Measuring Macroeconomic Activity

Measuring Macroeconomic Activity
Chapter 11

Measuring Gross Domestic Product (GDP)
The comprehensive measure of the market value of all currently produced final goods and services within a country in a given period of time by domestic and foreign supplied resources. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

The Circular Flow of Economic Activity
Foreign Sector Domestic Market for currently Produced goods and services Government Sector Financial Markets Resource Markets Firm Sector Household Sector X M Borrowing G Revenue Expenses Income, Wages, Rent, Interest, Profit C I TB TP S Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

National Income Accounting System
A system of accounts developed for each country, based on the circular flow, whose purpose is to measure the level of economic activity in that country. The U.S. national income accounting system is operated by the Bureau of Economic Analysis (BEA) in the U.S.Department of Commerce. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Final vs. Intermediate Goods and Services
Final goods and services are goods and services that are sold to their end-users. Intermediate goods and services goods and services that are used in the production of other goods and services. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Real vs. Nominal GDP Nominal GDP is the value of currently produced final goods and services measured in current year prices. Real GDP is the value of currently produced final goods and services measured in constant prices, or nominal GDP adjusted for price level changes. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Nominal and Real GDP, 2000 & 2001 VARIABLE 2000 2001 Nominal GDP $9,817.0 billion $10,128.0 billion Percent Change 3.17 Real GDP $9,890.7 billion 0.76 GDP Deflator (price changes) 100 102.40 2.40 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Nominal vs. Real GDP, 1985-present
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

US Real GDP and Recessions

Expenditure or Output Approach to Measuring GDP
Measuring overall economic activity by adding the expenditure on the output produced in the economy. GDP = C + I + G + (X – M) Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Personal Consumption Expenditures (C)
The total amount of spending by consumers on durable goods, nondurable goods, and services in a given period of time. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Real Personal Consumption Expenditures, 1985 - present

Gross Private Domestic Investment (I)
The total amount of spending on nonresidential structures, equipment, and software; residential structures; and business inventories in a given period of time. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Real Gross Private Domestic Product, 1985 - present

Government Consumption Expenditures and Gross Investment (G)
The total amount of spending by federal, state, and local governments on consumption outlays for goods and services and for depreciation charges for existing structures and equipment and on investment capital outlays for newly acquired structures and equipment in a given period of time. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Net Export Spending (X – M)
The total amount of spending on exports minus the total amount of spending on imports in a given period of time. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Real Net Export Spending, 1985 - present

Gross Domestic Product and Its Components, 2007
VALUE IN BILLIONS OF DOLLARS (% OF GDP) GROSS DOMESTIC PRODUCT (GDP) 13,807.5 PERSONAL CONSUMPTION EXPENDITURES (C ) 9,710.2 (70.3) GROSS PRIVATE DOMESTIC INVESTMENT (I ) 2,130.4 (15.5) GOVERNMENT CONSUMPTION EXPENDITURES AND GROSS INVESTMENT (G) 2,674.8 (19.4) NET EXPORTS OF GOODS AND SERVICES (F ) 707.8 (5.1) Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Earnings or Income Approach to Measuring GDP
Measuring overall economic activity by adding the earnings or income generated by selling the output produced in the economy. GDP = compensation of employees + proprietor’s income + rental income + corporate profits + net interest Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

National Income Compensation of employees: the wages and salaries and the fringe benefits paid by employers to employees. Proprietors’ income: the income of unincorporated businesses, such as medical practices, law firms, small farms, and retail stores. Rental income : the income households receive from the rental of their property. Corporate profits: the excess of revenues over costs for the incorporated business sector of the economy. Net interest: the interest private businesses pay to households for lending money to the firms minus the interest businesses receive plus interest earned from foreigners. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

