CHAPTER 24 Tracking the Macroeconomy The National

CHAPTER 24 Tracking the Macroeconomy

The National Accounts q. Almost all countries calculate a set of numbers known as the national income and product accounts. q. The national accounts track the flows of money between different parts of the economy. q. Calculated by US Commerce Dept. 2

The National Accounts earn income via the factor markets from wages, profits, interest, and rents on land. (WPIR) ØHouseholds ØInterest = revenue from loans bonds (loans to firms and governments) generate interest stocks (partial ownership of firms) generate profits (dividends) addition, they receive government transfers from the government. ØIn ØDisposable income, total household income minus taxes, is either expended as consumer spending (C) or goes into private savings. 3

The National Accounts the financial markets, private savings is channeled to firms for investment spending (I). ØVia ØGovernment purchases of goods and services (G) is paid for by tax receipts as well as by government borrowing. ØExports (X) generate an inflow of funds into the country from the rest of the world, while imports (M) lead to an outflow of funds to the rest of the world. Foreigners can also buy stocks and bonds in the U. S. financial markets. (capital inflows and outflows) 4

Gross Domestic Product Gross domestic product or GDP measures the value of all final goods and services produced in the economy. It does not include the value of intermediate goods. Gross National Product or GNP = measures the value of all final goods and services produced by US citizens anywhere in the world. Illegal Mexican aliens in US – their work adds to US GDP Their work is included in Mexico’s GNP; not US GNP 5

Calculating Gross Domestic Product GDP can be calculated three ways: Øadd up the value added of all producers; Øadd up all spending on domestically produced final goods and services, leading to the equation GDP = C+I+G+(X-M) Øadd up the all income paid to factors of production. 6

Calculating GDP 7

Pitfalls: GDP: WHAT’S IN AND WHAT’S OUT Included n n n Domestically produced final goods and services (including capital goods) New construction of structures Changes to inventories Not Included n n n n Intermediate goods and services (not the bads!) (illegal stuff) Inputs Used goods Financial assets like stocks and bonds Foreign-produced goods and services Transfer payments Unpaid home-maker production (cooking, cleaning) 8

U. S. GDP in 2004: Two Methods of Calculating GDP 9

Real vs. Nominal GDP *Real = adjusted for inflation *Nominal = raw numbers (not adjusted for inflation) ØReal GDP is the value of the final goods and services produced calculated using the prices of some base year. in the base year, real GDP is not the same as nominal GDP, output valued at current prices. ØExcept ØReal GDP per capita is a measure of average output person. Used to compare living standards between nations. 10

Calculating GDP and Real GDP in a Simple Economy To calculate Real GDP for year 2, use year 1 prices, and year 2 quantities! 11

Real vs. Nominal GDP 12

Ch. 24 – part 2 n Unemployment and price indexes (indicies? ? ? ) 13

The Unemployment Rate ØThe unemployment rate is an indicator of the state of the labor market. Ø 4. 5 - 5% unemployment = full employment rate may understate the true level of unemployment because it does not include discouraged workers. ØThe 14

Growth and Unemployment There is a strong relationship between growth in aggregate output and changes in the unemployment rate: High output = lower unemployment rate Low output = higher unemployment rate 15

Price Indexes and the Aggregate Price Level ØTo measure the aggregate price level, economists calculate the cost of purchasing a market basket. ØA price index is the ratio of the current cost of that market basket to the cost in a base year, multiplied by 100. 16

Calculating the Cost of a Market Basket 17

Inflation Rate, CPI and other Indexes The inflation rate is the yearly percentage change in a price index, typically based upon Consumer Price Index, or CPI. The consumer price index, or CPI, measures the cost of the market basket of a typical urban American family. Change formula: Big – Little (compliments of Adam Doebert) 18

The Makeup of the Consumer Price Index in 2004 19

The CPI, 1913– 2004 20

Other Price Measures A similar index to CPI for goods purchased by firms is the producer price index. n Economists also use the GDP deflator, which measures the price level by calculating the ratio of nominal to real GDP. n The GDP deflator for a given year is 100 times the ratio of nominal GDP to real GDP in that year. n 21

GDP Deflator example: n n Assume prices double in 1 year (100 % inflation) CPI index goes from 100 to 200 (big-little / little) Nominal GDP X 100 = GDP Deflator Real GDP 2000 / 1000 = 2 X 100 = 200 22

The CPI, the PPI, and the GDP Deflator 23

The End of Chapter 24 24