Econ 303 UIUC Section I Growth theory Chapter 2 Chain weighted GDP GDP measure the level of happiness OECD Better life index www oecdbetterlifeindex org Intermediate Macro Zhao 1 Econ 303 UIUC Computing GDP in a simple economy Example a toy economy In year 2000 Quantities Car 100 Apple pounds 10000 Nominal GDP Year 2000 Intermediate Macro Zhao Prices 1 000 2 100 1000 10000 2 120 000 2 Econ 303 UIUC Nominal GDP increases due to increases of prices Quantities 2000 Car 100 Apple pounds 10000 Nominal GDP Real GDP 2000 price Prices 2001 2000 100 1 000 10000 2 2001 1 100 2 20 120 000 132 000 In current dollars 120 000 120 000 In constant dollars Real and Nominal GDP Growth by decades Which decade has highest growth of real output Which decade has highest growth of price level Intermediate Macro Zhao 3 Econ 303 UIUC Decomposition of nominal GDP GDP Deflator If nominal GDP increases more than real GDP prices must have gone up inflation If nominal GDP increases by the same amount as the real GDP price is stable Inflation rate measures the changes of general price level within a specified period of time change of purchasing power of money base year is 2000 By GDP deflator it is one kind of price index Deflator shows the accumulated effect of inflation By direct measurement published by Bureau of labor statistics Consumer price index CPI Producer price index PPI Intermediate Macro Zhao 4 Econ 303 UIUC The most well known measure of aggregate price level CPI To measure the aggregate price level economists calculate the cost of purchasing a basket of goods and services The consumer price index or CPI measures the cost of the market basket of a typical urban American family Compute the price index in a toy economy 2000 is the base year Basket Quantities Prices 2000 2000 Car 100 1 000 Apple pounds 10000 2 Cost of basket CPI 1000 100 2 10000 Intermediate Macro Zhao 2001 950 2 40 2002 1 000 2 50 2000 2001 2002 120 000 119 000 125 000 100 99 105 950 100 2 4 10000 1000 100 2 5 10000 5 Econ 303 UIUC The most well known measure of aggregate price level CPI To measure the aggregate price level economists calculate the cost of purchasing a basket of goods and services The consumer price index or CPI measures the cost of the market basket of a typical urban American family Compute the price index in a toy economy 2000 is the base year Basket Quantities Prices 2000 2000 Car 100 1 000 Apple pounds 10000 2 Cost of basket CPI 1000 100 2 10000 Intermediate Macro Zhao 2001 950 2 40 2002 1 000 2 50 2000 2001 2002 120 000 119 000 125 000 100 99 105 950 100 2 4 10000 1000 100 2 5 10000 6 Econ 303 UIUC CPI vs simple real GDP Price Quantity 210 200 100 105 CPI 2012 210 cost of 100 lb bananas 2012 Base year 2011 real GDP 2011 2 100 200 nominal GDP 2011 cost of 100 lb bananas 2011 2012 2 1 110 231 220 Growth rate 5 10 nominal GDP 2012 real GDP 2012 15 5 231 220 100 105 GDP deflator 2012 Price index and inflation page 13 Intermediate Macro Zhao 7 Econ 303 UIUC Two types of price changes A Changes of general price level inflation Car Apple pounds Relative price apples per car 2000 1 000 2 500 2001 1 100 2 20 500 2000 1 000 2 500 2001 950 2 50 380 B Changes of relative prices Car Apple pounds Relative price apples per car 1 5 1 4 1 3 1 2 1 1 1 0 9 0 8 0 7 D ec 9 9 Ap r 0 Au 0 g0 D 0 ec 0 0 Ap r 0 Au 1 g0 D 1 ec 0 1 Ap r 0 Au 2 g0 D 2 ec 0 2 Ap r 0 Au 3 g0 D 3 ec 0 3 Ap r 0 Au 4 g0 D 4 ec 0 4 Ap r 0 Au 5 g0 D 5 ec 0 5 Ap r 0 Au 6 g0 D 6 ec 0 6 Ap r 0 Au 7 g0 D 7 ec 0 7 Ap r 0 Au 8 g0 D 8 ec 0 8 0 6 Durables Intermediate Macro Zhao Education 8 Econ 303 UIUC Different growth rates of GDP using prices in different years Car Apple pounds 2000 100 10000 2001 120 9000 Real GDP using 2000 prices Real GDP using 2001 prices Fisher index 1000 100 2 10000 2000 1 000 2 2001 950 2 40 2000 2001 Index 120 000 138 000 1 15 119 000 135 600 1 139496 1 144736 950 100 2 4 10000 The Chain weighted real GDP Intermediate Macro Zhao 9 Econ 303 UIUC As in the previous example 2000 2001 Fisher index 2000 is the base year in 2000 2001 is the base year in 2001 Chain weighted real GDP page 14 15 Intermediate Macro Zhao 10 Econ 303 UIUC Counting our labor force Current Population Survey CPS by Bureau of Labor Statistics BLS Employment is the number of people currently employed in the economy either full time or part time Unemployment is the number of people who are actively looking for work but aren t currently employed The labor force is equal to the sum of employment and unemployment have a job Intermediate Macro Zhao No looking for a job Yes Yes employed unemployed No Out of labor force 11 Econ 303 UIUC Employed Unemployed Out of the labor force A Rosa an older worker who lost her job months ago and gave up looking for one by now B Anthony a schoolteacher who is not working during his three month summer break C John a laid off auto worker expecting recalls from his plants D Grace an investment banker who has been laid off and is currently searching for another position E Sergio a classically trained musician who can only find work playing for local parties F Natasha a graduate student who went back to school because jobs were scarce Labor force participation rate and Unemployment Rate The labor force participation rate is the percentage of the population aged 16 or older that is in the labor force The unemployment rate is the percentage of the total number of people in the labor force who are unemployed Intermediate Macro Zhao 12 Econ 303 UIUC Intermediate Macro Zhao 13