & Real GDP Therefore, GDP = Price x Quaniy of final goods produced Quesions for Discussion Quesions for Discussion If price increases and quaniy remains consan, wha happens o he value of final oupu? Observaion Higher prices bias he GDP measuremen of producion upward over ime. Nominal & Real GDP (correcing for inflaion) One good economy Year Quaniy of Cars Price of Cars Nominal GDP $10,000 $100, $12,000 $144, $13,000 $169,000 4

5 Nominal & Real GDP (correcing for inflaion) One good economy Nominal GDP = P cars x Q cars Year Quaniy of Cars Price of Cars Nominal GDP(% increase) $10,000 $100,000 (--) $12,000 $144,000 (44%) $13,000 $169,000 (17.4%) Quesion Did he real oupu of cars increase 44% from 1991 o 1992? Calculaing Real GDP Calculaing Real GDP Real GDP = value of final goods in consan prices Real GDP in Unis Real GDP in Unis Producion of cars , ,000 (20% increase) ,000 (8.33% increase) Real GDP in 1992 $s Real GDP in 1992 $s Car Producion x 1992 Prices x $12,000 = $120, x $12,000 = $144,000 (20% increase) x $12,000 = $156,000 (8% increase) Noe: Nominal 1992 GDP = Real 1992 GDP Noe: Nominal 1992 GDP = Real 1992 GDP Calculaing Real GDP in Pracice Calculaing Real GDP in Pracice Accouning for all final goods Weighed average of he oupu of final goods Relaive prices serve as weighs Mus consider he change in relaive prices U.S. Real GDP is Real GDP in chained (1992) dollars 5

6 Nominal and Real U.S. GDP, Observaions The increase in real GDP is less han nominal GDP More variaion in real GDP han nominal GDP Synonyms for GDP Accouning Synonyms for GDP Accouning Nominal GDP Dollar GDP GDP in curren dollars Real GDP Synonyms for GDP Accouning Synonyms for GDP Accouning GDP in erms of goods GDP in consan dollars GDP adjused for inflaion GDP in 1992 dollars Technical Noes: For he Course Technical Noes: For he Course GDP growh in year -- rae of change in real GDP in year GDP growh = (y -y -1 )/y -1 Expansions -- periods of posiive growh Recessions -- periods of negaive growh (2 consecuive quarers) The Unemploymen Rae The Unemploymen Rae number unemployed ( U) Unemploymen Rae ( u ) = labor force ( L) Labor Force ( L ) = employed ( N) + unemployed( U) 6

7 Couning he Unemployed Couning he Unemployed Curren populaion survey 60,000 households monhly Employed -- job holders Unemployed -- job seekers Couning he Unemployed Couning he Unemployed 2004 (Sepember Bureau of Labor Saisics) Employed (E) Unemployed (U) 8 Labor Force (L) No in he labor force 76.5 Unemploymen rae 5.4% (U/L) Macro Terms Macro Terms Unemployed and Discouraged Workers labor force ( L) Paricipaion Rae = adul populaion (16+) Wha Do You Think? Wha Do You Think? Can he unemploymen rae rise when he number of employed increases? Change in he U.S. Unemploymen Rae versus U.S. GDP Growh Economic Policy Implicaions Economic Policy Implicaions If unemploymen is oo high -- high growh policy mus be pursued o reduce i If unemploymen is oo low -- low growh policy is required 7

8 Social Implicaions of Unemploymen Social Implicaions of Unemploymen Unemploymen raes and duraion vary by populaion groups Cerain groups incur a disproporionae share of he unemployed when unemploymen increases Unemploymen rae by Groups Adul men 5.4 Adul women 5.0 Teenagers 16.6 Whie 4.4 African American 10.3 Laino 7.1 The Inflaion Rae A susained rise in he price level Two Measures of he Price Level GDP Deflaor Consumer Price Index (CPI) The GDP Deflaor The GDP Deflaor Average price of final goods produced GDP deflaor in year = P nominal GDP P = Real GDP $Y = Y The GDP Deflaor The GDP Deflaor P is an index number P 1993 = (1992 = 100) Index numbers are used o measure rae of change over ime Rae of P P P - 1 inflaion = = % - 1 P The GDP Deflaor The GDP Deflaor P $ Y = Y $ Y = P Y 8

9 The Consumer Price Index (CPI) The Consumer Price Index (CPI) Average prices of goods consumed The CPI is no equal o he GDP deflaor Some final goods are sold o business, governmen, and foreigners Some consumer goods are impored The Consumer Price Index (CPI) The Consumer Price Index (CPI) Published monhly Involves several seps Seps in Calculaing he CPI Seps in Calculaing he CPI 1) Consumer expendiure survey o deermine a marke baske of iems 2) Bureau of labor saisics (BLS) field workers price he iems monhly (85 ciies, 22,000 sores) 3) A base period is chosen, currenly Seps in Calculaing he CPI Seps in Calculaing he CPI Price in ime period 4) CPI = 100 Base price ( ) 5) 1998 CPI = 163 ( = 100) Inflaion Rae, Using he CPI and he GDP Deflaor Change in he U.S. Inflaion Rae versus he U.S. Unemploymen Rae,

10 The Phillips Curve The Phillips Curve Low unemploymen --inflaion rae increases High unemploymen -- inflaion rae decreases Why Do Economiss Care Abou Inflaion? Why Do Economiss Care Abou Inflaion? Prices and wages do no rise proporionaely Inflaion creaes marke disorions due o: Regulaion Taxaion Uncerainy for business invesmen Wha Do Macroeconomiss Care Abou? The Cenral Quesion of Macroeconomics Wha deermines he level of aggregae oupu? Demand Supply Governmen, educaion, and savings Macroeconomic Analysis The Cenral Quesion of Macroeconomics The Cenral Quesion of Macroeconomics Wha deermines he level of aggregae oupu? Shor-run (a few years) -- demand Medium-run (10+ years) -- supply Long-run (50+ years) -- governmen, educaion, savings 10