VALUE IN BILLIONS OF DOLLARS
National Income COMPONENT VALUE IN BILLIONS OF DOLLARS (% OF NATIONAL INCOME) GROSS DOMESTIC PRODUCT 13,807.5 Less: Depreciation expenditures 1,618.0 Less: Statistical discrepancy 81.4 EQUALS: NATIONAL INCOME 12,270.9 Compensation of employees 7,812.3 (63.6) Proprietor’s income 1,056.2 (8.6) Rental income 40.0 (0.3) Corporate profits 1,642.4 (13.4) Net interest 664.4 (5.4) Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

National Income, continued
COMPONENT VALUE IN BILLIONS OF DOLLARS (% OF NATIONAL INCOME) Less: Income earned, but not received 4,321.0 Plus: Income received, but not earned 3,713.3 EQUALS: PERSONAL INCOME 11,663.2 Less: Personal taxes 1,492.8 EQUALS: DISPOSABLE INCOME 10,170.5 Personal consumption expenditure ($9,710.2) plus other outlays ($402.9) 10,113.1 Personal saving 57.4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Other Important Macroeconomic Variables
Price level measures GDP deflator Consumer price index Wholesale price index Employment and unemployment Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

A C T I V E L E A R N I N G 1 GDP and its components
In each of the following cases, determine how much GDP and each of its components is affected (if at all). A. Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston. B. Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. C. Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer. D. General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them. Suggestion: Show these questions, and give your students 1-3 minutes to formulate their answers. When you are ready to discuss the answers, go to the next slide….

A C T I V E L E A R N I N G 1 Answers
A. Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston. Consumption and GDP rise by $200. B. Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. Investment rises by $1800, net exports fall by $1800, GDP is unchanged. Suggestion (continued from previous slide): Show part A (but not the answer) and ask for someone to volunteer his or her response. Then show the answer to part A. Repeat for parts B, C, and D. (The answers to parts C and D appear on the following slide.) After showing the answer to part A, ask your students whether the answer would be different if Debbie were a government employee. The correct answer is NO. Government employees engage in consumption, just like everyone else. 26

C. Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer. Current GDP and investment do not change, because the computer was built last year. D. General Motors builds $500 million worth of cars, but consumers only buy $470 million of them. Consumption rises by $470 million, inventory investment rises by $30 million, and GDP rises by $500 million. Regarding part C: Jane’s purchase causes investment (for her own business) to increase by $ However, the computer is sold out of inventory, so inventory investment falls by $ The two transactions cancel each other, leaving aggregate investment and GDP unchanged. Regarding part D: This problem illustrates why expenditure always equals output, even when firms don’t sell everything they produce due to lackluster demand. The point here is that unsold output is counted in inventory investment, even when that “investment” was unintentional. 27

GDP Deflator The GDP deflator compares the price of each year’s output of real goods and services to the price of that same output in a base year. It is a broad measure of price changes because it reflects the changes in consumption patterns over time included in GDP. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Consumer Price Index (CPI)
A measure of the combined price consumers pay for a fixed market basket of goods and services in a given period relative to the combined price of an identical basket of goods and services in a base period. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Producer Price Index (PPI)
A measure of the prices firms pay for crude materials; intermediate materials, supplies, and components; and finished goods. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Measures of Employment and Unemployment
Labor force Number employed Number unemployed Unemployment rate Discouraged workers Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Labor Force The civilian labor force is composed of those individuals 16 years of age and over who are working in a job (employed) or who are actively seeking employment (unemployed). Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Employed Persons 16 years of age and over who, in the survey week, did any work as an employee, worked in their own business, profession, or farm; or worked without pay at least 15 hours in a family business or farm. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Unemployment Rate Proportion of the labor force that is unemployed.
UR = (number of unemployed ÷ labor force) x 100 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Discouraged Workers Persons 16 years of age and over who are not currently seeking work because they believe that jobs in their area or line of work are unavailable or that they would not qualify for existing job openings. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Natural Rate of Unemployment
The minimum level of unemployment that can be achieved with current institutions without causing inflation to accelerate Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Labor Force Statistics
Unemployment rate (“u-rate”): % of the labor force that is unemployed u-rate # of unemployed labor force = 100 x Labor force participation rate: % of the adult population that is in the labor force Many of the following slides abbreviate “unemployment rate” as “u-rate” to reduce slide clutter and to reduce the note-taking burden on students. labor force participation rate labor force adult population = 100 x UNEMPLOYMENT 38

