Chapter 2
Measuring
Macroeconomic
Data
Preview
• To examine the different approaches to
measuring gross domestic product
• To understand real versus nominal GDP
• To understand how to measure inflation
• To understand how to measure
unemployment
• To understand different interest rates
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Measuring Economic Activity:
National Income Accounting
• Gross domestic product (GDP) is the
total value of goods and services produced
in an economy
– the broadest measure of economic activity
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Measuring Economic Activity:
National Income Accounting (cont’d)
• National income accounting is an
accounting system that measures economic
activity and its components
• Fundamental identity of national
income accounting:
Total Production = Total Expenditure = Total Income
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Measuring GDP: The Production
Approach
• GDP is the current market value of all final
goods and services newly produced in the
economy during a fixed period of time
• In the case of apples and oranges, we
multiply the their prices and quantities, and
then add them up:
GDP = (price of apples ✕ quantity of apples)
+ (price of oranges ✕ quantity of oranges)
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Market Value
• Not all goods and services are counted in
GDP because they are:
– Nonmarket goods and services, which do not
have a market price (e.g., household services
produced within a family), or
– Produced in the underground economy
• Many nonmarket goods and services are
counted in GDP by their imputed values
Chỉ tính final goods bởi vì Final goods đã
bao gồm intermidiate goods và added
value
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Newly Produced Goods and Services
• GDP includes only goods and services that
are newly produced in the current period
• If you buy a 3-year-old car from a car
dealership
– The cost of the used car is not included in GDP
– The value of the services provided by the car
dealership is included in GDP
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Valued-Added Technique
• Value added is the value of a firm’s
output minus the cost of the intermediate
goods purchased by the firm
• By adding up the value added from each
firm, we get the final value of the goods
and services produced
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Capital Goods
• A capital good (e.g., a robot) is used in the production of other goods that is not
used up in the stages of production
• New capital goods are classified as final goods because they are not included in
spending on other final goods and yet their production is part of economic activity
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Capital Goods and Intermediate
goods
*Similarities:
•Both goods needed to produce final goods
*Differences:
•Intermediate goods: Use up (Decrease
gradually in production) Eg: Steel
•Capital goods: not use up (remains stable)
Eg: Robots
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Inventory Investment
• Inventory investment is the change in
inventories (firms’ holdings of raw
materials, unfinished goods and unsold
finished goods) over a given period of time
• Inventory investment is included in GDP for
the same reason that we include capital
goods
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Fixed Period of Time
• We calculate GDP over a fixed period of
time, such as a quarter or a year
• GDP is a flow, which is an amount per a
given unit of time
Eg: salary 500$ per month
• By contrast, a stock is a quantity at a
given point in time
Eg: Savings: 1000$
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Policy and Practice: Can GDP Buy
Happiness?
• Is GDP the best measurement of national well-
being?
• In 1972, the king of Bhutan proposed the
replacement of GDP by “gross national happiness”
that incorporates factors such as spirituality and
culture
• In 1990, the United Nations began to rank countries
on a so-called human development index, which is a
combination of life expectancy, education, literacy,
educational participation, and GDP
• In 2008, a French economic commission led by
Nobel Prize winner Joseph Stiglitz called for
modifications to GDP with factors such as political
freedom, physical safety, and work-life balance
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Box: Stocks Versus Flows
• A stock is often an accumulation of flows
over time
• Examples:
– Inventory investment is a flow, which
accumulates into the stock of inventories
– Saving is a flow, which accumulates into a
person’s wealth
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Measuring GDP: The
Expenditure Approach
• GDP is the total spending on currently
produced final goods and services in the
economy
• National income identity:
Y = C + I + G + NX
where
Y = GDP = total production (output)
C = consumption expenditure
I = investment
G = govt. purchases of goods & services
NX = net exports = exports – imports
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Consumption Expenditure
• Total spending for currently produced consumer
goods and services
• Consumption was 68.7% of GDP in 2012
• Basic categories:
1. Consumer durables: Goods purchased by consumers
that last a long time (Fluctuate significantly)
Eg: Laptop, car
2. Nondurable goods: Short-lived consumer goods
( Stay stable) Eg: goods
3. Services Eg: healthcare, education, insurance,
leisure, travel
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Consumption Expenditure
People tend to delay buying consumer durables during economic
downturns or uncertainty.
In developed economies, the largest share of
consumption usually goes to: Services
Why?
