1. Chapter 2: The Data of Macroeconomics

2. Stock vs. Flow Stock: quantity measured at a given point in time
Wealth
Debt
Budget
Flow: quantity measured per unit of time
Income
Employment
Price

3. The Circular Flow on Income and Product
Households:
sell labor resources to earn income
spend income to buy products
Firms:
buy labor resources to produce products
sell products to earn income

4. The Circular Flow on Income and Product
Income Payment
Labor Resources
Labor Market
Households
Firms
Product Market
Products
Consumption Expenditure

5. Gross Domestic Product
Market value of all final goods and services an economy produces in a current time period (year or quarter)
Total income = Total expenditure
Total value-added (value of output minus value of inputs at each production stage)

6. GDP Adjustments The GDP excludes the following items:
Intermediate goods: avoid double counting
Used goods: already counted
Illegal goods and services: not to be produced
Self-produced goods and services: non-market transactions

7. GDP Adjustments Treatment of inventories:
Accumulation is treated as “expenditure,” thus reducing GDP
Reduction is treated as a purchase (+) and a disinvestment (-), hence offsetting each other

8. GDP Adjustments Imputation: estimation of the value of services
Market rent for owner-occupied homes
Cost of provision for government services
Note: Imputation is not applied to other services such as private transportation

9. GDP Adjustments Seasonal adjustment:
GDP increases throughout the year, reaching a peak in the fourth quarter and then falling in the first quarter
We use a statistical technique to “smooth” seasonal variations

10. GDP Calculations
Nominal GDP = Current year prices * Current year quantities
Real GDP = Base year prices * Current Year quantities
GDP Deflator = Nominal GDP / Real GDP, representing the general price level

11. Base Year Determination
Real GDP:
Base year changes every five years
Chain-Weighted Real GDP:
Base year changes continuously over time

12. Components of GDP Nominal GDP Y = C + I + G + NX
= Consumption
+ Investment
+ Government purchases
+ Net Exports: exports less imports
Y = C + I + G + NX
(1997 data in %: 100 = –1)

13. Data

14. National Income Accounting
GNP: Gross National Product
= GDP
+ Factor payments from abroad
Factor payments to abroad

15. National Income Accounting
NNP: Net National Products
= GNP
Depreciation or Consumption of Fixed Capital (about 10%)

16. National Income Accounting
NI: National Income
= NNP
Indirect Business Taxes (e.g., sales tax; about 10%)

17. National Income Accounting
PI: Personal Income
= NI
- Corporate Profits
- Social Insurance Contributions
- Net Interest
+ Dividends
+ Gov’t Transfer Payments to Individuals
+ personal Interest Income

18. National Income Accounting
DPI: Disposable Personal Income
= PI
- Personal Income Taxes

19. Measuring Cost of Living
Consumer Price Index:
Average weighted prices of some 400 consumer products sold in urban areas around the nation
CPI = (current year market basket / base year market basket)*100

20. GDP Deflator vs. CPI Variable weights vs. Fixed weights
All products vs. Selected products
Domestic products vs. Domestic and imported products

21. GDP Deflator vs. CPI

22. Does CPI Overstates Inflation?
CPI tends to overstate inflation because
Substitution for less expensive goods is not considered in the fixed market basket
New goods are continuously introduced in the market
Improvement in the quality of goods is not considered

23. Population vs. Labor Force
Population = Labor force + + Not in labor force
In 1997, million
Labor force = Employed + Unemployed
In 1997, = million

24. Population vs. Labor Force

25. Labor Market Data Unemployment rate = unemployed as % of labor force
In 1997, (6.7/136.3)*100 = 4.9%
Labor force participation rate = labor force as % of adult population
In 1997, (136.3/203.1)*100 = 67.1%

26. Unemployment Conditions
Members of the labor force
Out of work
Actively looking for work

27. The Okun’s Law
For any percentage point increase in the unemployment rate, the real GDP growth rate falls by 2 percent
Change in real GDP = 3% - 2(change in unemployment rate)
Example: if unemployment increases from 4 to 6%, GDP growth rate would fall from 3 to –1%

28. Growth-Unemployment Trade-off