A C T I V E L E A R N I N G 1 Calculate labor force statistics
Compute the labor force, u-rate, adult population, and labor force participation rate using this data: Adult population of the U.S. by group, June 2008 # of employed 145.9 million # of unemployed 8.5 million not in labor force 79.2 million This exercise gives students immediate reinforcement and application of the concepts on the preceding slides. It prepares them for some of the kinds of questions they might see on your exam. And it gives them a sense of the actual magnitude of these statistics in the U.S. in a recent month. Suggestion: Before lecturing on this chapter, update the numbers in this table (and in the answers that follow) using the latest available data, which you can find here: Data source: Bureau of Labor Statistics, U.S. Department of Labor look for latest “Employment Situation Survey” 39

Labor force = employed + unemployed = = million U-rate = 100 x (unemployed)/(labor force) = 100 x 8.5/ = 5.5% Your students may get slightly different answers due to rounding differences. 40

Population = labor force + not in labor force = = LF partic. rate = 100 x (labor force)/(population) = 100 x 154.4/ = 66.1% Your students may get slightly different answers due to rounding differences. 41

GDP and Economic Well-Being
Real GDP per capita is the main indicator of the average person’s standard of living. But GDP is not a perfect measure of well-being. Most economists, policymakers, social scientists, and businesspersons use a country’s real GDP per capita as the main indicator of the average person’s standard of living in that country. MEASURING A NATION’S INCOME 42

Major Macroeconomic Policy Issues
What factors influence the spending behavior of the different sectors of the economy? How do behavior changes in these sectors influence the level of output and income in the economy? Can Policy Makers Maintain Stable Prices, Full Employment, and Adequate Economic Growth over Time? How Do Fiscal, Monetary, and Balance of Payments Policies Influence the Economy? What Impact Do These Macro Changes Have on Different Firms and Industries? Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall

Real versus Nominal GDP
Inflation can distort economic variables like GDP, so we have two versions of GDP: One is corrected for inflation, the other is not. Nominal GDP values output using current prices. It is not corrected for inflation. Real GDP values output using the prices of a base year. Real GDP is corrected for inflation. MEASURING A NATION’S INCOME 44

MEASURING A NATION’S INCOME
EXAMPLE: Pizza Latte year P Q 2005 $10 400 $2.00 1000 2006 $11 500 $2.50 1100 2007 $12 600 $3.00 1200 Compute nominal GDP in each year: 2005: $10 x $2 x = $6,000 2006: $11 x $2.50 x = $8,250 2007: $12 x $3 x = $10,800 Increase: This example is similar to that in the text, but using different goods and different numerical values. Suggestion: Ask your students to compute nominal GDP in each year before revealing the answers. Ask them to compute the rate of increase before revealing the answers. In this example, nominal GDP grows for two reasons: prices are rising, and the economy is producing a larger quantity of goods. Thinking of nominal GDP as total income, the increases in income will overstate the increases in society’s well-being because part of these increases are due to inflation. We need a way to take out the effects of inflation, to see how much people’s incomes are growing in purchasing power terms. That is the job of real GDP. 37.5% 30.9% MEASURING A NATION’S INCOME 45

EXAMPLE: Pizza Latte year P Q 2005 $10 400 $2.00 1000 2006 $11 500 $2.50 1100 2007 $12 600 $3.00 1200 $10 $2.00 Compute real GDP in each year, using 2005 as the base year: Increase: This example shows that real GDP in every year is constructed using the prices of the base year and that the base year doesn’t change. The growth rate of real GDP from one year to the next is the answer to this question: “How much would GDP (and hence everyone’s income) have grown if there had been zero inflation?” Thus, real GDP is corrected for inflation. 2005: $10 x $2 x = $6,000 2006: $10 x $2 x = $7,200 2007: $10 x $2 x = $8,400 20.0% 16.7% MEASURING A NATION’S INCOME 46

