The Data of Macroeconomics Chapter 2 of Macroeconomics

The Data of Macroeconomics Chapter 2 of Macroeconomics, 10 th edition, by N. Gregory Mankiw ECO 62 Udayan Roy

Chapter Overview • What do the following macroeconomic variables represent? How are they measured? – Gross Domestic Product (GDP) – The Consumer Price Index (CPI) – The Unemployment Rate You’ve seen this before in Introductory Macroeconomics. So, I will try to be brief.

GROSS DOMESTIC PRODUCT AND ITS COMPONENTS

GDP is both … • Total expenditure on domestically-produced final goods and services. • Total income earned by domestically-located productive resources. Expenditure equals income because every dollar spent by a buyer becomes income to the seller.

Final and Intermediate Goods • GDP counts the value of only final goods, not intermediate goods – Intermediate goods are those goods that disappear inside other goods that are produced for sale – Final goods are goods that are not intermediate goods • This way, the value of intermediate goods is counted only once, not twice or thrice.

The expenditure components of GDP • consumption, C • investment, I • government spending, G • net exports, NX The national income identity: Y = C + I + G + NX total expenditure (GDP) Sum of all components of expenditure

Consumption (C) • Consumption is the value of all goods and services bought by households. It includes: – durable goods last a long time e. g. , cars, home appliances – nondurable goods last a short time e. g. , food, clothing – services work done for consumers e. g. , dry cleaning, air travel

U. S. Consumption, 2017 Gross Domestic Product and its components, 2017 Source: Bureau of Economic Analysis, U. S. Department of Commerce, bea. gov Last Revised on: March 28, 2018 - Next Release Date April 27, 2018 Total Percent of GDP Person $ millions % $ Gross domestic product 19, 390, 605 100 59, 483. 49 Personal consumption expenditures 13, 395, 505 69. 1 41, 092. 65 Goods 4, 295, 313 22. 2 13, 176. 49 Durable goods 1, 473, 802 7. 6 4, 521. 10 Nondurable goods 2, 821, 511 14. 6 8, 655. 39 Services 9, 100, 192 46. 9 27, 916. 16 Population (midperiod, thousands) 325, 983

Investment (I) • This is spending on goods bought for future use (i. e. , capital goods) • It 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, 2017 Gross Domestic Product and its components, 2017 Source: Bureau of Economic Analysis, U. S. Department of Commerce, bea. gov Last Revised on: March 28, 2018 - Next Release Date April 27, 2018 Total Percent of GDP $ millions % Gross domestic product 19, 390, 605 100 Gross private domestic investment 3, 212, 828 16. 6 Fixed investment 3, 197, 164 16. 5 Nonresidential 2, 449, 581 12. 6 Structures 560, 180 2. 9 Equipment 1, 098, 360 5. 7 Intellectual property products 791, 040 4. 1 Residential 747, 583 3. 9 Change in private inventories 15, 664 0. 1 Population (midperiod, thousands) 325, 983 Person $ 59, 483. 49 9, 855. 81 9, 807. 76 7, 514. 44 1, 718. 43 3, 369. 38 2, 426. 63 2, 293. 32 48. 05

Government Purchases (G) • G includes all government spending on goods and services. • It excludes transfer payments (e. g. , unemployment insurance payments), because they do not represent spending on goods and services.

U. S. Government Spending, 2017 Gross Domestic Product and its components, 2017 Source: Bureau of Economic Analysis, U. S. Department of Commerce, bea. gov Last Revised on: March 28, 2018 - Next Release Date April 27, 2018 Total Percent of GDP $ millions % Gross domestic product 19, 390, 605 100 Government consumption expenditures and gross investment 3, 353, 834 17. 3 Federal 1, 260, 656 6. 5 National defense 744, 421 3. 8 Nondefense 516, 235 2. 7 State and local 2, 093, 178 10. 8 Population (midperiod, thousands) 325, 983 Person $ 59, 483. 49 10, 288. 37 3, 867. 24 2, 283. 62 1, 583. 63 6, 421. 13

Net Exports (NX) •

Net Exports: NX = EX – IM 20% Note the increase in the globalization of the U. S. NX 16% exports imports 12% 8% 4% 0% -4% -8% 1950 1960 1970 1980 1990 2000 2010

