Chapter 1: The Data of Macroeconomics
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1 Chapter 1: The Data of Macroeconomics Econ206 - Francesc Ortega August 31, 2011
2 Outline 1. The GDP 2. The inflation rate 3. The unemployment rate Reading: Mankiw 7e, chapter 2
3 Definition The Gross Domestic Product (GDP) is the market value of all final goods and services produced (output) within a territory in a given period of time. Measured in current USD. Calculated by the Bureau of Economic Analysis: For example, US GDP 2011 (2nd quarter) = $15, 004 billion. Does not include home production or the informal economy.
4 Uses Used to define business cycles. A recession is declared after two quarters of falling (real) GDP. Also used as a rough comparison of well-being across time and space. For example, in 2009 GDP per capita in the US was $46,400, compared to $13,500 in Mexico (2009 USD, at purchasing power parity). Source: CIA Factbook. Caveat: overestimates gap in well-being between poor and rich countries. Most things are cheaper in poor countries. That is why we need to adjust for differences in purchasing power.
5 The output - expenditure identity GDP = C + I + G + NX The value of total production in final goods equals the value of total expenditure. The reason is that every market transaction has a buyer (who spends $X) and a seller (who receives $X in revenue). Buyers: Families, Firms, the Government or the Rest of the world. Unsold production. What happens if a firm produces 10 units but can only sell 7 in the current year? The remaining 3 units are considered as sales to oneself (inventories) that will be sold in the next year (and will not count toward next year s GDP).
6 The expenditure - income identity GDP = Salaries + Rents + Profits What do firms to with the revenue they collect? Repay factors of production for their services and rebate profits to their owners. The circular flow of income. Expenditure: Dollars flow from Households to Firms, in exchange for the goods produced by firms. Income: The same dollars flow from Firms to Households, in compensation for using their factors of production (labor and capital). The rules of national accounting ensure that GDP coincides when measured from the income or expenditure sides.
7 A simple example Consider a simple economy consisting of only one farm that produces oranges using only labor. The whole production is sold to families that consume them. In 2009 the farm produced 1000 kgs of oranges and sold them at $4 per kg. The value of total production (GDP) was $4000. Total spending was $4000. These are the sales of oranges to the public (Consumption). Total income was $4000. The farm paid $3500 to their orange pickers (Salaries) and netted $500 in profits.
8 Intermediate goods Besides factors of production, firms also use other goods in production. Intermediate goods are goods used in the production of other goods and services. Already incorporated in the value of final goods. Example: the value of a croissant already includes the value of the flour and butter. Alternative way to compute GDP: 1. Compute the value added of each firm as value of its output minus value of its intermediate goods. 2. GDP equals the sum of the value added of all firms in the economy.
9 Example value added A farmer grows a bushel of wheat and sells it to a miller for $1. VA = 1 0 = 1. The miller turns the wheat into flour and sells it to a baker for $3. VA = 3 1 = 2. The baker uses the flour to make a loaf of bread and sells it to an engineer for $6. The engineer eats the bread. VA = 6 3 = 3. Adding the value added of each firm we get total value added of $6. Note that the value of all final goods is also $6, given by the bread sold to consumers.
10 Real GDP and the Price Deflator Over the past century US GDP has grown enormously. But is this really due to more stuff being produced or simply higher prices for the same goods? A useful decomposition: GDP t = P t Y t. Real GDP (Y) is a measure of the aggregate quantity produced. The GDP Deflator (P) is a measure of the aggregate price of a country s production.
11 GDP US Gross Domestic Product: Bureau of Economic Analysis billions US dollars (10^9) year
12 GDP Price Deflator 1.20 US Aggregate Price Index: Bureau of Economic Analysis base year
13 Growth rates GDP t = P t Y t gt GDP = GDP t 1 = P t Y t 1 GDP t 1 P t 1 Y ( ) ( t 1 ) Pt Yt = P t 1 Y t 1 = (g P t + 1)(g Y t + 1) 1 = g P t + g Y t + g P t g Y t g P t + g Y t
14 Annual growth rates GDP and RGD On average, 6.6% and 3.4%, resp GDP and RGDP growth: BEA GDP RGDP percentage change year
15 Annual growth rates GDP Price Deflator On average, 3% annually Inflation rate: BEA GDP Deflator percentage change year
16 (Nominal) GDP Data on prices and quantities of all final goods (n) in the economy for several years (t) Compute GDP and its annual growth rate: GDP(t) = N p n (t)y n (t) n=1 = p 1 (t)y 1 (t) p N (t)y N (t) g GDP t = = GDP(t) GDP(t 1) 1 n p n(t)y n (t) n p n(t 1)y n (t 1) 1
17 Constant-price (real) GDP Let us pick a base year. Typically, the first year (t=0). The constant-price GDP and its growth rate are defined by Y cp (t) = n g Ycp t = p n (0)y n (t) n p n(0)y n (t) n p n(0)y n (t 1) 1 Each year s basket priced using the base year prices Note that relative prices (say, between goods 1 and 2) are constant over time For the base year, GDP and constant-price GDP coincide
18 Numerical example Consider an economy with two final goods and 4 periods. Respectively, for each year, the quantities of good 1 are: (1,2,4,4). The quantities of good 2 are (10,11,11,15). The prices of good 1 are (8,9,10,11) and the prices of good 2 are (1,1,2,2). 1. Organize the data neatly in a table. 2. Compute the GDP for each year. 3. Compute the (constant-price) RGDP using base year Compute the (constant-price) RGDP using base year Compute the respective GDP price deflators. 6. Compute the annual growth rates for each variable. 7. Build index variables.
