Macroeconomics-Macroeconomic Measurement

Aggregation

combination of many different things into a single economic variable

Formal definition of GDP

the market value of all final goods and services produced within a country during a specified period of time

Impact of market value on GDP

higher-priced goods contribute more to total GDP because they have a higher value to customers

Intermediate goods

goods that are used up in the production of a final good

Capital goods

long-lived goods that are themselves produced and are used to produce other goods and services but are not used up in production; included in GDP of the year they are produced

Sir William Petty

tried to assess the ability of the Irish people to pay taxes to the crown

Simon Kuznets

economist commissioned by Department of Commerce to develop a system to measure national output, received Nobel Prize in Economic Science

Non-market production

goods that are not bought and sold in markets

Limitations of GDP

not always easy to determine what constitutes final goods and services, excludes non-market production, ignores activities that may increase GDP but do not make us better off

Consumption expenditures

household purchases

Consumer durables

long-lived consumer goods, are sensitive to changes in interest rates

Consumer nondurables

goods that are used up more quickly than durable goods

Services

intangible goods

Investment

spending by firms on final goods and services, household purchases of new houses; reserved for the purchase of new capital goods

Business fixed investment

aka capital investment; business purchases of factories, offices, machinery, equipment, etc; sensitive to interest rates

Residential fixed investment

purchase of new homes and apartment buildings

Inventories

additions of unsold goods to company inventories

Government purchases

goods and services purchased by federal, state, and local governments

Transfer payments

not counted in government purchases; ex. Social Security benefits

Net exports

difference between the value of domestically produced goods sold to foreigners (exports) and the value of foreign-produced goods purchased by domestic buyers (imports)

Equation for GDP

GDP=C+I+G+NX

GDP identity

GDP=Production=Expenditures=Income

Real GDP

GDP calculated using prices from a base year

Nominal GDP

GDP calculated with current year prices

Consumer Price Index (CPI)

measures the cost of purchasing a market basket of goods and services representative of the consumption of a typical consumer; expressed as an index number relative to cost in base year

Bureau of Labor Statistics

calculates CPI by conducting surveys of consumer expenditures

CPI formula

CPI in year t=100*(cost of bundle in year t)/(cost of bundle in base year)

Use of CPI

used to determine Social Security benefit payments, adjust wages

Inflation rate

rate of change in CPI from one time period to another; inflation rate=100*(CPI year 2-CPI year 1)/(CPI year 1)

Flaws of CPI

typically overstates the true increase in the cost of living by 1.3% per year

Substitution bias

as relative prices change, households shift their consumption away from more expensive goods to less expensive ones

Unmeasured quality change

price of goods typically rise as they improve due to technological change

New goods and services

new goods may not be included in CPI calculations until they achieve large market penetration

GDP deflator

measure of the relationship between real and nominal GDP; GDP deflator=100*(Nominal GDP)/(Real GDP); reflects only the prices of domestically produced goods

Unemployment rate

percentage of the labor force that is unable to find a job

Labor force

all working-age adults who are either employed or are actively seeking work; sum of the employed and unemployed

Employed

worked for pay full or part-time during the previous week or is on vacation/sick leave from a regular job

Unemployed

did not work during the previous week but made some effort to find employment during the past four weeks

Out of the labor force

did not work during the past week and did not actively seek work during the previous four weeks

Labor force participation rate

ratio of those in the labor force to the working age population

Frictional unemployment

unemployment caused by the time it takes workers to find jobs and the entry of new workers into the labor force

Structural unemployment

unemployment caused by the mismatch between job openings and job seekers

Cyclical unemployment

unemployment caused by the increase in lay-offs and decrease of new hires during a recession; NRU-actual rate of unemployment

Natural rate of unemployment (NRU)

frictional and structural rate of unemployment; if actual rate is below NRU, inflation occurs, if actual rate is above NRU, recession could occur