U. S. Net Exports, 2017 Gross Domestic Product and its components, 2017 Source: Bureau of Economic Analysis, U. S. Department of Commerce, bea. gov Last Revised on: March 28, 2018 - Next Release Date April 27, 2018 Total Percent of GDP $ millions % Gross domestic product 19, 390, 605 100 Net exports of goods and services -571, 563 -2. 9 Exports 2, 343, 988 12. 1 Goods 1, 546, 843 8 Services 797, 146 4. 1 Imports 2, 915, 551 15 Goods 2, 381, 754 12. 3 Services 533, 797 2. 8 Population (midperiod, thousands) 325, 983 Person $ 59, 483. 49 -1, 753. 35 7, 190. 52 4, 745. 16 2, 445. 36 8, 943. 87 7, 306. 37 1, 637. 50

Gross Domestic Product and its components, 2017 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Source: Bureau of Economic Analysis, U. S. Department of Commerce, bea. gov Last Revised on: March 28, 2018 - Next Release Date April 27, 2018 Total Percent of GDP $ millions % Gross domestic product 19, 390, 605 100 Personal consumption expenditures 13, 395, 505 69. 1 Goods 4, 295, 313 22. 2 Durable goods 1, 473, 802 7. 6 Nondurable goods 2, 821, 511 14. 6 Services 9, 100, 192 46. 9 Gross private domestic investment 3, 212, 828 16. 6 Fixed investment 3, 197, 164 16. 5 Nonresidential 2, 449, 581 12. 6 Structures 560, 180 2. 9 Equipment 1, 098, 360 5. 7 Intellectual property products 791, 040 4. 1 Residential 747, 583 3. 9 Change in private inventories 15, 664 0. 1 Net exports of goods and services -571, 563 -2. 9 Exports 2, 343, 988 12. 1 Goods 1, 546, 843 8 Services 797, 146 4. 1 Imports 2, 915, 551 15 Goods 2, 381, 754 12. 3 Services 533, 797 2. 8 Government consumption expenditures and gross investment 3, 353, 834 17. 3 Federal 1, 260, 656 6. 5 National defense 744, 421 3. 8 Nondefense 516, 235 2. 7 State and local 2, 093, 178 10. 8 Population (midperiod, thousands) 325, 983 Person $ 59, 483. 49 41, 092. 65 13, 176. 49 4, 521. 10 8, 655. 39 27, 916. 16 9, 855. 81 9, 807. 76 7, 514. 44 1, 718. 43 3, 369. 38 2, 426. 63 2, 293. 32 48. 05 -1, 753. 35 7, 190. 52 4, 745. 16 2, 445. 36 8, 943. 87 7, 306. 37 1, 637. 50 10, 288. 37 3, 867. 24 2, 283. 62 1, 583. 63 6, 421. 13

Real and Nominal GDP • GDP is the market value of all final goods and services produced. • Nominal GDP measures these values using current prices. – Current prices are the prices that prevailed at the time of production • Real GDP measure these values using constant prices (the prices during the base year).

NOW YOU TRY: Real and Nominal GDP 2016 2017 2018 P Q P Q good A $30 900 $31 1, 000 $36 1, 050 good B $100 192 $102 200 $100 205 Nominal GDP Real GDP § Compute nominal GDP in each year. § Compute real GDP in each year using 2016 as the base year.

NOW YOU TRY: Real and Nominal GDP 2016 2017 2018 P Q P Q good A $30 900 $31 1, 000 $36 1, 050 good B $100 192 $102 200 $100 205 Nominal GDP (30 × 900) + (100 × 192) = $46, 200 (31 × 1000) + (102 × 200) = $51, 400 (36 × 1, 050) + (100 × 205) = $58, 300 Real GDP (30 × 900) + (100 × 192) = $46, 200 (30 × 1000) + (100 × 200) = $50, 000 (30 × 1, 050) + (100 × 205) = $52, 000

GDP Deflator: overall price level 2016 GDP Deflator good A P $30 100 2017 Q 900 2018 P 100 × Q 51, 400/50, 000 = 58, 300/52, 000 = $31102. 8 1, 000 $36112. 1 1, 050 Average prices compared to base year good B $100 Same 192 $102 200 2. 8% higher Nominal GDP (30 × 900) + (100 × 192) = $46, 200 (31 × 1000) + (102 × 200) = $51, 400 (36 × 1, 500) + (100 × 205) = $58, 300 Real GDP (30 × 900) + (100 × 192) = $46, 200 (30 × 1000) + (100 × 200) = $50, 000 (30 × 1, 500) + (100 × 205) = $52, 000 $100 205 12. 1% higher

