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
GPD: final goods
- capital inputs
1. use up (dùng hết) --> không tính vào GPD
eg: flour --> cake
2. do not use up --> machine
oven --> cake (depreciation:khấu hao) theo thời
gian
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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
eg: TH hair dresser: B
người muốn cắt tóc: A
Gía cắt firms
tóc: 30$ households, gov households
A --> 30$
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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
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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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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
• By contrast, a stock is a quantity at a
given point in time
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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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FIGURE 2.1 Stocks Versus Flows
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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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TABLE 2.1 GDP AND ITS
COMPONENTS, 2012
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Consumption Expenditure
• Total spending for currently produced
consumer goods and services
• Consumption was 68.7% of GDP in 2012
machine, equipment
• Basic categories:
1. Consumer durables: Goods purchased by
consumers that last a long time
2. Nondurable goods: Short-lived consumer goods
3. Services
Saving của firms ( có nma ko thể hiện)
Saving f = profit = Saving households (income)
Saving households = consumption in the future
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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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FIGURE 2.2 Expenditure Components
of U.S. GDP, 1950-2013
Source: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/
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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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FIGURE 2.3 Shares of Expenditure
Components for Different Countries
Source: OECD and for China estimates from National Bureau of Statistics. The data are for the year 2010.
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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.
residents by foreigners minus factor income paid by U.S.
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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FIGURE 2.4 U.S. Inflation Rates with
Different Price Indexes, 1950-2013
Source: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/
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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:
nominal = price level x real gdp
% 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:
Inflation Rate = (Growth Rate of Nominal GDP)
- (Growth Rate of Real GDP)
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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
Number of Unemployed
Unemployment Rate =
Number of Employed
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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. http://research.stlouisfed.org/fred2/
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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:
i = nominal interest rate
r = nominal interest rate
pe = expected inflation
i = r + pe
e
or r =i-p
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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 ( e=6%),
then:
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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FIGURE 2.6 Real and Nominal Interest
Rates (Three-Month Treasury Bill), 1955-
2013
Source: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/; with the real interest rate calculated
using the Procedure outlined in Mishkin, Frederic S. 1981. The real interest rate: An empirical investigation. Carnegie-Rochester
Conference Series on Public Policy 15: 151–200.
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