ECON MACROECONOMIC THEORY Instructor: Dr. Juergen Jung Towson University. J.Jung Chapter 2 - Measurement Towson University 1 / 39

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1 ECON MACROECONOMIC THEORY Instructor: Dr. Juergen Jung Towson University J.Jung Chapter 2 - Measurement Towson University 1 / 39

2 Disclaimer These lecture notes are customized for Intermediate Macroeconomics 310 course at Towson University. They are not guaranteed to be error-free. Comments and corrections are greatly appreciated. They are derived from the Powerpoint c slides from online resources provided by Pearson Addison-Wesley. The URL is: These lecture notes are meant as complement to the textbook and not a substitute. They are created for pedagogical purposes to provide a link to the textbook. These notes can be distributed with prior permission. This version compiled February 7, J.Jung Chapter 2 - Measurement Towson University 2 / 39

3 Chapter 2: Measurement J.Jung Chapter 2 - Measurement Towson University 3 / 39

4 Chapter 2: Measurement 1 Understand basic issues concerning measurement of key macroeconomic variables 2 Need understanding of variables to understand the important role they play in economic models 3 Measuring GDP 4 Nominal and real GDP and price indices 5 Savings, wealth and capital 6 Labor market measurement J.Jung Chapter 2 - Measurement Towson University 4 / 39

5 Measurement: A Review Gross Domestic Product (GDP): dollar value of final output produced during a given period of time domestically. In the United States (US) measured quarterly as part of National Income and Product Accounts (NIPA). Three approaches: 1 Product - sum of all the value-added in the economy (do not count intermediate goods). 2 Expenditure - total spending on all final goods and services in the economy (do not count intermediate goods). 3 Income - add up all incomes received by economic agents contribution to production. GDP C I G NX $18,000 $12,300 $3,000 $3,312 -$630 J.Jung Chapter 2 - Measurement Towson University 5 / 39

6 Components of GDP (2014) J.Jung Chapter 2 - Measurement Towson University 6 / 39

7 J.Jung Chapter 2 - Measurement Towson University 7 / 39

8 J.Jung Chapter 2 - Measurement Towson University 8 / 39

9 National Income Accounting J.Jung Chapter 2 - Measurement Towson University 9 / 39

10 Firm, Government and Household Sector J.Jung Chapter 2 - Measurement Towson University 10 / 39

11 GDP Using the Product Approach J.Jung Chapter 2 - Measurement Towson University 11 / 39

12 GDP Using the Expenditure Approach J.Jung Chapter 2 - Measurement Towson University 12 / 39

13 GDP Using the Income Approach J.Jung Chapter 2 - Measurement Towson University 13 / 39

14 Extensions Production of 13 million coconuts (instead of 10) and storing the additional 3 million Restaurant imports 2 million coconuts from other islands for $2.00 each and all of the coconuts are used in the Restaurant J.Jung Chapter 2 - Measurement Towson University 14 / 39

15 U.S. GDP: Key Components J.Jung Chapter 2 - Measurement Towson University 15 / 39

16 Problems with measuring GDP J.Jung Chapter 2 - Measurement Towson University 16 / 39

17 Nominal vs. Real GDP J.Jung Chapter 2 - Measurement Towson University 17 / 39

18 An Example of Nominal and Real GDP J.Jung Chapter 2 - Measurement Towson University 18 / 39

19 An Example: Nominal GDP Period 1 nominal GDP is GDP 1 = P1 aqa 1 + Po 1 Qo 1 = (1.x50) + (.8x100) = 130. Period 2 nominal GDP is GDP 2 = P2 aqa 2 + Po 2 Qo 2 = (1.25x80) + (1.6x120) = 292. Percentage growth in nominal GDP from 1 to 2 is : x100 = 125 percent GDP 2 GDP 1 GDP 1 J.Jung Chapter 2 - Measurement Towson University 19 / 39

