Understanding the Economy: Consumer Price Index, GDP, and Investment - Prof. anónimo, Apuntes de Macroeconomía

¡Descarga Understanding the Economy: Consumer Price Index, GDP, and Investment - Prof. anónimo y más Apuntes en PDF de Macroeconomía solo en Docsity! Macroeconomics Chapter 2 - The Data in Macroeconomics In this chapter, you will learn: The meaning and measurement of the most important macroeconomic statistics: • Gross Domestic Product (GDP) • The Consumer Price Index (CPI) • The Unemployment Rate Value Added Value added: The value of output minus the value of the intermediate goods used to produce that output Practice: Identifying Value-added • A farmer grows a bushel of wheat and sells it to a miller for $1.00. • The miller turns the wheat into flour and sells it to a baker for $3.00. • The baker uses the flour to make 10 loaves of bread and sells it to an engineer for $6.00. • The engineer eats the bread. Final Goods, Value Added, and GDP • GDP = value of final goods produced = sum of value added at all stages of production. • The value of the final goods already includes the value of the intermediate goods, so including intermediate and final goods in GDP would be double-counting. U.S. Consumption, 2009 48.0 15.6 7.3 70.8% 6,771 2,204 1,027 $10,001 Services Nondurables Durables Consumption % of GDP $ billions Investment (I) • Spending on goods bought for future use (i.e., capital goods) • Includes: – Business fixed investment Spending on plant and equipment – Residential fixed investment Spending by consumers and landlords on housing units – Inventory investment The change in the value of all firms’ inventories U.S. Investment, 2009 –0.9 2.5 9.7 11.3% –127 352 1,364 $1,589 Inventory Residential Business fixed Investment % of GDP $ billions Stocks vs. Flows - Examples The govt budget deficit The govt debt # of new college graduates this year # of people with college degrees A person’s annual saving A person’s wealth Flow Stock Practice: Stock or Flow?  The balance on your credit card statement  How much you study economics outside of class  The size of your compact disc collection  The inflation rate  The unemployment rate Government spending (G) • G includes all government spending on goods and services • G excludes transfer payments (e.g., unemployment insurance payments), because they do not represent spending on goods and services Why Output = Expenditure • Unsold output goes into inventory, and is counted as “inventory investment”… …whether or not the inventory buildup was intentional. • In effect, we are assuming that firms purchase their unsold output. GDP: An important and versatile concept We have now seen that GDP measures: – total income – total output – total expenditure – the sum of value-added at all stages in the production of final goods GNP vs. GDP • Gross National Product (GNP): Total income earned by the nation’s factors of production, regardless of where located • Gross Domestic Product (GDP): Total income earned by domestically-located factors of production, regardless of nationality GNP – GDP = factor payments from abroad minus factor payments to abroad • Examples of factor payments: wages, profits, rent, interest & dividends on assets Practice: Real & Nominal GDP  Compute nominal GDP in each year.  Compute real GDP in each year using 2006 as the base year. 2006 2007 2008 P Q P Q P Q good A $30 900 $31 1,000 $36 1,050 good B $100 192 $102 200 $100 205 Answers Nominal GDP multiply Ps & Qs from same year 2006: $46,200 = $30  900 + $100  192 2007: $51,400 2008: $58,300 Real GDP (2006) multiply each year Qs by 2006 Ps 2006: $46,200 2007: $50,000 2008: $52,000 = $30  1050 + $100  205 Real GDP Controls for Inflation • Changes in nominal GDP can be due to: – changes in prices – changes in quantities of output produced • Changes in real GDP can only be due to changes in quantities, because real GDP is constructed using constant base-year prices Practice: GDP Deflator and Inflation  Use your previous answers to compute the GDP deflator in each year.  