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Learning objectives - PowerPoint PPT Presentation

Learning objectives. In this chapter, you will learn about: Gross Domestic Product (GDP) the Consumer Price Index (CPI) the Unemployment Rate. Gross Domestic Product. Two definitions: Total expenditure on domestically-produced final goods and services

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In this chapter, you will learn about:

• Gross Domestic Product (GDP)

• the Consumer Price Index (CPI)

• the Unemployment Rate

Two definitions:

• Total expenditure on domestically-produced final goods and services

• Total income earned by domestically-located factors of production

In every transaction, the buyer’s expenditure becomes the seller’s income.

Thus, the sum of all expenditure equals the sum of all income.

definition:

A firm’s value added is the value of its output minus the value of the intermediate goods the firm used to produce that output.

Exercise: (Problem 2, p.38)

• 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

• 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 goods in GDP would be double-counting.

• consumption

• investment

• government spending

• net exports

• durable goodslast a long time ex: cars, home appliances

• non-durable goodslast a short time ex: food, clothing

• serviceswork done for consumers ex: dry cleaning, air travel.

def: the value of all goods and services bought by households. Includes:

def1: spending on [the factor of production] capital.

def2: spending on goods bought for future use.

Includes:

• business fixed investmentspending on plant and equipment that firms will use to produce other goods & services

• residential fixed investmentspending on housing units by consumers and landlords

• inventory investmentthe change in the value of all firms’ inventories

• Capital is one of the factors of production. At any given moment, the economy has a certain overall stock of capital.

• Investment is spending on new capital.

Stock

Stocks vs. Flows

stock flow

a person’s wealth a person’s saving

# of people with # of new college college degrees graduates

the govt. debt the govt. budget deficit

More examples:

• 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.

Net exports (NX = EX - IM)

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

Y = C + I + G + NX

where Y = GDP = the value of total output

C + I + G + NX = aggregate expenditure

Suppose a firm

• produces \$10 million worth of final goods

• but only sells \$9 million worth.

Does this violate the expenditure = output identity?

• Unsold output goes into inventory, and is counted as “inventory investment”…

…whether the inventory buildup was intentional or not.

• 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

• 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)

In your country, which would you want to be bigger, GDP or GNP?

Why?

(GNP – GDP) as a percentage of GDP for selected countries, 1997.

• Taiwan's gross national product (GNP) in 2002 was US\$289.3 billion, and per capita GNP was US\$12,916.

• Its gross domestic product (GDP) in 2002 was US\$281.9 billion, of which 31.05 percent was contributed by the industrial sector and only 1.86 percent by agriculture.

• The service sector, which has been particularly robust and responsible for generating more than 50 percent of Taiwan's GDP since 1988, accounted for 67.10 percent of the GDP in 2002

2007.09.18 01:03 pm

• 2000～2002年我國的年平均經濟成長率較1996～1999年平均經

濟成長率衰退3.27個百分點，台灣經濟的衰退率在亞洲各國中

高居第一。 單位：％

• 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.

• Compute nominal GDP in each year

• Compute real GDP in each year using 2001 as the base year.

• Nominal GDP multiply Ps & Qs from same year2001: \$46,200 = \$30900 + \$100192 2002: \$51,400 2003: \$58,300

• Real GDP multiply each year’s Qs by 2001 Ps2001: \$46,3002002: \$50,000 2003: \$52,000 = \$301050 + \$100205

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

• One measure of the price level is the GDP Deflator, defined as

• Use your previous answers to compute the GDP deflator in each year.

• Use GDP deflator to compute the inflation rate from 2001 to 2002, and from 2002 to 2003.

USEFUL TRICK #2

the percentage change in (X/Y)  the percentage change in Xthe percentage change in Y

EX: GDP deflator = 100NGDP/RGDP.

If NGDP rises 9% and RGDP rises 4%, then the inflation rate is approximately 5%.

• A measure of the overall level of prices

• 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

• 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

Exercise: Compute the CPI

The basket contains 20 pizzas and 10 compact discs.

prices:

pizza CDs

2000 \$10 \$15

2001 \$11 \$15

2002 \$12 \$16

2003 \$13 \$15

For each year, compute

• the cost of the basket

• the CPI (use 2000 as the base year)

• the inflation rate from the preceding year

cost of inflation

2000 \$350 100.0 n.a.

2001 370 105.7 5.7%

2002 400 114.3 8.1%

2003 410 117.1 2.5%

Reasons why the CPI may overstate inflation

• Substitution bias: The CPI uses fixed weights, so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen.

• Introduction of new goods: The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI uses fixed weights.

• Unmeasured changes in quality: Quality improvements increase the value of the dollar, but are often not fully measured.