EXAMPLE: year Nominal GDP Real GDP 2005 $6000 2006 $8250 $7200 2007 $10,800 $8400 In each year, nominal GDP is measured using the (then) current prices. real GDP is measured using constant prices from the base year (2005 in this example). The table in the top half of this slide merely summarizes the answers from the previous two slides. This table will be used shortly to compute the growth rates in nominal and real GDP and to compute the GDP deflator and inflation rates. MEASURING A NATION’S INCOME 47

Hence, real GDP is corrected for inflation.
EXAMPLE: year Nominal GDP Real GDP 2005 $6000 2006 $8250 $7200 2007 $10,800 $8400 37.5% 30.9% 20.0% 16.7% The change in nominal GDP reflects both prices and quantities. Again, the growth rate of real GDP from one year to the next is the answer to this question: “How much would GDP (and hence everyone’s income) have grown if there had been zero inflation?” This is why real GDP is corrected for inflation. The change in real GDP is the amount that GDP would change if prices were constant (i.e., if zero inflation). Hence, real GDP is corrected for inflation. MEASURING A NATION’S INCOME 48

Nominal and Real GDP in the U.S., 1965-2007
Real GDP (base year 2000) The source I used: The original source: U.S. Department of Commerce: Bureau of Economic Analysis Note: This graph is different than the one in this chapter of the textbook. The one in the textbook excludes nominal GDP, but includes shaded vertical bars over the dates of each recession. Since you have just finished covering real vs. nominal GDP, it might be worthwhile pointing out the following to your students: The graph shows that nominal GDP rises faster than real GDP. This should make sense, because growth in nominal GDP is driven by growth in output AND by inflation. Growth in real GDP is driven only by growth in output. The two lines cross in the year 2000 (the base year for the real GDP data in this graph). This should make sense because real GDP equals nominal GDP in the base year. (Better yet, ask your students whether there’s anything significant about the point where the two lines cross.) Before the base year, real GDP > nominal GDP. For example, in 1970, nominal GDP is about $1 trillion, while real GDP is about $3.8 trillion (in 2000 dollars). This should make sense because prices were so much higher in 2000 than in 1970, so using those high 2000 prices to value 1970 output would lead to a bigger result than valuing 1970 output using 1970 prices. Similarly, after 2000, nominal GDP is higher than real GDP because prices are higher in later years than they were in 2000. Nominal GDP 49 49

The GDP Deflator The GDP deflator is a measure of the overall level of prices. Definition: GDP deflator = 100 x nominal GDP real GDP The GDP Deflator gets its name because it is used to “deflate” (i.e., take the inflation out of) nominal GDP to get real GDP. One way to measure the economy’s inflation rate is to compute the percentage increase in the GDP deflator from one year to the next. MEASURING A NATION’S INCOME 50

EXAMPLE: year Nominal GDP Real GDP GDP Deflator 2005 $6000 2006 $8250 $7200 2007 $10,800 $8400 2005: 100 x (6000/6000) = 100.0 14.6% 2006: 100 x (8250/7200) = 114.6 12.2% 2007: 100 x (10,800/8400) = 128.6 Compute the GDP deflator in each year: MEASURING A NATION’S INCOME 51

A C T I V E L E A R N I N G 2 Computing GDP
2007 (base yr) 2008 2009 P Q Good A $30 900 $31 1,000 $36 1050 Good B $100 192 $102 200 205 Use the above data to solve these problems: A. Compute nominal GDP in 2007. B. Compute real GDP in 2008. C. Compute the GDP deflator in 2009. The data in the table are for a hypothetical economy that produces two final goods, A and B. For all parts of this problem, use 2007 as the base year. If you’re running short on time, you can skip part A – it’s the least challenging. If you only have time for one of the three, you might skip A and B, as C by itself covers all of the material: it requires students to compute nominal and real GDP before they can compute the GDP deflator. 52

