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Aggregate Output (Standard Measure)

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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
  • 2) Value added
  • 3) Income

4
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
    intermediate good (steel)

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

7
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
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 adjusted 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

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
  • Uncertainty for business investment

56
What Do Macroeconomists Care About?
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
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