Chapter 2:

The Data of Macroeconomics

 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
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
The Circular Flow on Income and Product

Income Payment

Labor Resources

Labor Market

Firms Households
Product Market
Products

Consumption Expenditure
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)
 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
 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
 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
 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
 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
 Base Year Determination
Real GDP:
Base year changes every five years

Chain-Weighted Real GDP:

Base year changes continuously over
time
 Components of GDP
Nominal GDP
= Consumption
+ Investment
+ Government purchases
+ Net Exports: exports less imports

Y = C + I + G + NX
(1997 data in %: 100 = 68 + 15 + 18 1)
Data
 National Income Accounting

GNP: Gross National Product

= GDP
+ Factor payments from abroad
- Factor payments to abroad
 National Income Accounting

NNP: Net National Products

= GNP
- Depreciation or Consumption of Fixed Capital
(about 10%)
 National Income Accounting

NI: National Income

= NNP
Indirect Business Taxes (e.g., sales tax; about 10%)
 National Income Accounting
PI: Personal Income
= NI
- Corporate Profits
- Social Insurance Contributions
- Net Interest
+ Dividends
+ Govt Transfer Payments to Individuals
+ personal Interest Income
 National Income Accounting

DPI: Disposable Personal Income

= PI
- Personal Income Taxes
 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
 GDP Deflator vs. CPI

Variable weights vs. Fixed weights

All products vs. Selected products

Domestic products vs. Domestic and imported

products
GDP Deflator vs. CPI
 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

 Population vs. Labor Force

Population = Labor force + + Not in labor force

In 1997, 203.1 million

Labor force = Employed + Unemployed

In 1997, 129.6 + 6.7 = 136.3 million
 Population vs. Labor Force

6.7
Unemployed
Not in the labor
force
66.8

129.6

Employed
 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%
Unemployment Conditions

Members of the labor force

Out of work

Actively looking for work

 The Okuns 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%
Growth-Unemployment Trade-off