•Developed countries have high living standards and
most basic material needs (food, clothing, appliances) are
already met.
•People value experiences, health, and convenience
more.
•There's a larger aging population, increasing demand
for healthcare and retirement services.
•Services can't be postponed as easily (e.g., dental
checkups, subscriptions).
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Investment
• Spending on currently produced capital
goods that are used to produce goods and
services over an extended period of time
• Investment was 15.2% of GDP in 2012
• Basic categories:
1. Fixed investment: Spending by businesses on
equipment
2. Inventory investment: Change in inventories
held by firms
3. Residential investment: Household purchases
of new houses
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Box: Meaning of the Word
Investment
• For non-economists, an investment
normally refers to the purchase of common
stocks or bonds
• For economists, investment spending refers
to the purchase of physical assets, such as
new machines or new houses—purchases
that add to GDP
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Government Purchases
• Spending by the government on currently
produced goods and services
• Government purchases were 19.2% of GDP
in 2012
• Government consumption includes
government purchases for short-lived goods
and services like health care and police
• Government investment includes spending
for capital goods like buildings and computers
represents
• Pure government transfers (e.g., Social
Security and Medicare) are excluded from G
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Net Exports
• Net exports (or trade balance) are
exports minus imports
• Why subtract imports from GDP?
– Answer: Spending on imports is included
in consumption expenditure, investment,
and government purchases, but is not
produced in this country
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Changes in the Spending Components
of GDP Over Time
• Consumption grew steadily as a share of
GDP from 1970 to 2012
• Investment is much more volatile than
other components of GDP
• Government purchases have actually
remained quite stable at around 20% of
GDP
• Net exports have been negative
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Box: An International Comparison of
Expenditure Components
• The United States differ from other
countries by having the highest share of
GDP going to consumption, the lowest
share of investment, and net exports have
been negative
• By contrast, China has the lowest share of
consumption, the highest share of
investment, and the largest share of net
exports
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Measuring GDP: The Income
Approach
• Compensation of employees – wages and salaries of
employees, and employee benefits
• Corporate profits – profits after taxes of corporations
• Other income – income of the self-employed, royalty income
and net interest earned by individuals, etc.
• Depreciation – the loss of value of capital from wear and tear
(net domestic product = GDP – depreciation)
• Net factor income – wages, profits, and rent paid to U.S.
(domestic) residents by foreigners minus factor income paid
by U.S. (domestic) residents to foreigners
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TABLE 2.2 INCOME APPROACH TO
GDP, 2012
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Income Measures
• National income = Compensation of
employees + other income + corporate
profits
• Gross national product (GNP) = national
income + depreciation
– total income earned by U.S. residents
• Gross domestic product (GDP) = GNP -
net factor income
– domestically produced measure of gross product
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Real Versus Nominal GDP
• A nominal variable is a measure at
current market (nominal) prices (e.g.,
nominal GDP)
• A real variable is a measure in terms of
quantities of actual goods and services
(e.g., real GDP)
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Real Versus Nominal GDP
(cont’d)
Nominal GDP
Real GDP =
Price Level
or
Nominal GDP = Price Level ✕ Real GDP
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Real Versus Nominal GDP
(cont’d)
• If 2005 is the base year, then real GDP for
the year 2014 is:
Real GDP in 2014 =
(price of apples in 2005 ✕ quantity of apples in 2014)
+ (price of oranges in 2005 ✕ quantity of oranges in
2014)
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Real Versus Nominal GDP
(cont’d)
• Raw data on GDP tends to fall in cold and
snowy months
• Therefore, economic statistics like GDP data
are seasonally adjusted to account for
regular seasonal fluctuations within a year
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Chain-Weighted Measures of Real
GDP
• If prices of some important goods changed
dramatically relative to other goods, using a
fixed base-year for prices when calculating
real GDP can produce misleading results
• Chain-weighted measures of GDP allow
the base year to change continuously
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Measuring Inflation
• Price indexes are measures of the price
level
• Examples:
– GDP deflator (or implicit price deflator)
– Personal consumption expenditure deflator
– Consumer price index
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GDP Deflator
GDP Deflator for Year y
Nominal GDP in Year y
= 100 x
Real GDP in Year y
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PCE Deflator
PCE Deflator for Year y
Nominal PCE in Year y
= 100 x
Real PCE in Year y
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Consumer Price Index
• A measure of the average prices of
consumer goods and services, i.e., a cost of
living index
• Calculated monthly by the Bureau of Labor
Statistics using a basket of thousands of
consumer goods and services
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Consumer Price Index
• If the basket consists of 10 gallons of gas
and 2 apples, then the CPI for 2014 with a
base year of 2005 is:
