Chapter 2 1

1/28/21 • Macroeconomic data consist mainly of the aggregate values of economic flows either at the level of the total economy, such as GDP and National Income, or at lower levels of aggregation such as the income, expenditure, and saving of thehousehold or government sectors 1/28/21 Learning objectives In this chapter, you will learn about: • Gross Domestic Product (GDP) • the Consumer Price Index (CPI) • the Unemployment Rate 1/28/21 1/28/21 GDP as Income • 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 a loaf of bread and sells it to an engineer for $6.00 • The engineer eats the bread Compute • value added at each stage of production • GDP The expenditure components of GDP • consumption • investment • government spending on goods and services • net exports Y = C + I + G + NX 1/28/21 U.S Consumption - 2003 10 1/28/21 Investment (I) def1: spending on [the factor of production] capital def2: spending on goods bought for future use Includes: § business fixed investment spending on plant and equipment that firms will use to produce other goods & services § residential fixed investment spending on housing units by consumers and landlords § inventory investment the change in the value of all firms’ inventories 11 U.S Investment, 2003 12 1/28/21 13 14 1/28/21 Government spending (G) • Government spending refers to money spent by the public sector on the acquisition of goods and provision of services such as education, healthcare, social protection, defense, public consumption and public investment • Transfer payments consisting of income transfers 15 Government spending (G) • Federal expenditures fall into five main categories: • Health insurance (Medicaid and Medicare) • Retirement benefits (Social Security) • National defense • Interest on the debt • Other spending (a broad category that covers spending on education, housing, transportation, agriculture,…) 16 1/28/21 • Transfer payments include welfare, financial aid, social security, and government subsidies for certain businesses These include, but are not limited to: • Unemployment compensations • Old age insurance • Civil service pensions • State and local government pensions • Survivors benefits • Supplemental Security Income 17 Government spending (G) • G includes all government spending on goods and services • G excludes transfer payments (e.g unemployment insurance payments), because they not represent spending on goods and services 18 1/28/21 Government spending, 2003 19 20 10 1/28/21 21 22 11 1/28/21 Output = Expenditures Suppose a firm • produces $10 million worth of final goods • but only sells $9 million worth Does this violate the expenditure = output identity? 23 24 12 1/28/21 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) – (factor payments to abroad) 25 Real vs Nominal GDP • GDP is the value of all final goods and services produced • Nominal GDP measures these values using current prices • Real GDP measure these values using the prices of a base year 26 13 1/28/21 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 27 A base year is the first of a series of years in an economic or financial index New, up-to-date base years are periodically introduced to keep data current in a particular index Any year can serve as a base year, but analysts typically choose recent years 28 14 1/28/21 29 Consumer Price Index (CPI) • A measure of the overall level of prices • Published by the Bureau of Labor Statistics (BLS) • Used to • track changes in the typical household’s cost of living • adjust many contracts for inflation (i.e “COLAs”) • allow comparisons of dollar figures from different years 32 15 1/28/21 33 • In 2019, the consumer price index (CPI) for all items in Vietnam was at 165.82 points, with 2010 as the base year (2010=100) • The consumer price index indicates changes in the price of a weighted average market basket of consumer goods and services purchased by households 34 16 1/28/21 How the BLS constructs the CPI Survey consumers to determine composition of the typical consumer’s “basket” of goods Every month, collect data on prices of all items in the basket; compute cost of basket CPI in any month equals 35 Exercise: Compute the CPI The basket contains 20 pizzas and 10 i-Tunes For each year, compute prices: pizza iTunes 2009 2010 $10 $11 $15 $15 2011 2012 $12 $13 $16 $15 § the cost of the basket § the CPI (use 2009 as the base year) § the inflation rate from the preceding year 36 17 1/28/21 Example 2009 2010 2011 2012 cost of basket $350 370 400 410 CPI 100.0 105.7 114.3 117.1 inflation rate n.a 5.7% 8.1% 2.5% 37 The composition of the CPI’s “basket” in US 38 18 1/28/21 The composition of the CPI’s “basket” in Vietnam 39 The composition of the CPI’s “basket” in Vietnam 40 19 1/28/21 The composition of the CPI’s “basket” in Singapore 41 42 20 1/28/21 Categories of the population • employed working at a paid job • unemployed not employed but looking for a job • labor force the amount of labor available for producing goods and services; all employed plus unemployed persons • not in the labor force not employed, not looking for work 45 Two important labor force concepts • unemployment rate percentage of the labor force that is unemployed • labor force participation rate the fraction of the adult population that ‘participates’ in the labor force 46 21 1/28/21 47 48 22 1/28/21 49 23 ... 36 17 1 /28 / 21 Example 20 09 20 10 20 11 20 12 cost of basket $350 370 400 410 CPI 10 0.0 10 5.7 11 4.3 11 7 .1 inflation rate n.a 5.7% 8 .1% 2. 5% 37 The composition of the CPI’s “basket” in US 38 18 1 /28 / 21 ... represent spending on goods and services 18 1 /28 / 21 Government spending, 20 03 19 20 10 1 /28 / 21 21 22 11 1 /28 / 21 Output = Expenditures Suppose a firm • produces $10 million worth of final goods • but... basket contains 20 pizzas and 10 i-Tunes For each year, compute prices: pizza iTunes 20 09 20 10 $10 $11 $15 $15 20 11 20 12 $ 12 $13 $16 $15 § the cost of the basket § the CPI (use 20 09 as the base