The document discusses key concepts in macroeconomics, including the distinction between flow and stock variables, the components of Gross Domestic Product (GDP), and the importance of investment, consumption, and government spending in economic measurement. It also addresses various measures of income, implications of inflation, and unemployment metrics, such as types of unemployment and labor market indicators. Additionally, it highlights limitations of GDP in measuring economic welfare and outlines methods for calculating inflation rates.

1. MMeeaassuurreemmeenntt ooff
MMaaccrrooeeccoonnoommiicc VVaarriiaabblleess
CChhaapptteerr 22
Professor Steve Cunningham
Intermediate Macroeconomics
ECON 219

2. The CCiirrccuullaarr FFllooww ooff IInnccoommee aanndd PPrroodduucctt
2

3. 3
SSttoocckkss aanndd FFlloowwss
A flow is a quantity per unit of time.
– How much per period?
– Example: pay rate
A stock is a quantity that exists at
one point in time.
– Example: your bank balance

4. 4
WWeeaalltthh aanndd SSaavviinngg
Wealth is the value of all the things
that people own. Savings is one
form of wealth. It is a stock.
Saving is the amount of income that
is left over after consumption. It
adds to wealth. It is a flow.
Dissaving is the process of making
expenditures out of savings. It
reduces wealth.

5. GGrroossss DDoommeessttiicc PPrroodduucctt ((GGDDPP))
 GDP is the total value of all the goods and
services produced in a country per time
period (usually one year). It is a flow variable.
 In 2002, U.S. GDP was $10.4 trillion (per year).
 In contrast, Gross National Product (GNP) is
the total value of all the goods and services
produced by the citizens of a country
(wherever they might be) per time period.
5

6. 6
TTyyppeess ooff GGooooddss
 Two types of goods:
– Consumer goods
– Capital goods
• Gross or net, considering depreciation
 Leads to two different components of aggregate
demand related to the private sector:
– Consumption (C)
– Investment (I)
 Public sector demand is treated separately (G).
 Net exports (exports – imports) is another source
of demand for goods and services (NX)

7. 7
FFiirrmm SSeeccttoorr EExxppeennddiittuurree
 Investment is the change in the capital
stock. Investment is a flow.
 Gross investment is the new capital
purchased in a given period. (I)
 Depreciation is the capital “used up” in a
given period. (d)
 Net investment is the change in the capital
stock, accounting for depreciation. (I - d)

8. CCoonnssuummeerr SSeeccttoorr EExxppeennddiittuurree
Consumption (C) is the flow of
expenditures related to the purchase
of goods and services.
Saving (S) is the flow of income
dollars withheld from consumption to
increase wealth.
Income = Consumption + Saving +
Taxes (Y = C + S + T )
8

9. GGoovveerrnnmmeenntt SSeeccttoorr EExxppeennddiittuurree
Government Purchases (G) of goods and
services (gross).
Net Taxes (T) are equal to the taxes paid
to the government less the transfer
payments received from the government
less interest payments made by the
government on its debt
(T = taxes - transfers - gov’t interest)
A Budget Deficit is G > T
A Budget Surplus is G < T
9

10. 10
IInntteerrnnaattiioonnaall SSeeccttoorr
 Imports (IM or M) are goods and services
purchased by domestic consumers that
are produced elsewhere.
 Exports (EX or X) are goods and services
purchased by foreign consumers that are
produced domestically (EX).
 Net Exports (NX) = EX - IM

11. 11
AAddddiinngg IItt AAllll UUpp
Y = C + I + G + NX
The Expenditure Approach:
computes GDP this way.
Aggregate production (GDP) equals
aggregate expenditure equals
aggregate income.
Aggregate Supply = Aggregate
Demand

12. GGDDPP:: EExxppeennddiittuurree AApppprrooaacchh
Y = C + I + G + NX
Focuses on final expenditure
Does not include:
– Intermediate goods and services
– Used goods
– Financial Assets
12

13. 13
GGDDPP CCoommppoonneennttss
Year GDP = C + I + G + NX
1929 103.7 77.5 16.5 9.4 0.4
1990 5,803.2 3,831.5 861.7 1,181.4 -71.4
2000 9,824.6 6,683.7 1,755.4 1,751.0 -365.5
2002 10,446.2 7,303.7 1,593.2 1,972.9 -423.6
billions of dollars

14. UU..SS.. GGrroossss DDoommeessttiicc PPrroodduucctt
14

15. 15
NNeett DDoommeessttiicc PPrroodduucctt
Net Domestic Product (NDP) is Gross
Domestic Product less depreciation.
NDP includes net investment instead
of gross investment.

