Econ 303 UIUCIntermediate Macro Zhao 1Section I: Growth theoryChapter 2: Chain-weighted GDPGDP measure the level of happiness?OECD Better life index: www.oecdbetterlifeindex.orgComputing GDP in a simple economyEcon 303 UIUCIntermediate Macro Zhao 2Example: a toy economyIn year 2000Quantities Prices Car 100 $1,000Apple (pounds) 10000 $2Nominal GDPYear 2000 100*1000+10000*2=$120,000Nominal GDP increases due to increases of pricesQuantities Prices 2000 2001 2000 2001Car 100 100 $1,000 $1,100Apple (pounds) 10000 10000 $2 $2.20Nominal GDP $120,000 $132,000Real GDP (2000 price) $120,000 $120,000In current dollarsIn constant dollarsReal and Nominal GDP Growth by decadesWhich decade has highest growth of real output?Which decade has highest growth of price level?Econ 303 UIUCIntermediate Macro Zhao 3Decomposition of nominal GDPGDP DeflatorIf 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• 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 PPIbase year is 2000The 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.Econ 303 UIUCIntermediate Macro Zhao 4Compute the price index in a toy economy(2000 is the base year)Quantities Prices 2000 2000 2001 2002Car 100 $1,000 $950 $1,000Apple (pounds)10000 $2 $2.40 $2.502000 2001 2002Cost of basket $120,000 $119,000 $125,000100 99 105CPI1000*100+2.5*10000Basket1000*100+2*10000950*100+2.4*10000The 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)Quantities Prices 2000 2000 2001 2002Car 100 $1,000 $950 $1,000Apple (pounds)10000 $2 $2.40 $2.502000 2001 2002Cost of basket $120,000 $119,000 $125,000100 99 105CPI1000*100+2.5*10000Basket1000*100+2*10000950*100+2.4*10000Econ 303 UIUCIntermediate Macro Zhao 5Price Quantity2102011 $2 100 2002012 $2.1 110 231 220Growth 5% 10% 15.5%rateCPI vs. (simple) real GDPnominal GDP 2011nominal GDP 2012real GDP 2012real GDP 2011cost of 100 lb. bananas 2011cost of 100 lb. bananas 2012231/220 *100 = 105, GDP deflator 2012210/200 *100 = 105, CPI 2012Base yearPrice index and inflation (page 13)Two types of price changes2000 2001Car $1,000 $1,100Apple (pounds) $2 $2.20Relative price (apples per car) 500 5002000 2001Car $1,000 $950Apple (pounds) $2 $2.50Relative price (apples per car) 500 380B. Changes of relative pricesA. Changes of general price level (inflation)Econ 303 UIUCIntermediate Macro Zhao 60.60.70.80.911.11.21.31.41.5Dec-99Apr-00Aug-00Dec-00Apr-01Aug-01Dec-01Apr-02Aug-02Dec-02Apr-03Aug-03Dec-03Apr-04Aug-04Dec-04Apr-05Aug-05Dec-05Apr-06Aug-06Dec-06Apr-07Aug-07Dec-07Apr-08Aug-08Dec-08Durables EducationDifferent growth rates of GDP using prices in different years2000 2001 2000 2001Car 100 120 $1,000 $950Apple (pounds) 10000 9000 $2 $2.402000 2001 Index$120,000 $138,000 1.15$119,000 $135,600 1.1394961.144736Real GDP using 2000 pricesReal GDP using 2001 pricesFisher index1000*100+2*10000950*100+2.4*10000The Chain-weighted real GDPEcon 303 UIUCIntermediate Macro Zhao 7As 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)Counting our labor forceCurrent 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.Econ 303 UIUCIntermediate Macro Zhao 8have a job?Nolooking for a job?YesemployedNoOut of labor forceYesunemployedEmployed? 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.Econ 303 UIUCIntermediate Macro Zhao