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Policy and Practice: Policy and
Overstatements of the Cost of Living
• The CPI is used in determining labor
contracts and government payments such
as Social Security benefits
• A study led by Michael Boskin of Stanford
University found that increases in the CPI
overstate increases in the cost of living by
1% point
• Measurements errors in the CPI could have
important implications
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Inflation Rate
• The inflation rate is the % rate of change of
the price level over a particular period:
Pt - Pt 1 Pt
t = =
Pt 1 Pt 1
where
t = inflation rate in period t
Pt = period level at time t
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Percentage Change Method and the
Inflation Rate
• Because:
% Change in ( x X y ) = (% Change in x)
+ (% Change in y )
• We know that:
% Change in No min al GDP =
(% Change in the Price Level)
+ (% Change in Real GDP)
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Percentage Change Method and the
Inflation Rate (cont’d)
• Because the % change in the price level is
the inflation rate, while the % changes in
nominal and real GDP are the growth rate:
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Measuring Unemployment
• The unemployment rate is the percentage of
people in the civilian population who want to
work but who do not have jobs
• The Bureau of Labor Statistics classifies each
adult over age 16 into:
1. Employed
2. Unemployed
3. Not in the labor force
• Discouraged workers (those who would live to work but
have given up looking, and those who have voluntarily left
the labor force)
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Measuring Unemployment
(cont’d)
Labor Force =
Number of Employed + Number of Unemployed
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Measuring Unemployment (cont’d)
Labor Force
Labor-Force Participation Rate =
Adult Population
Employed
Employment Ratio =
Adult Population
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FIGURE 2.5 Unemployment in the
Adult Civilian Population, 2013
Source: Federal Reserve Bank of St. Louis, FRED Database. [Link]
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Macroeconomics In The News:
Unemployment and Employment
• The Bureau of Labor Statistics reports employment
and unemployment data using two alternative
surveys: the household survey and the survey of
business establishments
• The two surveys sometimes give a different picture
of labor market conditions due to:
• The household survey counts workers, while the
establishment survey counts jobs
• The household survey counts the self-employed as
working, while the establishment does not
• The establishment survey covers more workers
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Measuring Interest Rates
• An interest rate is the cost of borrowing,
or the price paid for the rental of funds
• Interest rates are returns for holding debt
securities, such as bonds
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Macroeconomics In The News:
Interest Rates
• Interest rates that receive media attention
are:
– Prime rate
– Federal funds rate
– London Inter-Bank Offered Rate (LIBOR)
– Treasury bill rate.
– Ten-year Treasury bond rate
– Federal Home Loan Mortgage Corporation rate
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Real Versus Nominal Interest Rates
• A nominal interest rate makes no
allowance for inflation
• The real interest rate is the amount of
extra purchasing power a lender must be
paid for the rental of his/her money
– The ex ante real interest rate is adjusted
for expected changes in the price level
– The ex post real interest rate is adjusted
for actual changes in the price level
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Real Versus Nominal Interest Rates
(cont’d)
• The Fisher equation:
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Real Versus Nominal Interest Rates
(cont’d)
• Example: For a one-year loan with a 4% nominal
interest rate (i=4%) and you expect the inflation to be
6% in a year ( =6%), then: e
r = 4% - 6% = -2%
• When the real interest rate is low, there are greater
incentives to borrow and invest, but fewer incentives
to lend.
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The Important Distinction Between
Real and Nominal Interest Rates
• Credit markets are where households and
businesses get funds (credit) from each
other
• Because the real interest rate reflects the
real cost of borrowing, it is likely to be a
better indicator of the incentives to borrow,
invest, and lend in credit markets than
nominal interest rates
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1) The statistic most often used by economists to measure the value of economic
activity is => GDP
2) The production approach to measuring GDP requires ____=> that the market
value of a given good is a reasonable approximation of its economic value
3) The reason only newly produced goods and services are counted in GDP is that
it allows economists to avoid double counting the production of goods and services
4) To avoid double counting in the calculation of GDP, which types of goods are
typically excluded from the calculation? => intermediate goods
5) Capital goods are typically purchased to ________. They get included in GDP
________. => enable the investor to produce other goods and services; in the year
they are produced
6) The difference between inventories and inventory investment is that typically
=> the first one is a stock of unfinished or unsold goods; the second one is a flow that
indicates productive activity
7) If C is consumption, I is investment, G is government purchases and NX is net
exports, according to the expenditure approach, Y would stand for ________; and
the national income identity could be written as ________. => GDP; Y - C - I = G
+ NX
8) Which of the following will be counted as an expenditure in the measurement of
GDP? (Assume that none of the transactions is concealed from the relevant
authorities.)
