1. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #1 Chapter Topics Aggregate Output The Other Major Macroeconomic Variables

2. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #2 Aggregate Output Gross Domestic Product (GDP)  The value of the final goods and services produced in an economy during a given period  Y = C + I + G + X - Im Aggregate Output (national income and product accounts, or NIPA)

3. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #3 Aggregate Output 1) Final good 2) Value added 3) Income Defining GDP: Three Approaches

4. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #4 Aggregate Output Firm 1: Steel Company Revenues from sales$100 Expenses (wages)$80 Profit$20 Firm 2: Car Company Revenues from sales$210 Expenses $170 Wages$70 Steel purchases$100 Profit$40 What is GDP? $310 or $210 GDP: The final goods approach

5. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #5 Aggregate Output Two Firm Example

6. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #6 Aggregate Output GDP from the income side Defining GDP

7. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #7 Income (steel)  Labor = $80  Capital = $20 $100 Income (car)  Labor = $70  Capital = $40 $110 Aggregate Output Compared to:

8. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #8 Aggregate Output GDP = Price x Quantity of final goods produced If price increases and quantity remains constant, the $ value of final output increases.  But real output hasn’t changed. Nominal & Real GDP

9. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #9 Nominal and Real U.S. GDP, 1960-1998

10. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #10 Aggregate Output Real GDP = value of final goods in constant prices The increase in real GDP is less than nominal GDP when prices are rising More variation in real GDP than nominal GDP Observations

11. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #11 Aggregate Output Real GDP  GDP in terms of goods  GDP in constant dollars  GDP adjusted for inflation  GDP in 1992 dollars Synonyms for GDP Accounting

12. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #12 Aggregate Output GDP -- refers to real GDP Y t -- real GDP in year t $GDP -- nominal GDP $Y t = nominal GDP in year t Technical Notes: For the Course

13. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #13 The Other Major Macroeconomic Variables The Unemployment Rate

14. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #14 Current population survey  60,000 households monthly  Employed -- job holders  Unemployed -- job seekers The Other Major Macroeconomic Variables Counting the Unemployed

15. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #15 1998 The Other Major Macroeconomic Variables Counting the Unemployed

16. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #16 Unemployed and Discouraged Workers The Other Major Macroeconomic Variables Macro Terms

17. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #17 The Other Major Macroeconomic Variables Okun’s Law  High output growth -- reduces unemployment  Low output growth -- increases unemployment Unemployment and Economic Activity

18. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #18 Change in the U.S. Unemployment Rate versus U.S. GDP Growth 1960 - 1998

19. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #19 The Other Major Macroeconomic Variables The Inflation Rate  A sustained rise in the price level Two Measures of the Price Level  GDP Deflator  Consumer Price Index (CPI)

20. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #20 The Other Major Macroeconomic Variables  Average price of final goods produced  GDP deflator in year t = P t The GDP Deflator

21. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #21 The Other Major Macroeconomic Variables  P t is an index number P 1993 = 102.6 (1992 = 100)  Index numbers are used to measure rate of change over time The GDP Deflator

22. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #22 The Other Major Macroeconomic Variables The GDP Deflator

23. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #23 The Other Major Macroeconomic Variables 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 The Consumer Price Index (CPI)

24. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #24 The Other Major Macroeconomic Variables 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 4) End 2001 CPI = 177.4 (1982-84 = 100)  A basket of goods that cost $100 in 1982 – 84 cost $177.40 at end of 2001.  The price of the representative consumer good increased by 77.4% over this period. Steps in Calculating the CPI

25. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #25 Inflation Rate, Using the CPI and the GDP Deflator, 1960, 1998

26. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #26 Change in the U.S. Inflation Rate versus the U.S. Unemployment Rate, 1970-1998

27. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #27 The Other Major Macroeconomic Variables Low unemployment --inflation rate increases High unemployment -- inflation rate decreases The Phillips Curve

28. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #28 What determines the level of aggregate output?  Demand?  Supply?  Government, education, and savings? Short-run (a few years)  demand Medium-run (10+ years)  supply Long-run (50+ years)  government, education, savings The Central Question of Macroeconomics

29. Chapter 2: A Tour of the BookBlanchard: Macroeconomics Slide #29 A Road Map 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 The Central Question of Macroeconomics