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Chapter Topics

Chapter Topics. Aggregate Output The Other Major Macroeconomic Variables. Aggregate Output. Aggregate Output (national income and product accounts, or NIPA). Gross Domestic Product (GDP) The value of the final goods and services produced in an economy during a given period

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Chapter Topics

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  1. Chapter Topics • Aggregate Output • The Other Major Macroeconomic Variables

  2. Aggregate Output Aggregate Output (national income and product accounts, or NIPA) • Gross Domestic Product (GDP) • The value of the final goods and services produced in an economy during a given period • Y = C + I + G + X - Im

  3. Aggregate Output Defining GDP: Three Approaches 1) Final good 2) Value added 3) Income

  4. Firm 1: Steel Company Revenues from sales $100 Expenses (wages) $80 Profit $20 Firm 2: Car Company Revenues from sales $210 Expenses $170 Wages $70 Steel purchases $100 Profit $40 Aggregate Output GDP: The final goods approach What is GDP? $310 or $210

  5. Aggregate Output Two Firm Example

  6. Aggregate Output Defining GDP • GDP from the income side

  7. Income (steel) Labor = $80 Capital = $20 $100 Income (car) Labor = $70 Capital = $40 $110 Compared to: Aggregate Output

  8. Aggregate Output Nominal & Real GDP • GDP = Price x Quantity of final goods produced • If price increases and quantity remains constant, the $ value of final output increases. • But real output hasn’t changed.

  9. Nominal and RealU.S. GDP, 1960-1998

  10. Aggregate Output Observations • Real GDP = value of final goods in constant prices • The increase in real GDP is less than nominal GDP when prices are rising • More variation in real GDP than nominal GDP

  11. Aggregate Output Synonyms for GDP Accounting • Real GDP • GDP in terms of goods • GDP in constant dollars • GDPadjusted for inflation • GDP in 1992 dollars

  12. Aggregate Output Technical Notes: For the Course • GDP -- refers to real GDP • Yt -- real GDP in year t • $GDP -- nominal GDP • $Yt = nominal GDP in year t

  13. The Other MajorMacroeconomic Variables The Unemployment Rate

  14. The Other MajorMacroeconomic Variables Counting the Unemployed • Current population survey • 60,000 households monthly • Employed -- job holders • Unemployed -- job seekers

  15. The Other MajorMacroeconomic Variables Counting the Unemployed • 1998

  16. The Other MajorMacroeconomic Variables Macro Terms Unemployed and Discouraged Workers

  17. The Other MajorMacroeconomic Variables Unemployment and Economic Activity • Okun’s Law • High output growth -- reduces unemployment • Low output growth -- increases unemployment

  18. Change in the U.S. Unemployment Rate versus U.S. GDP Growth 1960 - 1998

  19. The Other MajorMacroeconomic Variables • The Inflation Rate • A sustained rise in the price level • Two Measures of the Price Level • GDP Deflator • Consumer Price Index (CPI)

  20. The Other MajorMacroeconomic Variables The GDP Deflator • Average price of final goods produced • GDP deflator in year t = Pt

  21. The Other MajorMacroeconomic Variables The GDP Deflator • Pt is an index number • P1993 = 102.6 (1992 = 100) • Index numbers are used to measure rate of change over time

  22. The Other MajorMacroeconomic Variables The GDP Deflator

  23. The Other MajorMacroeconomic Variables The Consumer Price Index (CPI) • Average prices of goods consumed • The CPI is not equal to the GDP deflator • Some final goods are sold to business, government, and foreigners • Some consumer goods are imported

  24. The Other MajorMacroeconomic Variables Steps in Calculating the CPI 1) Consumer expenditure survey to determine a market basket of items 2) Bureau of labor statistics (BLS) field workers price the items monthly (85 cities, 22,000 stores) 3) A base period is chosen, currently 1982-84 4) End 2001 CPI = 177.4 (1982-84 = 100) • A basket of goods that cost $100 in 1982 – 84 cost $177.40 at end of 2001. • The price of the representative consumer good increased by 77.4% over this period.

  25. Inflation Rate, Using the CPIand the GDP Deflator, 1960, 1998

  26. Change in the U.S. Inflation Rate versus the U.S. Unemployment Rate, 1970-1998

  27. The Other MajorMacroeconomic Variables The Phillips Curve • Low unemployment --inflation rate increases • High unemployment -- inflation rate decreases

  28. The Central Question of Macroeconomics • What determines the level of aggregate output? • Demand? • Supply? • Government, education, and savings? • Short-run (a few years)  demand • Medium-run (10+ years)  supply • Long-run (50+ years)  government, education, savings

  29. A Road Map The Central Question of Macroeconomics • What determines the level of aggregate output? • Short-run (a few years) -- demand • Medium-run (10+ years) -- supply • Long-run (50+ years) -- government, education, savings

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