=> Copyright
purchase, usingEducation
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9) Which of the following will be counted as an investment expenditure in the
measurement of GDP? => purchase of an apartment in a newly-built building
10) An international comparison of eight major industrialized countries
reveals the following about the components of GDP: ____=> the U.S. runs one of the
largest trade deficits
11) An international comparison of eight major industrialized countries reveals the
following about the components of GDP: _____=> all of the above
12) Over the past half-century, government transfer payments have increased. As a
result ___=> none of the above
13) The income approach to measuring GDP involves adding up the following ___
=> household income and income generated by firms
14) Which of the following is included in the calculation of national income?
all of the above
15) In a country with unusually high tax rates, one might expect that __
=> GDP might be understated because its citizens might avoid reporting some of their
income
16) Net national product + ________ = ________. => depreciation; gross national
product
17) Which of the following is included in net government income? => taxes
18) Which is the largest category of income in the United States?
=> employee compensation
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7) Which component of employee compensation has grown most rapidly in recent
decades? => benefits
8) Private disposable income equals GDP ________.
=> plus net factor income minus net government income
9) The total income earned by residents of an economy is known as
gross national product
10) Subtraction of ________ from Gross National Product yields Gross Domestic
Product. => net factor income
11) All income, production, and expenditure variables that are measured at current
market prices are referred to as ________. => nominal variables
12) An example of a nominal variable is ________.=> income measured at current
market prices
13)The most frequently reported price index is ______=> the consumer price index
(CPI)
14) Nominal GDP =________ where the price level is the ________.
Price level × Real GDP; GDP deflator
15) Real GDP =________ where the price level is the ________.
Nominal GDP ÷ Price level; GDP deflator
16) Examples of deflators are the ________ and ________ deflator
=> personal consumption expenditure; gross domestic product
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17) Examples of deflators are the _______and ________ deflator => none of the above
18)To compute the CPI, the Bureau f Labor Statistics (BLS) compiles a
"basket of goods" that ________; each price in the index is weighted by ________.
=> the average urban consumer buys; the quantity of the good that goes into the basket
18) Computing the CPI is important because it provides ____=> all of the above
19) Computing the CPI is important because ________.
=> government uses it to index entitlements, such as social security benefits, so that
beneficiariesdo not lose purchasing power in periods of inflation
20)The inflation rate = ______=> none of the above
21) The inflation rate can be obtained by ________.
=> subtracting the growth in real GDP from the growth in nominal GDP
22) A discouraged worker might ________.=> none of the above
23) If a large number of people were to leave their civilian jobs and join the military,
which of the following would increase?
the civilian unemployment rate
24) The unemployment rate is computed by ______=> none of the above
25) The household and establishment surveys sometimes differ on the labor market
conditions. => all of the above
26) The household and establishment surveys sometimes differ on the labor market
conditions. This is probably because ________.
=> none of the above
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27) There are different interest rates associated with many types of securities. Which of
the following statements is correct? => all of the above
28)The Federal Funds Rate is _____=> the rate charged on overnight loans
between banks
29) The nominal interest rate ____=> all of the above
30)Which of the following is a good indicator of short-term interest rates in
international markets? => LIBOR
31) The real interest rate differs from the nominal rate in that ________.
=> all of the above
32) The Fisher equation implies ______=> none of the above
33) The Fisher equation implies that an increase in the nominal rate of interest relative
to the real rate indicates that ________. => inflation is expected to rise
34) An increase in the expected rate of inflation is most likely to cause an increase in
the nominal interest rate
35) An increase in the actual rate of inflation is most likely to cause a decrease in
the ex post real interest rate
36) In 1995, the Boskin commission identified which of the following problems with
the computation of the CPI?
=>all of the above
37) Which of these represents an example of citizens who would not typically be
counted as unemployed? => all of the above
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