September 1 2011 Macroeconomics Three Big Variables but cant 1 Output Y value of goods and services produced by economy 2 Unemployment rate UR percent of the population that want to work 3 Inflation rate rate at which overall prices are growing Y UR and Political History 1929 stock market crash triggers great depression From 1929 to 1932 Y falls around 30 UR rises around 3 25 price level drops around 23 deflation 1932 Election incumbent Hoover looses to Roosevelt 1973 Political turmoil in Middle East oil price jumps again From 1974 75 Y drops recession UR rises to 8 5 by 75 over 9 in 1974 75 stagflation 1979 more turmoil in Middle East oil price jumps again 1980 stagflation returns Y decreases UR increases to over 7 increases 9 Also election Carter looses to Reagan 1991 president George H W Bush riding high in polls due to Golf War but Y decreased recession no inflation Y growing slowly in 1992 UR is greater than 7 1992 Bush closes to Clinton Rule Incumbent president running for re election will loose if macro economy is weak high UR declining Y and or high if economy is strong president will win Economy Today Decreasing Y 5 from late 2007 mid 2009 since mid 2009 Y grows but slowly last 4 quarters ending June 11 Y increased only 1 6 BELOW TREND UR rose from 5 in Dec 2007 to 10 in Oct 2009 currently 9 1 3 5 over last 12 months a bit high core inflation excludes gas food only 1 8 last 12 months most economists focus on CORE inflation Output Y How is it Measured Nominal gross domestic product Nominal GDP or NGDP The market value at current prices of all final goods and services produced domestically this period Example 2010 Guns Price Quantity 20 30 NGDP 20x30 value of guns 2x100 value of butters 800 2 Butter 100 1 Only goods produce THIS PERIOD not used goods to avoid double counting 2 Only DOMESTICALLY PRODUCED output included in NGDP NOT foreign imports deducted excluded from NGDP Ex car dealer in US imports Lexus for 30k sells to me for 50k US GDP increases 3 FINAL goods and services sold to ultimate user as opposed to intermediate transactions which includes input used in making other products Ex farmer buys seed for 1 000 grows corn sells to Green Giant for 10 000 Green Giant sells to Safeway for 20 000 intermediate transactions not in GDP Safeway sells to costumer for 30 000 FINAL GOOD IN GDP WHY AVOID DOUBLE COUNTING GDP increased by 30 000 Ex VA sale price of transaction minus cost of material inputs VA 1 000 9 000 10 000 10 000 30 000 REVIEW NGDP market value at current prices of all final goods and services produced domestically this period main goal avoid double counting includes 1 Only new goods not used 2 Only domestic output not foreign 3 Only final transactions not intermediate September 6 2011 Categories of Transactions final Consumption C most households spending Investment I spending on tangible physical capital assets i e business plant and equipment buying new store new machinery new housing construction inventories not included in GDP purchases of paper assets stock bonds or gold Government Purchases G federal state and local purchases of goods and services police militias bureaucrats schools all in GDP Not included in GCP directly transfer payments TR social security interest on national debt TANF Exports X all exports automatically included in GDP Note transactions that might otherwise seem intermediate can count in GDP of they are G or X ordinarily we eliminate intermediate level but here no danger of double counting because its being exported Y C I G X M Net export NX exports imports trade balance Not exports added to GDP while imports subtracted to reflect fact that part of C I G spending goes to imports Ex I buy BMW from car dealer in US for 40k car dealer paid 25k for car to German BMW factory This will ass 40k 25k to US GDP National Income Accounting Identity In terms of identity consumption C increases by 40k and imports M increase by 25k Y increases by change in C minus change in M Ex I spend 10k on vacation in Cancun Net impact on US GDP 0 C increases by 10k M increases by 10k Y C 70 I 15 G 20 NX 5 How much each factor accounts for in the National Income Accounting Identity Is NGDP a good measure of society s output 2010 Q 20 100 2010 P 2011 Q 30 2 GUNS BUTTER 2010 NGDP 800 2011 NGDP 19x 33 95x 2 20 836 Growth rate of NGDP 836 800 800 x 100 4 5 19 95 2011 P 33 2 20 Changes in NGDP reflect changes in P as well as Q If price level changes overtime inflation deflation comparisons of NGDP can be misleading Solution real GDP correct NGDP for changes in price level 1 Choose some year as base year 2 Use formula converting nominal to real where P measure of price level RGDP for year x In base year prices NGDP in year x x P base year P year x In our example both guns and butter are 10 more expensive in 2010 10 relative price of guns to butter unchanged Can write P2010 P2011 100 110 apply formula RGDP 2011 In 2010 prices RGDP 2011 In 2010 prices RGDP 2010 In 2010 prices NGDP in 2011 836 NGDP in 2010 x x x P 2010 P 2011 100 110 P 2010 P 201 760 800 By construction In base year by construction RGDP NGDP So RGDP fell in 2011 even though NGDP rose RGDP holds price lever fixed at base year values changes in RGDP overtime only reflect changes in Q Suppose I wanted base year to be 2011 instead of 2010 RGDP 2011 In 2011 prices RGDP 2010 In 2011 prices NGDP2011 NGDP in 2010 x 836 P 2011 P 2010 RGDP 2010 In 2011 prices 800 110 100 x 880 Again RGDP in 2010 is higher than RGDP in 2011 regardless of which base year you choose September 8 2011 KWIK KWIZ 1 Fill in blanks and calculate growth rate of NGDP Price index Year 2008 100 103 108 2009 2010 RGDP 2008 X 790 800 X NGDP Formula for converting Nominal to Real Real value in year X In base year prices Nominal value in year X P base year P year x Real value in 2009 In 2008 prices Real value in 2010 In 2008 prices gNGDP gRGDP gPrice Level Exact method x 100 103 100 108 800 776 7 NGDP 2010 853 2 800 800 790 776 7 776 7 108 103 103 x NGDP 2010 790 853 2 100 6 65 100 1 7 100 4 85 Rule of Thumb gRGDP gNGDP gRGDP 6 65 4 85 1 7 2 Was Babe Ruth over paid 1929 salary 100 000 Year X 1929 Base year 2011 CPI Price Index 17 1 in 1929 22 5 in July 2011 Babe Ruth s salary In 2011 …
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