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MACROECONOMICS

© 2011 Worth Publishers, all rights reserved

S E V E N T H E D I T I O N

PowerPoint
®

Slides by Ron Cronovich

N. Gregory
Mankiw

C H A P T E R

The Science of
Macroeconomics

(edited by L. Lamb, 2011)

2

2 0 1 0 U P D A T E

In this chapter, you will learn:

…the meaning and measurement of the

most important macroeconomic statistics:


2.1 Gross Domestic Product (GDP)


2.2 The Consumer Price Index (CPI)


2.3.
The
unemployment rate


2

CHAPTER 2

The Data of Macroeconomics

2.1 Gross Domestic Product:


Expenditure and Income

Two ways to look at GDP:


Total expenditure on domestically
-
produced

final goods and services.


Total income earned by domestically
-
located

factors of production.

Expenditure equals income because

every dollar spent by a buyer

becomes income to the seller.

3

CHAPTER 2

The Data of Macroeconomics

The Circular Flow

Households

Firms

Goods

Labor

Expenditure ($)

Income ($)

4

CHAPTER 2

The Data of Macroeconomics

Value added

Value added
:

The value of output minus

the value of the intermediate goods

used to produce that output

5

CHAPTER 2

The Data of Macroeconomics

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.

6

CHAPTER 2

The Data of Macroeconomics

Table 2.1
GDP and the Components of Expenditure: 2008

Mankiw

and
Scarth
: Macroeconomics, Canadian Fourth Edition

Copyright © 2011 by Worth Publishers

7

CHAPTER 2

The Data of Macroeconomics

The expenditure components of GDP


consumption,
C


investment,
I


government spending,
G


net exports,
NX

An important identity:


Y = C + I + G + NX

aggregate
expenditure

value of
total output

8

CHAPTER 2

The Data of Macroeconomics

Consumption (C)







durable goods



nondurable goods


services


definition: The value of all
goods and services bought
by households. Includes:

9

CHAPTER 2

The Data of Macroeconomics

Investment (I)


Spending on goods bought for future use

(
i.e.
, capital goods)


Includes:


Business fixed investment



Residential fixed investment



Inventory investment


10

CHAPTER 2

The Data of Macroeconomics

Investment vs. Capital

Note: Investment is spending on new capital.

Example
(assumes no depreciation)
:


January 1, 2012:

economy has $500b worth of capital


during 2012:

investment = $60b


January 1, 2013:

economy will have $560b worth of capital

11

CHAPTER 2

The Data of Macroeconomics

Government spending (G)


G

includes all government spending on goods
and services.


G

excludes transfer payments

because they do not represent spending on
goods and services.


NOW YOU TRY:

An expenditure
-
output puzzle?

Suppose a firm:


produces $10 million worth of final goods


only sells $9 million worth


Does this violate the

expenditure

=
output


identity?

13

CHAPTER 2

The Data of Macroeconomics

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

14

CHAPTER 2

The Data of Macroeconomics

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.

15

CHAPTER 2

The Data of Macroeconomics

GDP Deflator


Inflation rate
: the percentage increase in the
overall level of prices


One measure of the price level:
GDP deflator


Definition:

16

CHAPTER 2

The Data of Macroeconomics

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.

17

CHAPTER 2

The Data of Macroeconomics

2.2 Consumer Price Index (CPI)




A measure of the overall level of prices


In Canada, it is published by Statistics Canada

18

CHAPTER 2

The Data of Macroeconomics

How CPI is constructed

1
.

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; compute cost of basket

3
.

CPI in any month equals

19

CHAPTER 2

The Data of Macroeconomics

Why the CPI may overstate inflation



Substitution bias



Introduction of new goods




Unmeasured changes in quality


20

CHAPTER 2

The Data of Macroeconomics

Figure 2.3
The Inflation Rate as Measured by the GDP Deflator and the CPI

Mankiw and Scarth: Macroeconomics, Canadian Fourth Edition

Copyright © 2011 by Worth Publishers

21

CHAPTER 2

The Data of Macroeconomics

2.3 Measuring Joblessness:

Categories of the population


employed




unemployed




labor force



not in the labor force



22

CHAPTER 2

The Data of Macroeconomics

Figure 2.4
The Three Groups of the Population

Mankiw

and
Scarth
: Macroeconomics, Canadian Fourth Edition

Copyright © 2011 by Worth Publishers

23

CHAPTER 2

The Data of Macroeconomics

Two important labor force concepts



unemployment rate



labor force participation rate


24

CHAPTER 2

The Data of Macroeconomics

Figure 2.5
Okun’s

Law

Mankiw

and
Scarth
: Macroeconomics, Canadian Fourth Edition

Copyright © 2011 by Worth Publishers

2.4 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.

27

CHAPTER 2

The Data of Macroeconomics

Homework



End of chapter 2 in textbook:

Questions for review: 1,2,3,4

Problems & Applications: 2, 3, 4, 6, 7, 8 & 9