2007 (base yr) 2008 2009 P Q Good A $30 900 $31 1,000 $36 1050 Good B $100 192 $102 200 205 A. Compute nominal GDP in 2007. $30 x $100 x 192 = $46,200 B. Compute real GDP in 2008. $30 x $100 x 200 = $50,000 53

2007 (base yr) 2008 2009 P Q Good A $30 900 $31 1,000 $36 1050 Good B $100 192 $102 200 205 C. Compute the GDP deflator in 2009. Nom GDP = $36 x $100 x 205 = $58,300 Real GDP = $30 x $100 x 205 = $52,000 GDP deflator = 100 x (Nom GDP)/(Real GDP) = 100 x ($58,300)/($52,000) = 54

A C T I V E L E A R N I N G 3 CPI vs. GDP deflator
In each scenario, determine the effects on the CPI and the GDP deflator. A. Starbucks raises the price of Frappuccinos. B. Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory. C. Armani raises the price of the Italian jeans it sells in the U.S. To make this exercise more challenging, move the preceding slide so that it appears immediately after the answers to this exercise. If you are outside the U.S., please make the following changes: In (b), change the example to “A local manufacturer raises the price on industrial tractors it produces.” In (c), change “U.S.” to your country’s name, unless your country is Italy. In that case, change the example to something involving an imported consumer good. 55

A. Starbucks raises the price of Frappuccinos. The CPI and GDP deflator both rise. B. Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory. The GDP deflator rises, the CPI does not. C. Armani raises the price of the Italian jeans it sells in the U.S. The CPI rises, the GDP deflator does not. Explanations: A. Frappuccinos are produced in the U.S., so their prices are part of the GDP deflator. They are purchased by consumers, so their prices are part of the CPI. Hence, an increase in the price of Frappuccinos causes both the CPI and GDP deflator to increase. B. Since the tractors are produced here in the U.S., the price increase causes the GDP deflator to rise. However, industrial tractors are a capital good, not a consumer good, so the CPI is unaffected. C. Italian jeans appear in the U.S. consumer’s shopping basket, and hence the increase in their price causes the CPI to rise. However, the GDP deflator is unchanged because it only includes prices of domestically produced goods and excludes the prices of imports. 56

Correcting Variables for Inflation: Comparing Dollar Figures from Different Times
Amount in today’s dollars Amount in year T dollars Price level today Price level in year T = x In our example, year T = 12/1964, “today” = 12/2007 Min wage = $1.15 in year T CPI = 31.3 in year T, CPI = today Note: the ratio of price levels = 211.7/31.3 = This means that the cost of living has increased by a factor of We multiply this factor by the 1964 figure to convert the latter into “today’s dollars.” Interpreting the result: The $1.15 minimum wage in December 1964 could have purchased $7.78 worth of goods and services if prices in 1964 equaled their December 2007 level. Source of data: Bureau of Labor Statistics, The minimum wage in 1964 was $7.78 in today’s (2007) dollars. 211.7 31.3 $7.78 = $1.15 x MEASURING THE COST OF LIVING 57

A C T I V E L E A R N I N G 4 Converting to “today’s dollars”
Annual tuition and fees, average of all public four-year colleges & universities in the U.S. : $1, (1986 CPI = 109.6) : $5, (2006 CPI = 203.8) After adjusting for inflation, did students pay more for college in 1986 or in 2006? Convert the 1986 figure to 2006 dollars and compare. Sources: Data on tuition and fees from Trends in College Pricing 2006, the College Board, CPI from BLS.gov. 58

