Econ 2020, Topic 3

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Notes for Topic 3 of Econ 2020, Spring 2013

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Econ 2020, Topic 3

  1. 1. Macroeconomic Measurement Spring 2013 Topic 3
  2. 2. Output and GrowthGDP Total market value of all final goods and services produced in an economy in a year
  3. 3. Historical Data
  4. 4. Does this capture everything?Home production“Under the table” transactionsBlack market activity
  5. 5. Components of GDPConsumptionInvestmentGovernment ExpendituresNet Exports
  6. 6. GrowthFormula
  7. 7. Growth
  8. 8. Another approachThe Sum of Price x OutputWhat could cause GDP to increase?
  9. 9. Real vs. Nominal GDPBase year prices or current year prices
  10. 10. InflationMeasured by the percentage change of a priceindexExamples GDP Deflator Consumer Price Index (CPI)
  11. 11. DeflatorNominal GDP ÷ Real GDP 2012, Q3: 115.81
  12. 12. CPINominal Consumer Cost ÷ Real ConsumerCost 2012, November: 231.03
  13. 13. Using a Price IndexFinding real wages Nominal Wage ÷ Price Index $10 ÷ 2.3103 = $4.33
  14. 14. An application to minimum wagesFederal minimum wage, 1982: $3.35Federal minimum wage, 2013: $7.25 Real wage = ?Colorado minimum wage, 2013: $7.78 Real wage = ?
  15. 15. An application to minimum wagesFederal minimum wage, 1982: $3.35Federal minimum wage, 2013: $7.25 Real wage = $3.14Colorado minimum wage, 2013: $7.78 Real wage = $3.37
  16. 16. Calculating inflation
  17. 17. Historical data
  18. 18. Using inflation dataFinding real interest rates Nominal Rate - Inflation Rate = Real Rate Example Interest rate on government debt = 2.04% Real rate?
  19. 19. Using inflation dataFinding real interest rates Example Interest rate on government debt = 2.04% Real rate is 2.04% - 1.8% = 0.24%
  20. 20. Using inflation dataFinding real interest ratesIndexing Cost of living adjustments
  21. 21. Biases to themeasurement of inflation Substitution bias Quality bias New product bias Outlet bias
  22. 22. UnemploymentLinking unemployment to output Okun’s Law 1% increase in unemployment costs 2% of GDP
  23. 23. Historical data
  24. 24. What is this measuring? BLS Link http://www.bls.gov/news.release/empsit.t15. htm
  25. 25. U-3 measure of unemploymentNumber Unemployed ÷ Labor Force
  26. 26. Labor force participation rate Labor Force ÷ Over 16 Population
  27. 27. Problems with U-3Discourage workersPart-time workersUnderemployed
  28. 28. Is all unemployment the same? Frictional Structural Cyclical
  29. 29. The “appropriate”amount of unemployment Zero cyclical unemployment Full employment rate of unemployment VERY roughly 5%
  30. 30. Back to Okun’s LawEconomic underperformance?7.8% - 5% = 2.8% too much unemployment2.8% x 2 = 5.6% too little output5.6% x $15.811 trillion = $885 billionunderproduction

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