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## Aggregate Output (Standard Measure)

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### If price increases and quantity remains constant, what happens to the value of final ... Car Production x 1992 Prices. Economics 302 Lecture 2. Aggregate Output ... – PowerPoint PPT presentation

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Title: Aggregate Output (Standard Measure)

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
• 3) Income

4
Aggregate Output
GDP The final goods approach
What is GDP? 310 or 210
5
Aggregate Output
Defining GDP
• If both firms are summed (100 210) the 100
in steel is counted twice
• Counting only the final good (cars) includes the
intermediate good (steel)

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

7
Aggregate Output
Defining GDP Three Approaches

8
Aggregate Output
Two Firm Example
• Steel
• No intermediate goods

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
Aggregate Output
GDP Income Approach
17
Aggregate Output
• Income (steel)
• Labor 80
• Capital 20
• 100
• Income (car)
• Labor 70
• Capital 40
• 110

18
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
Aggregate Output
• Nominal Real GDP (correcting for inflation)
• One good economy

25
Aggregate Output
• Nominal Real GDP (correcting for inflation)
• One good economy

26
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
Production of cars
• 1991 -- 10,000
• 1992 -- 12,000 (20 increase)
• 1993 -- 13,000 (8.33 increase)

29
Aggregate Output
Real GDP in 1992 s
Car Production x 1992 Prices
• 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)

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
• 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
• 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

51
The Other MajorMacroeconomic Variables
Steps in Calculating the CPI
• 5) 1998 CPI 163 (1982-84 100)

52
Inflation Rate, Using the CPIand the GDP
Deflator, 1960, 1998
53
Change in the U.S. Inflation Rate versus the U.S.
Unemployment Rate, 1970-1998
54
The Other MajorMacroeconomic Variables
The Phillips Curve
• Low unemployment --inflation rate increases
• High unemployment -- inflation rate decreases

55
The Other MajorMacroeconomic Variables
Why Do Economists Care About Inflation?
• Prices and wages do not rise proportionately
• Inflation creates market distortions due to
• Regulation
• Taxation

56
The Central Question of Macroeconomics
• What determines the level of aggregate output?
• Demand
• Supply
• Government, education, and savings

57
Macroeconomic Analysis
The Central Question of Macroeconomics
• What determines the level of aggregate output?
• Short-run (a few years) -- demand
• Medium-run (10 years) -- supply
• Long-run (50 years) -- government, education,
savings