CHAPTER 24
Tracking the Macroeconomy
PowerPoint® Slides
by Can Erbil
© 2005 Worth Publishers, all rights reserved
What you will learn in this chapter:
How economists use aggregate measures to track the performance of the economy.
What gross domestic product , or GDP, is and the three ways of calculating it
The difference between real GDP and nominal GDP and why real GDP is the appropriate measure of real economic activity
The significance of the unemployment rate and how it moves over the business cycle
What a price index is and how it is used to calculate the inflation rate
An Expanded Circular-Flow Diagram: The Flows of Money Through the Economy
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.
Calculating GDP
In this hypothetical economy consisting of three firms, GDP can be calculated in three different ways: Measuring GDP as the value of production of final goods and services, by summing each firm’s value added; measuring GDP as spending on domestically produced final goods and services, and measuring GDP as factor income earned from firms in the economy.
. GDP in 2004: Two Methods of Calculating GDP
Real vs. Nominal GDP
Real GDP: the value of the final goods and services produced calculated using the prices of some base year.
Nominal GDP: output valued at current prices.
Real GDP per capita is a measure of average output per person, but is not by itself an appropriate policy goal.
Calculating GDP and Real GDP in a Simple Economy
Real vs. Nominal GDP
Real vs. Nominal GDP
To illustrate the difference between nominal GDP and real GDP, this figure shows the percent change in both measures over successive decades within the United States. (Real GDP was calculated using chained 2000 dollars.) The years 1929–1939 show the effect of deflation on the difference between nominal and real GDP: . nominal GDP in 1939 was 11% lower than in 1929, but . aggregate output as measured by real GDP was nearly 10% higher. The remaining years show the effect of inflation on the difference between the two measures: relatively high growth of . nominal GDP in the years 1969–1979 and 1979–1989 contrast with relatively low growth of . real GDP during those same periods. Those years experienced high levels of inflation and a simultaneous slowdown in real GDP growth.
Source: Bureau of Economic Analysis.
Unemployment Rate
The overall unemployment rate in January 2005 was %. But underlying this average were wide variations in unemployment rates for different demographic groups: African-Americans had a much higher unemployment rate than whites, and young workers had much higher unemployment rates than older workers.
The Relationship between Real GDP and Unemployment, 1949-2004
The horizontal axis measures the annual growth rate of real GDP, the vertical axis measures the change in the unemployment rate over the previous year, and each dot represents one year over the period 1949–2004. The data show that there is typically a negative relationship between growth in the economy and the change in the rate of unemployment. The vertical dashed line is drawn at a value of %, the average growth rate of real GDP from 1949 to 2004. Points lying to the right of the vertical dashed line indicate that years of above-average growth were typically years of a falling unemployment rate. Points lying to the left show that years of below-average growth were typically years of a rising unemployment rate. The downward trend of the scatter points shows that there is, in general, a negative relationship between the real GDP growth rate and the change in the unemployment rate.
Source: Bureau of Economic Analysis; Bureau of Labor Statistics.
Price Indexes and the Aggregate Price Level
A price index is the ratio of the current cost of that market basket to the cost in a base year, multiplied by 100.
Calculating the Cost of a Market Basket
The Makeup of the Consumer Price Index in 2004
The CPI, 1913–2004
Since 1940 the CPI has risen steadily. But the annual % increases in recent years have been much smaller than those of the 1970s and early 1980s. (The vertical axis is measured in log scale so that equal % changes in the CPI appear the same.)
The CPI, the PPI, and the GDP Deflator
As the figure shows, these three different measures of inflation usually move closely together. Each reveals a drastic acceleration in the inflation rate during the 1940s and the 1970s and a return to relative price stability in the 1990s.
The End of Chapter 7
coming attraction:
Chapter 8:
Long-Run Economic Growth
In this hypothetical economy consisting of three firms, GDP can be calculated in three different ways: Measuring GDP as the value of production of final goods and services, by summing each firm’s value added; measuring GDP as spending on domestically produced final goods and services, and measuring GDP as factor income earned from firms in the economy.
To illustrate the difference between nominal GDP and real GDP, this figure shows the percent change in both measures over successive decades within the United States. (Real GDP was calculated using chained 2000 dollars.) The years 1929–1939 show the effect of deflation on the difference between nominal and real GDP: . nominal GDP in 1939 was 11% lower than in 1929, but . aggregate output as measured by real GDP was nearly 10% higher. The remaining years show the effect of inflation on the difference between the two measures: relatively high growth of . nominal GDP in the years 1969–1979 and 1979–1989 contrast with relatively low growth of . real GDP during those same periods. Those years experienced high levels of inflation and a simultaneous slowdown in real GDP growth.
Source: Bureau of Economic Analysis.
The overall unemployment rate in January 2005 was %. But underlying this average were wide variations in unemployment rates for different demographic groups: African-Americans had a much higher unemployment rate than whites, and young workers had much higher unemployment rates than older workers.
The horizontal axis measures the annual growth rate of real GDP, the vertical axis measures the change in the unemployment rate over the previous year, and each dot represents one year over the period 1949–2004. The data show that there is typically a negative relationship between growth in the economy and the change in the rate of unemployment. The vertical dashed line is drawn at a value of %, the average growth rate of real GDP from 1949 to 2004. Points lying to the right of the vertical dashed line indicate that years of above-average growth were typically years of a falling unemployment rate. Points lying to the left show that years of below-average growth were typically years of a rising unemployment rate. The downward trend of the scatter points shows that there is, in general, a negative relationship between the real GDP growth rate and the change in the unemployment rate.
Source: Bureau of Economic Analysis; Bureau of Labor Statistics.
Since 1940 the CPI has risen steadily. But the annual % increases in recent years have been much smaller than those of the 1970s and early 1980s. (The vertical axis is measured in log scale so that equal % changes in the CPI appear the same.)
As the figure shows, these three different measures of inflation usually move closely together. Each reveals a drastic acceleration in the inflation rate during the 1940s and the 1970s and a return to relative price stability in the 1990s.
