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Topics. Aggregate Output (Standard Measure) GDP vs GPI discussion The Other Major Macroeconomic Variables (Unemployment and Inflation Rate). Aggregate Output. Aggregate Output (national income and product accounts, or NIPA). Gross Domestic Product (GDP)

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  1. Topics • Aggregate Output (Standard Measure) • GDP vs GPI discussion • The Other Major Macroeconomic Variables (Unemployment and Inflation Rate)

  2. Aggregate Output Aggregate Output (national income and product accounts, or NIPA) • Gross Domestic Product (GDP) • The value of the final goods and services produced in an economy during a given period

  3. Aggregate Output Defining GDP: Three Approaches 1) Final good 2) Value added 3) Income

  4. Firm 1: Steel Company Revenues from sales $100 Expenses (wages) $80 Profit $20 Firm 2: Car Company Revenues from sales $210 Expenses $170 Wages $70 Steel purchases $100 Profit $40 Aggregate Output GDP: The final goods approach What is GDP? $310 or $210

  5. Aggregate Output Defining GDP • Answer: $210 • If both firms are summed ($100 + $210) the $100 in steel is counted twice • Counting only the final good (cars) includes the intermediategood (steel)

  6. Aggregate Output Question for Discussion • What would GDP be if the firms merged?

  7. Value added = value of production - value of intermediate goods Aggregate Output Defining GDP: Three Approaches 2) Value Added Approach

  8. Aggregate Output Two Firm Example • Steel • No intermediate goods • Value added = $100

  9. Aggregate Output Two Firm Example • Cars • Intermediate goods (steel) = $100 • Value added = $210 - $100 = $110

  10. Aggregate Output Two Firm Example

  11.  Aggregate Output • Defining GDP

  12. Aggregate Output • Defining GDP • Approach 1 & 2 define GDP from the production side

  13. Aggregate Output • Defining GDP 3) GDP from the income side

  14. Aggregate Output Consider • Revenues after payment for intermediate goods • Some pay indirect taxes (sales taxes) • Some pay workers (labor income) • Remainder to the firm (capital income)

  15. Aggregate Output Defining GDP • GDP from the income side

  16. Firm 1: Steel Company Revenues from sales $100 Expenses (wages) $80 Profit $20 Firm 2: Car Company Revenues from sales $210 Expenses $170 Wages $70 Steel purchases $100 Profit $40 Aggregate Output GDP: Income Approach

  17. Income (steel) Labor = $80 Capital = $20 $100 Income (car) Labor = $70 Capital = $40 $110 Compared to: Aggregate Output

  18. In Percent1960 1998 Labor income 66% 65% Capital income 26% 27% Indirect taxes 8% 8% The Composition of GDP byType of Income, 1960 and 1998

  19. Aggregate Output Defining GDP – A Summary • Output Approach = Income Approach • Final goods & value added = sum of indirect taxes + labor income + capital income

  20. Aggregate Output Nominal & Real GDP • Recall • GDP = the value of final goods and services produced • Value is the price of the final good

  21. Aggregate Output Nominal & Real GDP • Therefore, • GDP = Price x Quantity of final goods produced

  22. Aggregate Output Questions for Discussion • If price increases and quantity remains constant, what happens to the value of final output?

  23. Aggregate Output Observation • Higher prices bias the GDP measurement of production upward over time.

  24. Year Quantity of Cars Price of Cars Nominal GDP 1991 10 $10,000 $100,000 1992 12 $12,000 $144,000 1993 13 $13,000 $169,000 Aggregate Output • Nominal & Real GDP (correcting for inflation) • One good economy

  25. Year Quantity of Cars Price of Cars Nominal GDP(% increase) 1991 10 $10,000 $100,000 (--) 1992 12 $12,000 $144,000 (44%) 1993 13 $13,000 $169,000 (17.4%) Aggregate Output • Nominal & Real GDP (correcting for inflation) • One good economy