Annual tuition and fees, average of all public four-year colleges & universities in the U.S. : $1, (1986 CPI = 109.6) : $5, (2006 CPI = 203.8) Solution Convert 1986 figure into “today’s dollars” $1,414 x (203.8/109.6) = $2,629 Even after correcting for inflation, tuition and fees were much lower in 1986 than in 2006! If prices were as high in 1986 as they were in 2006, then tuition & fees in 1986 would have been $2,629, less than half as much as actual tuition & fees in 2006! Tuition and fees have risen much faster than the overall cost of living. 59

How the CPI Is Calculated
Fix the “basket.” The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.” Find the prices. The BLS collects data on the prices of all the goods in the basket. Compute the basket’s cost. Use the prices to compute the total cost of the basket. MEASURING THE COST OF LIVING 60

How the CPI Is Calculated
Choose a base year and compute the index. The CPI in any year equals 100 x cost of basket in current year cost of basket in base year Compute the inflation rate. The percentage change in the CPI from the preceding period. CPI this year – CPI last year CPI last year Inflation rate x 100% = MEASURING THE COST OF LIVING 61

basket: {4 pizzas, 10 lattes}
EXAMPLE basket: {4 pizzas, 10 lattes} $3.00 $2.50 $2.00 price of latte $12 2009 $11 2008 $10 2007 price of pizza year cost of basket $10 x $2 x = $60 $11 x 4 + $2.5 x 10 = $69 $12 x $3 x = $78 Compute CPI in each year 2007: x ($60/$60) = 100 2008: x ($69/$60) = 115 2009: x ($78/$60) = 130 using 2007 base year: Inflation rate: Suggestion: Show students the data in the first three columns of the table. Before showing them the cost of basket calculations, tell them to take 3 minutes to compute the cost of the basket in each of the three years, and use those results to compute the value of the CPI in each of the three years. Then, show the rest of the slide. Or, you can just cruise through this example, but tell them to pay close attention because in a few moments they will have to compute a similar example. 15% 115 – 100 100 x 100% = 13% 130 – 115 115 x 100% = MEASURING THE COST OF LIVING 62

A C T I V E L E A R N I N G 1 Calculate the CPI
A C T I V E L E A R N I N G Calculate the CPI price of beef price of chicken 2004 $4 2005 $5 2006 $9 $6 CPI basket: {10 lbs beef, lbs chicken} The CPI basket cost $120 in 2004, the base year. A. Compute the CPI in 2005. B. What was the CPI inflation rate from ? Part A is not difficult but requires an intermediate step: students must compute the cost of the basket in 2005 to find the CPI in 2005. Part B has two intermediate steps: computing the cost of the basket in 2006, then computing the CPI in 2006. 63

A C T I V E L E A R N I N G Answers price of beef price of chicken 2004 $4 2005 $5 2006 $9 $6 CPI basket: {10 lbs beef, lbs chicken} The CPI basket cost $120 in 2004, the base year. A. Compute the CPI in 2005: Cost of CPI basket in = ($5 x 10) + ($5 x 20) = $150 CPI in 2005 = 100 x ($150/$120) = 125 64

A C T I V E L E A R N I N G Answers price of beef price of chicken 2004 $4 2005 $5 2006 $9 $6 CPI basket: {10 lbs beef, lbs chicken} The CPI basket cost $120 in 2004, the base year. B. What was the inflation rate from ? Cost of CPI basket in 2006 = ($9 x 10) + ($6 x 20) = $210 CPI in = 100 x ($210/$120) = 175 CPI inflation rate = (175 – 125)/125 = 40% 65

What’s in the CPI’s Basket?
This slide replicates Figure 1 from the textbook. Source: Bureau of Labor Statistics, This graph shows just a few highly aggregated categories. A more detailed breakdown is available at the BLS website: look for “Relative Importance of Components in the Consumer Price Index” there. MEASURING THE COST OF LIVING 66

Measuring Macroeconomic Activity

Similar presentations

Presentation on theme: "Measuring Macroeconomic Activity"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Measuring Macroeconomic Activity

Similar presentations

Presentation on theme: "Measuring Macroeconomic Activity"— Presentation transcript:

Similar presentations

About project

Feedback