U. S. Nominal and Real GDP, 1929 -2017

U. S. Real GDP per capita, 1929 -2017 Source: https: //fred. stlouisfed. org/series/A 939 RX 0 Q 048 SBEA

Growth Rate: Computation

2016 2017 2018 NOW YOU TRY: Real and Nominal GDP Nominal $46, 200 $51, 400 $58, 300 GDP Growth Rate % Real GDP Growth Rate % $46, 200 $50, 000 $52, 000

2016 2017 2018 NOW YOU TRY: Real and Nominal GDP Nominal $46, 200 $51, 400 $58, 300 GDP Growth Rate % 11. 26 Real GDP $46, 200 $50, 000 $52, 000 Growth Rate % 8. 23 13. 42 4. 00 [(51, 400 – 46, 200) / 46, 200] × 100 = 11. 26

2016 2017 2018 NOW YOU TRY: Real and Nominal GDP Nominal $46, 200 $51, 400 $58, 300 GDP Growth Rate % 11. 26 Real GDP $46, 200 $50, 000 $52, 000 Growth Rate % 8. 23 4. 00 1. 028 1. 121 2. 80 9. 06 GDP Deflator Growth Rate % 13. 42 GDP Deflator = Nominal GDP / Real GDP 1. 00 It is a measure of the overall price level Its growth rate is a measure of the rate of inflation As an approximation, the GDP Deflator’s growth rate = growth rate of Nominal GDP – growth rate of Real GDP

Where to find US data • Bureau of Economic Analysis, U. S. Department of Commerce: http: //bea. gov • Federal Reserve Bank of St. Louis: http: //research. stlouisfed. org/fred 2/categories/18

International Comparisons • When the GDP numbers for various countries’ are being compared, the same currency units must be used • There are two ways of converting from national countries to a common currency, such as the US dollar – Use market exchange rates – Use a common set of prices (PPP)

GDP per capita, in US dollars PPP Market Exchange Rates 44063. 34 United Kingdom 33849. 18 40237. 54 Japan 32051. 81 34263. 64 Uruguay 10584. 77 6036. 12 Ukraine 6269. 05 2324. 32 China 5815. 12 4657. 28 2891. 94 2021. 97 India 2317. 19 762. 14 Bangladesh 1223. 01 417. 66 724. 61 202. 05 333. 45 170. 88 United States Albania Ethiopia Liberia Source: World Economic Outlook 2008 database, IMF

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 uses constant-price real GDP, because: – the two measures are highly correlated – constant-price real GDP is easier to compute.

GROWTH RATE MATH

If Z = X × Y then gz = gx + gy The growth rates here are in decimal form: for example, if X grows at the rate of 5%, then gx = 0. 05. The product of two decimals is small enough to be ignored: for example, 0. 05 × 0. 04 = 0. 0020.

If Z = X ÷ Y then gz = gx – gy

If Z = Xa then gz = a × gx •

CONSUMER PRICE INDEX (CPI)

Consumer Price Index (CPI) • The CPI is a measure of the overall level of prices – Recall that the GDP deflator is also a measure of the overall level of prices • The CPI is published by the Bureau of Labor Statistics (BLS) • The CPI is used to: – track changes in the typical household’s cost of living – adjust many contracts for inflation (“COLAs”) – allow comparisons of dollar amounts over time

How the BLS constructs the CPI Survey consumers to determine composition of the typical consumer’s “basket” of goods 2. Every month, collect data on prices of all items in the basket, and compute cost of basket 3. CPI in any month equals 1.

The composition of the CPI’s “basket”

NOW YOU TRY: Compute the CPI Typical consumer’s basket: 20 pizzas, 10 compact discs prices: 2002 2003 2004 2005 For each year, compute pizza $10 $11 $12 $13 CDs $15 $16 $15 § the cost of the basket § the CPI (use 2002 as the base year) § the inflation rate from the preceding year

NOW YOU TRY: Compute the CPI and Inflation Rate Typical consumer’s basket: 20 pizzas, 10 compact discs 2002 2003 2004 2005 pizza $10 $11 $12 $13 CDs $15 $16 $15 cost CPI inflation

NOW YOU TRY: Compute the CPI and Inflation Rate Typical consumer’s basket: 20 pizzas, 10 compact discs 2002 2003 2004 2005 pizza $10 $11 $12 $13 CDs $15 $16 $15 cost $350 $370 $400 $410 CPI inflation

NOW YOU TRY: Compute the CPI and Inflation Rate Typical consumer’s basket: 20 pizzas, 10 compact discs 2002 2003 2004 2005 pizza $10 $11 $12 $13 CDs $15 $16 $15 cost $350 $370 $400 $410 CPI 100 105. 71 114. 29 117. 14 inflation

