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National Income & Business Cycles

ƒ There are three main measures of macroeconomic performance:

ƒ Gross Domestic Product (GDP), GNP, and others ƒ Inflation ƒ Unemployment

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2. Measuring Macroeconomic Performance 0

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.H\&RQFHSWV ƒ Gross domestic product (GDP) ƒ National income accounting ƒ Imputed value ƒ Nominal versus real GDP ƒ GDP deflator ƒ National income accounts identity ƒ Consumption

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ƒ Investment ƒ Government purchases ƒ Net exports ƒ Consumer price index (CPI) ƒ Labor force ƒ Unemployment rate ƒ Labor-force participation rate

• measures the ______ of all goods and services •

produced in a country (domestically). is also total ______ earned by domesticallylocated factors of production.

ƒ Definition: Gross Domestic Product (GDP) is the market value of all _____ goods and services produced within a country in its own currency and in a given period of time.

ƒ To measure GDP we use the National Income Accounting Identity : ___________________

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1. GDP by expenditure

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2. GDP by income 3. GDP by production (output)

ƒ durable goods ƒ non-durable goods

Computed __________ by the __________ ___________________ (_____)

ƒ services 4

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86FRQVXPSWLRQ $ billion Consumption Durables

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def1: spending on (the factor of production) capital. def2: spending on goods bought for future use.

% of GDP

$ 12,438.8

71.7 %

1,371.8

7.9

Nondurables

2,666.3

15.4

Services

8,400.6

48.4

Includes:

ƒ business fixed investment ƒ residential fixed investment ƒ inventory investment 6

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86,QYHVWPHQW $ billions

ƒ includes all government spending on goods and

% of GDP

services. Investment Business

$3,059.9 2,997.2

17.3 %

ƒ excludes transfer payments (e.g. unemployment insurance payments),

13.3

Residential

730.9

4.2

Inventory

685.9

4.0

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86*RYHUQPHQW6SHQGLQJ $ billions Govt spending

18.7%

1,234.0

7.1

Non-defense

498.4

2.9

Defense

735.6

4.2

2,011.0

11.6

- Federal

- State & local

ƒ def: the value of total exports (EX) minus the value of total imports (IM)

% of GDP

$3,245.0

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ƒ Circular flow • In every transaction, the buyer’s expenditure

•

becomes the seller’s income The sum of all _________ equals the sum of all __________.

ƒ Components of National Income 1. compensation for ____ – wages, salaries and other employment benefits (roughly 2/3% of NI in the US Æ has been falling) 2. compensation for ______ – interest, rents and profits. 12

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ƒ GDP = value of final goods produced

Suppose a firm

= sum of value added at all stages of prod.

ƒ produces $10 million worth of final goods

ƒ The goal is to attribute to each industry its

ƒ but only sells $9 million worth.

contribution to GDP without ______________

Does this violate the expenditure = output identity?

ƒ A firm’s value added is:

ƒ Unsold output goes into __________,

the value of its output

and is counted as “_________________”…

minus

the value of the intermediate goods the firm used to produce that output

In effect, we are assuming that firms __________________________.

Æ Y = C + I + G + NX

ƒ So, output ___ expenditure 14

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Country

ƒ Gross National Product (GNP): total income earned by the nation’s factors of production, regardless of where located

GNP

Bangladesh

ƒ Gross Domestic Product (GDP): total income earned by domestically-located factors of production, regardless of nationality.

122,061

111,879

9.1

Japan

6,041,592

5,867,154

3.0

China

7,305,440

7,318,499

-0.2

15,211,300

14,991,300

1.5

India

1,856,807

1,872,840

-0.9

Canada

1,705,545

1,736,050

-1.8

Greece

281,225

289,627

-2.9

Iraq

111,865

115,388

-3.1

Ireland

178,195

217,274

-18.0

United States

(GNP – GDP) = (factor payments from abroad) – (factor payments to abroad) 16

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GNP – GDP (% of GDP)

GDP

GNP and GDP in millions of current U.S. dollars

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ƒ GDP is the value of all final goods and services

2010

produced.

ƒ Nominal GDP measures these values using _______ prices. • changes in nominal GDP can be due to:

- changes in _____________ - changes in _____________ of output produced

ƒ Real GDP measure these values using the prices of a _____ year. • changes in real GDP can only be due to

2011

P

Q

P

Q

good A

$10

100

$12

120

good B

$100

50

$110

60

ƒ Compute nominal GDP in each year ƒ Compute real GDP in each year using 2010 as the base year.

- changes in ____________ 18

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± nominal GDP 2010: 2011:

real GDP 2010: 2011:

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3UDFWLFHSUREOHPSDUW Nom. GDP

Real GDP

GDP deflator

Inflation rate

2010

$6,000

$6,000

1

n.a.