16. 16
NNaattiioonnaall IInnccoommee
Gross National Product 10,436.7
Minus: Depreciation 1,393.5
Net National Product 9,043.2
Minus: Indirect Taxes & Other 703.1
National Income 8,340.1
2002, Billions of Dollars

17. 17
GGDDPP:: IInnccoommee AApppprrooaacchh
 Measures GDP by summing the incomes
that firms pay households for the
resources to produce the goods.
 Includes:
– Wages for labor (total compensation)
– interest for capital (net interest)
– rent for land (rental income)
– profits for entrepreneurs (corporate profits and
proprietor’s income)

18. PPeerrssoonnaall DDiissppoossaabbllee IInnccoommee
National Income 8,340.1
less Corporate Profit Taxes, Undistributed
Profits, and Valuation Adjustment
18
353.8
less Social Security Contributions 746.5
plus Transfer Payments to Individuals 1,288.0
plus Personal Interest Income 394.4
Personal Income 8,922.2
less Personal Taxes 1,111.9
Personal Disposable Income 7,810.3
2002, Billions of Dollars

19. 19
RReeaall GGDDPP
Real GDP is the GDP valued at the prices
of a base year.
In the U.S., the current base year is 1996.
GDP given in current prices is called
nominal GDP or money GDP.
The economic growth rate is the
percentage change in real GDP.

20. GDP deflator = GDP ´
20
GGDDPP DDeeffllaattoorr
The GDP Deflator measures the
average price of all the goods and
services that are included in GDP.
It is computed as:
100
Real GDP

21. 21
EEccoonnoommiicc WWeellffaarree??
 Real GDP does not measure economic welfare.
Examples of reasons why GDP does not measure
economic welfare:
– GDP over-adjustments for inflation
– GDP does not include household production
– GDP does not include the underground economy
– GDP does not account for health and life expectancy
– GDP does not consider the value of leisure time
– GDP does not consider environment quality
– GDP does not consider political freedom and social
justice

22. 22
CCPPII aanndd PPPPII
 The Consumer Price Index (CPI) measures
the average level of prices of the goods
and services that the typical urban family
buys. The Bureau of Labor Statistics (BLS)
calculates the CPI monthly.
 The Producer Price Index (PPI) measures
the wholesale prices of approximately
3000 items.

23. TThhee DDiissttrriibbuuttiioonn ooff EExxppeennddiittuurreess iinn CCoommppuuttiinngg
tthhee CCoonnssuummeerr PPrriiccee IInnddeexx
Source: Bureau of Labor Statistics. 23

24. Inflation rate
(CPI this year - CPI last year)
24
IInnffllaattiioonn
The inflation rate is the percentage
change in the price level from one
year to the next.
100
CPI last year
´
=

25. 25
SSoouurrcceess ooff BBiiaass iinn CCPPII
 New goods bias
– The new, hot product costs more than the older product
it replaced. (Computer vs. typewriter )
 Quality change bias
– The newer products have more features and reliability.
 Commodity substitution bias
– When the price rises, the consumer chooses to
substitute a lower priced substitute.
 Outlet substitution bias
– When the price rises, the consumer changes shopping
habits and goes to an outlet store or buys foreign goods.

26. 26
GGDDPP DDeeffllaattoorr BBiiaass
In principle, the GDP deflator cannot
be biased.
– It reflects prices of the goods actually
chosen by consumers, not a fixed
shopping list.
– Substitutions of various kinds are
naturally accounted for.

27. Figure 2–3
Sources: Economic Report of the President, 2002;
Economic Indicators (various issues).
27 TThhee GGDDPP
DDeeffllaattoorr aanndd RReeaall
aanndd NNoommiinnaall
GGDDPP
$ Billions
GDP Deflator

28. 28
((UUnn))EEmmppllooyyeedd??
 To be employed, a person must have either
a full-time job or a part-time job.
 To be unemployed, a person must be
available for work, and must be:
– Without work but have made specific efforts to
find a job within the previous four (4) weeks, or
– Waiting to be called back from a job from which
he or she has been laid off, or
– Waiting to start a new job within 30 days.

29. 29
DDiissccoouurraaggeedd WWoorrkkeerrss
Discouraged workers are people who
are available and willing and able to
work but have not made specific
efforts to find a job within the
previous four weeks.
Unemployment measures tend to
exclude these people and thus
understate unemployment.

30. 30
WWoorrkkiinngg--AAggee PPooppuullaattiioonn
 The working-age population is the total
number of people aged 16 years and over,
who are neither instutionalized or
incarcerated.
 The working-age population is divided into
those in labor force and those not in the
labor force.
 The labor force is made up of the
employed and the unemployed.

31. LLaabboorr MMaarrkkeett IInnddiiccaattoorrss
100%
number employed ´
labor force ´
31
Unemployment Rate =
labor force
Labor Force Participation Rate =
100%
working - age population

32. 32
MMoorree MMeeaassuurreess
Employment to population ratio
– Indicative of the availability of jobs and
the degree of match between people’s
skills and jobs
Aggregate hours
– The total number of hours worked by all
the people employed, both full and part-time,
during a year. (Given in labor
hours per year)

33. 33
MMoorree MMeeaassuurreess
((CCoonnttiinnuueedd))
The average weekly hours per person
divides aggregate hours by the
number of workers in the labor force.
The real wage rate is the quantity of
goods and services that an hour’s
wages can buy. It is the average wage
rate deflated by a price index.

34. 34
TTyyppeess ooff UUnneemmppllooyymmeenntt
Frictional
– Arises from normal labor turnover
– Related to search
– It is normal, permanent, and good
Structural
– Related to mismatched skills
Cyclical
– Related to general business conditions

35. 35
FFuullll EEmmppllooyymmeenntt
Full employment occurs when there
is no cyclical unemployment.
The unemployment rate at full
employment is the natural rate of
unemployment.