19 Solution Data year pa pb ya yb Constant-price GDP base year year GDP CP_GDP CP_GDP Deflator Deflator Annual growth rates base year year GDP CP_GDP CP_GDP Deflator Deflator 2000 n.a. n.a. n.a. n.a. n.a INDEX base year year GDP CP_GDP CP_GDP Deflator Deflator
20 Chain-weighted (real) GDP The problem with keeping the base year constant is that relative prices become obsolete. For instance, the relative price of computers to tomatoes has fallen dramatically over the last three decades. As a result, the aggregation of these two goods based on 1980 prices would be misleading.
21 Chain-weighted (real) GDP The solution is an index with a moving base year. For example, with base year b(t) = t 1, g Ycw 2009 = n p n(2008)y n (2009) n p n(2008)y n (2008) 1 g Ycw 2010 = n p n(2009)y n (2010) n p n(2009)y n (2009) 1 Now easy to build an index. Just pick a reference year and initialize series at 100 (or at GDP in the base year).
22 Example Data year pa pb ya yb GDP CHAIN-WEIGHTED GDP Annual growth rates year CH_GDP 2000 n.a INDEX and RGDP ref. year year INDEX CH_GDP DEFLATOR
23 The official BEA data on real GDP Current-Dollar and "Real" Gross Domestic Product Annual Year GDP in billions GDP in billions GDP percent change based GDP percent change based of current dollars of chained 2005 dollars P(t) on current dollars on chained 2005 dollars perc.chg.p
24 Breakdown of GDP by Expenditure GDP = C + I + G + NX We classify all final goods according to who bought them Consumption (purchased by households): durable goods (cars, TVs), non-durable goods (food, clothing), services (dry cleaning, air travel). Investment (purchased of goods for future use, mostly by firms): business fixed investment (plants and equipment), residential fixed investment (new housing units by households), inventory changes (unsold production) Government spending on goods and services (infrastructures, salaries of public employees, Defense). Does not include transfer payments (unemployment benefits). Net exports (purchased by the rest of the world): value of exports of goods and services minus value of imports
25 The official BEA data on GDP by expenditure Table Gross Domestic Product (by Expenditure category) Last Revised on: July 29, Next Release Date August 26, 2011 Year Quarter II II II II USD Billions Share USD Billions Share Gross domestic product Personal consumption expenditures Goods Durable goods Nondurable goods Services Gross private domestic investment Fixed investment Nonresidential Structures Equipment and software Residential Change in private inventories Net exports of goods and services Exports Goods Services Imports Goods Services Government consumption expenditures Federal National defense Nondefense State and local
26 Net exports Net Exports: NX = EX IM def: the value of total exports (EX) minus the value of total imports (IM)
27 The inflation rate The inflation rate is the annual percentage increase in the aggregate price level (P) ( ) g P Pt P t 1 (t) = 100 % P t 1 The most common data for P is the GDP Deflator or the CPI
28 Consumer Price Index (CPI) Produced monthly by the Bureau of Labor Statistics (BLS) Based on the consumption basket of the typical household in the US Each month the BLS updates the cost of that same basket (Laspeyres price index) It is an index: cost basket in month t CPI(t) = 100 cost basket in base period % The inflation rate is then the growth rate of the CPI.
29 CPI basket The composition of the CPI s basket Food and bev. Housing Apparel Transportation Medical care Recreation 3.8% 17.4% Education Communication Other goods and services 6.2% 5.6% 3.0% 3.1% 15.1% 3.5% 42.4%
30 GDP Deflator versus CPI Inflation They represent different sets of goods. The Deflator includes all goods produced in the economy whereas the CPI only includes the goods consumed by the typical household. E.g. Deflator contains tanks and helicopters. CPI includes imported consumer goods that are not produced domestically. The basket of goods is fixed in the CPI but changes every year in the Deflator.
31 The CPI is more appropriate to measure changes in the cost of living for the typical household. But keep in mind that CPI inflation overstates slightly the increase in the cost of living. Since its basket is fixed it fails to capture consumers ability to substitute toward relatively cheaper goods. Also imperfect adjustments for quality improvements of existing goods and introduction of new goods.
32 Inflation rates Two measures of inflation in the U.S. CPI Percentage change from 12 months earlier GDP deflator
33 The unemployment rate The Bureau of Labor Statistics (BLS) runs a monthly household survey (the Current Population Survey). See Employed (E): someone currently working at a paid job Unemployed (U): not employed but looking for a job Labor force (LF): Employed + Unemployed? The Unemployment rate equals U LF = U U+E The labor force Participation rate equals LF/adult population In July 2011 the unemployment rate was 9.1% and the participation rate was 63.9%. The employment-population ratio 58.1%.
34 Exercise In May 2009 the US adult population was 243 million. The number of employed individuals was 141 million and unemployment was 15 million. Compute the labor force participation rate. Compute the unemployment rate. Currently the US economy is pulling out of a deep recession. The number of people that want to work is increasing faster than the number of people that are finding jobs. What is happening to the participation and unemployment rates?
35 US unemployment rate US unemployment rate June BLS Jun Year
36 The establishment survey The BLS also asks businesses how many workers are on their payrolls. Each month the Current Employment Statistics (CES) surveys 140,000 businesses and government agencies. Provides an additional measure of employment. Neither is perfect and occasionally they diverge. Also provides info on earnings of workers.
37 Annual growth rate Employment Two measures of employment growth Percentage change from 12 months earlier
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