Notes for Topic 3 of Econ 2020, Spring 2013

1. Macroeconomic
Measurement
Spring 2013
Topic 3

2. Output and Growth
GDP
Total market value of all final goods and
services produced in an economy in a year

3. Historical Data

4. Does this capture
everything?
Home production
“Under the table” transactions
Black market activity

5. Components of GDP
Consumption
Investment
Government Expenditures
Net Exports

6. Growth
Formula

7. Growth

8. Another approach
The Sum of Price x Output
What could cause GDP to increase?

9. Real vs. Nominal GDP
Base year prices or current year prices

10. Inflation
Measured by the percentage change of a price
index
Examples
GDP Deflator
Consumer Price Index (CPI)

11. Deflator
Nominal GDP ÷ Real GDP
2012, Q3: 115.81

12. CPI
Nominal Consumer Cost ÷ Real Consumer
Cost
2012, November: 231.03

13. Using a Price Index
Finding real wages
Nominal Wage ÷ Price Index
$10 ÷ 2.3103 = $4.33

14. An application to
minimum wages
Federal minimum wage, 1982: $3.35
Federal minimum wage, 2013: $7.25
Real wage = ?
Colorado minimum wage, 2013: $7.78
Real wage = ?

15. An application to
minimum wages
Federal minimum wage, 1982: $3.35
Federal minimum wage, 2013: $7.25
Real wage = $3.14
Colorado minimum wage, 2013: $7.78
Real wage = $3.37

16. Calculating inflation

17. Historical data

18. Using inflation data
Finding real interest rates
Nominal Rate - Inflation Rate = Real Rate
Example
Interest rate on government debt =
2.04%
Real rate?

19. Using inflation data
Finding real interest rates
Example
Interest rate on government debt =
2.04%
Real rate is 2.04% - 1.8% = 0.24%

20. Using inflation data
Finding real interest rates
Indexing
Cost of living adjustments

21. Biases to the
measurement of inflation
Substitution bias
Quality bias
New product bias
Outlet bias

22. Unemployment
Linking unemployment to output
Okun’s Law
1% increase in unemployment costs 2%
of GDP

23. Historical data

24. What is this measuring?
BLS Link
http://www.bls.gov/news.release/empsit.t15.
htm

25. U-3 measure of
unemployment
Number Unemployed ÷ Labor Force

26. Labor force participation
rate
Labor Force ÷ Over 16 Population

27. Problems with U-3
Discourage workers
Part-time workers
Underemployed

28. Is all unemployment the
same?
Frictional
Structural
Cyclical

29. The “appropriate”
amount of unemployment
Zero cyclical unemployment
Full employment rate of unemployment
VERY roughly 5%

30. Back to Okun’s Law
Economic underperformance?
7.8% - 5% = 2.8% too much unemployment
2.8% x 2 = 5.6% too little output
5.6% x $15.811 trillion = $885 billion
underproduction