2011

8,040

7,200

ƒ The inflation rate is the percentage increase in the overall level of prices.

ƒ One measure of the price level is the GDP Deflator, defined as GDP deflator =

Real GDP =

GDP deflator2010 =

Nominal GDP

GDP deflator2011 =

GDP deflator

Inflation rate2011 =

ƒ Inflation is the percentage change in the GDP deflator

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&KDLQ:HLJKWHG5HDO*'3 ƒ Over time, relative prices change, so the base

Inflation is a measure of changes in the price level.

year should be updated periodically.

ƒ In essence, chain-weighted real GDP updates the base year every year, so it is more accurate than constant-price GDP.

Definition: The rate of inflation is the percentage rate of change in the general price level from one period to the next.

ƒ Your textbook usually uses constant-price real GDP, because:

• the two measures are highly ____________. • constant-price real GDP is easier to compute. 24

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&RQVXPHU3ULFH,QGH[&3, ƒ Definition: The CPI is a ratio that shows the weighted value of a basket of goods (i.e., prices) relative to prices in a given _______ year.

1. CPI – consumer price index 2. PPI – producer price index

ƒ It is a measure of the overall level of prices ƒ Published by the ____________________ (___)

3. deflators – implicit measure of inflation

ƒ Used to

Æ already covered

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1. _______ consumers to determine composition of

Basket contains 20 pizzas and 10 compact discs.

the typical consumer’s _______ of goods.

2. Every ______ , collect data on prices of all items in the basket; compute cost of basket 2010 2011

3. CPI in any month equals

prices: pizza $10 $11

For each year, compute ƒ the cost of the basket

CDs $15 $15

ƒ the CPI (use 2010 as the base year) ƒ the inflation rate from the preceding year

Inflation is the ________________ in the CPI 28

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Food and bev.

Cost of basket 2010

CPI

Inflation rate

Housing

n.a.

Transportation

15.3%

Apparel

3.3%

2011

7.7%

5.8% 3.3% 3.7% 3.4%

Medical care

15.3%

Recreation Education

42.2%

Communication Other goods and services 30

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3URGXFHU3ULFH,QGH[33, ƒ measures the prices charged by __________ at

ƒ Substitution bias: • • ƒ Introduction of new goods: •

various stages of the production process; or “it measures the price of a typical basket of goods bought by firms.”

ƒ firms are surveyed instead of consumers. ƒ Problems • - Weights issue

ƒ Unmeasured changes in quality: •

ƒ Benefit • information on raw material prices 32

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&3,YV*'3'HIODWRU Differences between CPI and GDP deflator?

ƒ the basket of goods • CPI: _______________ • GDP deflator: ______________ ƒ prices of capital goods • __________ in GDP deflator (if produced

•

domestically) __________ CPI

ƒ prices of imported consumer goods • _____________ CPI • _____________ GDP deflator

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&DWHJRULHVRIWKHSRSXODWLRQ ƒ employed (E) working at a paid job

ƒ Each month the BLS conducts the “Current

ƒ unemployed (U)

Population Survey”

not employed but looking for a job

ƒ __________ people are interviewed to find out if they were:

• • •

ƒ labor force (LF) the amount of labor available for producing goods and services; all employed plus unemployed persons

ƒ not in the labor force (NILF) not employed, not looking for work. 36

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ƒ unemployment rate (U/L) percentage of the labor force that is __________

U.S. adult population by group, Jul 2016 Number employed = 151.517 million Number unemployed = 7.770 million Adult population = 253.620 million

ƒ labor force participation rate (L/POP) the fraction of the adult population that ‘participates’ in the labor force

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Use the above data to calculate • the labor force the number of people not in the labor force • the labor force participation rate • the unemployment rate 39

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ƒ data: E =

, U=

1. Gross Domestic Product (GDP) measures both

, POP =

total income and total expenditure on the economy’s output of goods & services.

ƒ labor force L = E +U =

2. Nominal GDP values output at current prices;

ƒ not in labor force

real GDP values output at constant prices. Changes in output affect both measures, but changes in prices only affect nominal GDP.

NILF = POP – L =

ƒ unemployment rate

3. GDP is the sum of consumption, investment,

U/L x 100% =

government purchases, and net exports.

ƒ labor force participation rate L/POP x 100% = 40

6XPPDU\ 4. The overall level of prices can be measured by either • the Consumer Price Index (CPI), • the Producer Price Index (PPI) • the GDP deflator

5. The unemployment rate is the fraction of the labor force that is not employed. When unemployment rises, the growth rate of real GDP falls. 42

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