20 An Example: Real GDP Setting period 1 real GDP as period 1 nominal GDP RGDP 1 = GDP 1 = 130. Holding prices constant in period 1 prices RGDP 2 = P1 aqa 2 + Po 1 Qo 2 = (1.x80) + (.8x120) = 176. Percentage growth in real GDP from 1 to 2 is : RGDP 2 GDP 1 RGDP 1 x100 = = 35.4 percent Holding prices constant in period 2 prices, real GDP in period 1 is RGDP 1 = P2 aqa 1 + Po 2 Qo 1 = (1.25x50) + (1.6x100) = J.Jung Chapter 2 - Measurement Towson University 20 / 39

21 Chain-weighted Measure Chain-weighted ratio of real GDP between two periods is: g c = (g 1 ).5 (g 2 ).5 g c = (RGDP 1 2 /RGDP1 1 ).5 (RGDP 2 2 /RDGP2 1 )5. = This is a geometric average between consecutive ratios, each using either base year. So period 2 real GDP in period 1 dollars is GDP 1 g c = = Or period 1 real GDP in period 2 dollars is GDP 2 g c = = J.Jung Chapter 2 - Measurement Towson University 21 / 39

22 Figure 1: Nominal and Chain-Weighted GDP J.Jung Chapter 2 - Measurement Towson University 22 / 39

23 Price Level and CPI Inflation J.Jung Chapter 2 - Measurement Towson University 23 / 39

24 Measures of Aggregate Price Level General Price Level (P-GDP) Implicit GDP price deflator = Consumer Price Index (CPI) Nominal GDP Real GDP 100 CPI = Price current Quantity base Price base Quantity base 100 CPI 1 = 100 and CPI 2 = = J.Jung Chapter 2 - Measurement Towson University 24 / 39

25 Measures of Aggregate Price Level (cont.) J.Jung Chapter 2 - Measurement Towson University 25 / 39

26 Figure 2: Inflation using CPI and GDP deflator J.Jung Chapter 2 - Measurement Towson University 26 / 39

27 Figure 3: Price Level, CPI vs. GDP deflator J.Jung Chapter 2 - Measurement Towson University 27 / 39

28 Figure 4: The Relative Price of Housing in the United States J.Jung Chapter 2 - Measurement Towson University 28 / 39

29 Accounting Identities J.Jung Chapter 2 - Measurement Towson University 29 / 39

30 Stocks vs. Flows Private disposable Income (Y d ) Y d = Y + NFP + TR + INT T NFP = Net Factor Payments, TR = Transfers from Govt to Private sector, INT=interest on govt debt, T = Taxes J.Jung Chapter 2 - Measurement Towson University 30 / 39

31 Unemployment J.Jung Chapter 2 - Measurement Towson University 31 / 39

32 Who is Unemployed? Jack having lost his job in a car factory 15 year old Mike going to High school Homemakers Undergrad student at TU looking for a summer job in June Person who is serving in the army Uncle Bob working 10 hours per month at the local library Ski instructor in June in Colorado J.Jung Chapter 2 - Measurement Towson University 32 / 39

33 Definition of Unemployment Labor Force: 16+, non-institutionalized non-retired non-student non-military and able to work Labor Force = Employed + Unemployed J.Jung Chapter 2 - Measurement Towson University 33 / 39

34 Unemployment: Labor Force and Unemployment J.Jung Chapter 2 - Measurement Towson University 34 / 39

35 Labor Force Participation Rate in 2015 The labor force participation rate is the fraction of the population that is over 16 years of age that is in the labor force labor force participation rate = labor force population 16 The labor force participation rate for this year was 62.8% Thee unemployment rate was 5.5% J.Jung Chapter 2 - Measurement Towson University 35 / 39

36 Four Types of Unemployment 1 Frictional Unemployment 2 Seasonal Unemployment 3 Structural Unemployment 4 Cyclical Unemployment J.Jung Chapter 2 - Measurement Towson University 36 / 39

37 Question Revisited: Who is Unemployed? Jack having lost his job in a car factory 15 year old Mike going to High school Homemakers Undergrad student at TU looking for a summer job in June Person who is serving in the army Uncle Bob working 10 hours per month at the local library Ski instructor in June in Colorado J.Jung Chapter 2 - Measurement Towson University 37 / 39

38 Unemployment Rates around the World J.Jung Chapter 2 - Measurement Towson University 38 / 39

39 Alternative Measures of Unemployment J.Jung Chapter 2 - Measurement Towson University 39 / 39