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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.

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Presentation on theme: "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."— Presentation transcript:

1 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) U P D A T E

2 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

3 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.

4 3 CHAPTER 2 The Data of Macroeconomics The Circular Flow Households Firms Goods Labor Expenditure ($) Income ($)

5 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

6 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.

7 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

8 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

9 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:

10 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

11 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

12 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.

13 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?

14 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

15 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.

16 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:

17 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.

18 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

19 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

20 19 CHAPTER 2 The Data of Macroeconomics Why the CPI may overstate inflation  Substitution bias  Introduction of new goods  Unmeasured changes in quality

21 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

22 21 CHAPTER 2 The Data of Macroeconomics 2.3 Measuring Joblessness: Categories of the population  employed  unemployed  labor force  not in the labor force

23 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

24 23 CHAPTER 2 The Data of Macroeconomics Two important labor force concepts  unemployment rate  labor force participation rate

25 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

26 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.

27 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.

28 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


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