NOW YOU TRY: Compute the CPI and Inflation Rate Typical consumer’s basket: 20 pizzas, 10 compact discs 2002 2003 2004 2005 pizza $10 $11 $12 $13 CDs $15 $16 $15 cost $350 $370 $400 $410 CPI 100 105. 71 114. 29 117. 14 inflation 5. 71 8. 11 2. 50

CPI vs. GDP Deflator Prices of non-consumer goods: – included in GDP deflator (if produced domestically) – excluded from CPI Prices of imported consumer goods: – included in CPI – excluded from GDP deflator The basket of goods: – CPI: fixed – GDP deflator: changes every year

A Third Measure of the Overall Price Level! •

A Third Measure of the Overall Price Level! • The GDP deflator considers the prices of all domestically produced final goods and services whereas the PCE deflator considers the prices of only consumer goods and services, wherever produced.

CPI vs. GDP Deflator vs. PCE Deflator Prices of non-consumer goods: – included in GDP deflator (if produced domestically) – excluded from CPI and PCE deflator The PCE deflator is a compromise between the CPI and Prices of imported consumer goods: – included in CPI and PCE deflator – excluded from GDP deflator The basket of goods: the GDP deflator. For this reason, the Federal Reserve, which conducts monetary policy in the US, considers the PCE deflator its preferred measure of the price level. More precisely, the Fed uses a version of the PCE deflator that ignores the prices of food and energy. This is the Core PCE deflator. It is less volatile (because it leaves food and energy out) and is considered more useful as a guide to future prices. – CPI: fixed – GDP deflator and PCE deflator: changes every year

CPI vs. GDP Deflator vs. PCE Deflator

UNEMPLOYMENT

The Current Population Survey • The Bureau of Labor Statistics (BLS) of the U. S. Department of Labor computes the unemployment rate every month • The data comes from a monthly survey of U. S. households called the Current Population Survey – See http: //bls. gov/cps/ • This survey classifies each adult into one of three categories: employed, unemployed, and not in the labor force

Three Population Categories • This survey classifies each adult into one of three categories: – employed (working at a paid job) – unemployed (not employed but looking for a job), and – not in the labor force (not employed, not looking for work) • Labor force = employed + unemployed

Two important labor market stats • unemployment rate percentage of the labor force that is unemployed • labor force participation rate percentage of the adult population that is in the labor force

U. S. Unemployment Rate Source: https: //fred. stlouisfed. org/series/UNRATE

U. S. Labor Force Participation Rate Source: https: //fred. stlouisfed. org/series/CIVPART

NOW YOU TRY: Computing labor statistics U. S. adult population by group, May 2009 Number employed = 140. 57 million Number unemployed = 14. 51 million Adult population = 235. 45 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

NOW YOU TRY: Answers data: E = 140. 57, U = 14. 51, POP = 235. 45 § labor force L = E +U = 140. 57 + 14. 51 = 155. 08 § not in labor force NILF = POP – L = 235. 45 – 155. 08 = 80. 37 § unemployment rate U/L x 100% = (14. 51/155. 08) x 100% = 9. 4% § labor force participation rate L/POP x 100% = (155. 08/ 235. 45) x 100% = 65. 9%

Unemployment and Labor Force Participation Population Labor Force Unemployed Unemployment Rate Labor Force Participation Rate Situation A 10 10 1 10% 100% Situation B 10 9 0 0% 90% • Suppose the one unemployed person in Situation A gets discouraged and drops out of the labor force • The result is Situation B • The unemployment rate is lower in Situation B. But that does not mean it is an improvement over Situation A. • Lesson: We need to watch both the unemployment rate and the labor force participation rate. A fall in the former is good news only when it is not accompanied by a fall in the latter.

The Current Establishment Survey • The BLS obtains a second measure of employment by surveying businesses, asking how many workers are on their payrolls. – See http: //bls. gov/ces/ • 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

Two measures of employment growth 8% Percentage change from 12 months earlier household survey 6% establishment survey 4% 2% 0% -2% -4% 1960 1970 1980 1990 2000 2010

U. S. Labor Data • Current Population Survey: http: //bls. gov/cps/ • ftp: //ftp. bls. gov/pub/special. requests/lf/aat 1. txt • Current Establishment Survey: http: //bls. gov/ces/ • ftp: //ftp. bls. gov/pub/suppl/empsit. ceseeb 1. txt • ftp: //ftp. bls. gov/pub/suppl/empsit. ceseeb 2. txt

International Labor Comparisons • The BLS presents internationally comparable labor data for many countries at http: //bls. gov/fls/home. htm

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.