Use GDP deflator to compute the inflation rate from 2006 to 2007, and from 2007 to 2008. Nom. GDP Real GDP GDP deflator Inflation rate 2006 $46,200 $46,200 n.a. 2007 51,400 50,000 2008 58,300 52,000 Answers Nominal GDP Real GDP GDP deflator Inflation rate 2006 $46,200 $46,200 100.0 n.a. 2007 51,400 50,000 102.8 2.8% 2008 58,300 52,000 112.1 9.1% Understanding the GDP deflator Example with 3 goods For good i = 1, 2, 3 Pit = the market price of good i in year t Qit = the quantity of good i produced in year t NGDPt = Nominal GDP in year t RGDPt = Real GDP in year t Two Arithmetic Tricks for Working with Percentage Changes Ex: GDP deflator = 100  NGDP/RGDP. If NGDP rises 9% and RGDP rises 4%, then the inflation rate is approximately 5%. 2. percentage change in (X/Y )  percentage change in X  percentage change in Y Chain-Weighted Real GDP • Over time, relative prices change, so the base year should be updated periodically • In essence, chain-weighted real GDP updates the base year every year, so it is more accurate than constant-price GDP • Your textbook usually uses constant-price real GDP, because: – The two measures are highly correlated – Constant-price real GDP is easier to compute Consumer Price Index (CPI) • A measure of the overall level of prices • Published by the Bureau of Labor Statistics (BLS) • Uses: – Tracks changes in the typical household’s cost of living – Adjusts many contracts for inflation (“COLAs”) – Allows comparisons of dollar amounts over time Answers: Compute the CPI Cost of Inflation basket CPI Rate 2002 $350 100.0 n.a. 2003 370 105.7 5.7% 2004 400 114.3 8.1% 2005 410 117.1 2.5% The Composition of the CPI’s “Basket” 15,1% 42,4% 3,8% 17,4% 6,2% 5,6% 3,0% 3,1% 3,5% Food and bev. Housing Apparel Transportation Medical care Recreation Education Communication Other goods and services Understanding the CPI Example with 3 Goods For good i = 1, 2, 3 Ci = the amount of good i in the CPI’s basket Pit = the price of good i in year t Et = the cost of the CPI basket in year t Eb = the cost of the basket in the base period The Size of the CPI’s Bias • In 1995, a Senate-appointed panel of experts estimated that the CPI overstates inflation by about 1.1% per year • So the BLS made adjustments to reduce the bias • Now, the CPI’s bias is probably under 1% per year GDP Deflator vs. CPI Prices of capital goods: – Included in GDP deflator (if produced domestically) – Excluded from CPI Prices of imported consumer goods: – Excluded from GDP deflator – Included in CPI The basket of goods: – GDP Deflator: Changes every year – CPI: Fixed Two Measures of Inflation in the U.S. 0% 5% 10% 15% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 P e rc e n ta g e c h a n g e fr o m 1 2 m o n th s e a rl ie r CPI GDP deflator Practice: Computing Labor Statistics U.S. Adult Population by Group (Oct 2010) Number employed = 139.1 million Number unemployed = 14.8 million Adult population = 238.5 million 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 Answers: Computing Labor Statistics E = 139.1, U = 14.8, POP = 238.5  Labor Force (L) L = E +U = 139.1 + 14.8 = 153.9  Not in Labor Force NILF = POP – L = 238.5 – 153.9 = 84.6  Unemployment Rate U/L x 100% = (14.8/153.9) x 100% = 9.6%  Labor Force Participation Rate L/POP x 100% = (153.9/238.5) x 100% = 64.5% The Establishment Survey • The BLS obtains a second measure of employment by surveying businesses, asking how many workers are on their payrolls. • Neither measure is perfect, and they occasionally diverge due to: – treatment of self-employed persons – new firms not counted in establishment survey – technical issues involving population inferences from sample data Okun´s Law 1% increase in UR leads to a reduction of 2% in GDP Chapter Summary • Gross Domestic Product (GDP) measures both total income and total expenditure on the economy’s output of goods & services. • Nominal GDP values output at current prices; real GDP values output at constant prices. Changes in output affect both measures, but changes in prices only affect nominal GDP. • GDP is the sum of consumption, investment, government purchases, and net exports. Chapter Summary • The overall level of prices can be measured by either: – the Consumer Price Index (CPI), the price of a fixed basket of goods purchased by the typical consumer, or – the GDP deflator, the ratio of nominal to real GDP • The unemployment rate is the fraction of the labor force that is not employed.