  26. Did the real output of cars increase 44% from 1991 to 1992? Question Aggregate Output Nominal GDP = Pcars x Qcars

  27. Aggregate Output Calculating Real GDP • Real GDP = value of final goods in constant prices

  28. Aggregate Output Real GDP in Units • 1991 -- 10,000 • 1992 -- 12,000 (20% increase) • 1993 -- 13,000 (8.33% increase) Production of cars

  29. Aggregate Output Real GDP in 1992 $s • 1991 -- 10 x $12,000 = $120,000 • 1992 -- 12 x $12,000 = $144,000 (20% increase) • 1993 -- 13 x $12,000 = $156,000 (8% increase) Car Production x 1992 Prices Note: Nominal 1992 GDP = Real 1992 GDP

  30. Aggregate Output Calculating Real GDP in Practice • Accounting for all final goods • Weighted average of the output of final goods • Relative prices serve as weights • Must consider the change in relative prices • U.S. Real GDP is Real GDP in chained (1992) dollars

  31. Nominal and RealU.S. GDP, 1960-1998

  32. Aggregate Output Observations • The increase in real GDP is less than nominal GDP • More variation in real GDP than nominal GDP

  33. Aggregate Output Synonyms for GDP Accounting • Nominal GDP • Dollar GDP • GDP in current dollars

  34. Aggregate Output Synonyms for GDP Accounting • Real GDP • GDP in terms of goods • GDP in constant dollars • GDPadjusted for inflation • GDP in 1992 dollars

  35. Aggregate Output Technical Notes: For the Course • GDP growth in year t -- rate of change in real GDP in year t • GDP growth = (yt - yt-1)/yt-1 • Expansions -- periods of positive growth • Recessions -- periods of negative growth(2 consecutive quarters)

  36. The Other MajorMacroeconomic Variables The Unemployment Rate

  37. The Other MajorMacroeconomic Variables Counting the Unemployed • Current population survey • 60,000 households monthly • Employed -- job holders • Unemployed -- job seekers

  38. The Other MajorMacroeconomic Variables Counting the Unemployed • 1998

  39. The Other MajorMacroeconomic Variables Macro Terms Unemployed and Discouraged Workers

  40. The Other MajorMacroeconomic Variables What Do You Think? • Can the unemployment rate rise when the number of employed increases?

  41. Change in the U.S. Unemployment Rate versus U.S. GDP Growth 1960 - 1998

  42. The Other MajorMacroeconomic Variables Economic Policy Implications • If unemployment is too high -- high growth policy must be pursued to reduce it • If unemployment is too low -- low growth policy is required

  43. The Other MajorMacroeconomic Variables Social Implications of Unemployment • Unemployment rates and duration vary by population groups • Certain groups incur a disproportionate share of the unemployed when unemployment increases

  44. The Other MajorMacroeconomic Variables • The Inflation Rate • A sustained rise in the price level • Two Measures of the Price Level • GDP Deflator • Consumer Price Index (CPI)

  45. The Other MajorMacroeconomic Variables The GDP Deflator • Average price of final goods produced • GDP deflator in year t = Pt

  46. The Other MajorMacroeconomic Variables The GDP Deflator • Pt is an index number • P1993 = 102.6 (1992 = 100) • Index numbers are used to measure rate of change over time

  47. The Other MajorMacroeconomic Variables The GDP Deflator

  48. The Other MajorMacroeconomic Variables The Consumer Price Index (CPI) • Average prices of goods consumed • The CPI is not equal to the GDP deflator • Some final goods are sold to business, government, and foreigners • Some consumer goods are imported

  49. The Other MajorMacroeconomic Variables The Consumer Price Index (CPI) • Published monthly • Involves several steps

  50. The Other MajorMacroeconomic Variables Steps in Calculating the CPI 1) Consumer expenditure survey to determine a market basket of items 2) Bureau of labor statistics (BLS) field workers price the items monthly (85 cities, 22,000 stores) 3) A base period is chosen, currently 1982-84

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