• The Boskin Panel’s “best estimate”:The CPI overstates the true increase in the cost of living by 1.1% per year.

• Result: the BLS has refined the way it calculates the CPI to reduce the bias.

• It is now believed that the CPI’s bias is slightly less than 1% per year.

prices of capital goods

• included in GDP deflator (if produced domestically)

• excluded from CPI

prices of imported consumer goods

• included in CPI

• excluded from GDP deflator

• CPI: fixed

• GDP deflator: changes every year

GDP deflator

Two measures of inflation

Percentage

change

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2007/08/07 中國時報

九月消費者物價年增率破三％，說了八個月「物價還算平穩」的主計處終於鬆口表示，漲幅「相當顯著」。但其實，這個「高得礙眼」的三％，與民眾的感受還是很遠，無法表達民眾每天實際要面對荷包變薄的痛苦。

以一個標準的四口、中產、雙薪、有車家庭來說，每天要吃的食物類漲了七．七％，每天要開的車，油價從去年的一公升二十二元漲到今年的近三十元，每日充飢的排骨飯、牛肉麵漲五元、十元，口渴時要買的飲料也漲，想省錢時吃的泡麵也漲，這些每天要掏錢買的東西，漲幅都遠遠超過三％。

至於拉低消費者物價的物品，例如行動電話跌兩成、個人電腦跌四％、手提包及背包跌八％、微波爐跌六％，都不是每日會感受到的。這些東西，一、兩年才換一次，甚至到時候為了省錢，還可以將就著用，不必換。

每天要面對的民生用品大漲特漲，和每一、兩年才會碰到的小跌微跌，感受真的是天差地遠，完全無法舒緩每日荷包變得愈來愈薄的痛苦。加上薪水幾年沒漲，未來前途不明，國家亂成一團，民眾的痛苦是以等比級數在增加，這就是主計處調查結果與民眾感受差距的來源。民眾承受的經濟壓力，心理層面的感受，主計處規規矩矩按照國際標準、幾個百分點乘幾百分點的理性算式，是完全算不出來的。

而且，收入愈低的家庭，感受到的物價痛苦更劇烈。主計處過去曾經公布五等分位的消費結構，收入最低的五分之一家庭，食品及房租水電支出占了總消費的五十二％，但高所得家庭花在這上面的錢不到四成，當這些民生用品大漲特漲時，窮人受到的影響很大，有錢人則是不痛不癢，還有很多閒錢繼續買豪宅名車。

根據主計處的家庭收支調查，去年高收入家庭每年可以存下六十五萬，中等收入家庭只存下九萬，最低收入家庭只存下一百八十三元。對最窮的人來說，這些民生用品的漲，真是痛在心裡，一百八十三元，只能負擔今年一、二十碗排骨麵多出來的漲幅，是難以承受的重。

主計處昨公布九月核心物價指數年增率一．九四％，創五年半以來新高，公股行庫財務部門主管表示，核心物價（Core CPI）走高，比消費者物價（ＣＰＩ）走高更值得關注，「這是警訊」，倘若核心物價持續上漲，研判央行今年底理監事會可能恢復六月底升息一碼（○．二五個百分點）的幅度。

行庫主管說，核心物價是扣除蔬果與能源後的消費者物價指數，比較不受颱風等偶發性因素影響，央行自己有經濟研究室，這次堅定升息，可能與預先掌握九月份核心物價走高的訊息有關。

行庫主管說，目前看來，央行今年底至少升息半碼（○．一二五個百分點）；匯率方面，因台灣仰賴出口經濟比重仍大，加上其他亞洲貨幣並未大幅升值、新台幣沒道理強出頭，研判今年底前，新台幣會在三二．五元兌一美元上下二角盤整，即波動區間三二．三元到三二．七元。

• employedworking at a paid job

• unemployednot 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 forcenot employed, not looking for work.

• 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

Exercise: Compute labor force statistics

U.S. adult population by group, April 2002

Number employed = 134.0 million

Number unemployed = 8.6 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

• data: E = 134.0, U = 8.6, POP = 213.5

• labor forceL = E +U = 134.0 + 8.6 = 142.6

• not in labor forceNILF = POP– L = 213.5 – 142.6 = 70.9

• unemployment rateU/L = 8.6/142.6 = 0.06 or 6.0%

• labor force participation rateL/POP = 142.6/213.5 = 0.668 or 68.8%

• Employed workers help produce GDP, while unemployed workers do not. So one would expect a negative relationship between unemployment and real GDP.

• This relationship is clear in the data…

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Okun’s Law

Okun’s Law states that a one-percent decrease in unemployment is associated with two percentage points of additional growth in real GDP

Percentage change in real GDP

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Change in unemployment rate