B.  Measuring Macroeconomic Activity

1.  Gross Domestic Product (GDP)

• Market value of all currently produced final goods and services within a country in a given period of time by domestic and foreign-supplied  resources

a.  Circular flow model

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(1)  Expenditure or output approach

• Measure the expenditures on output produced in the economy

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(2)  Earnings or income approach

• Measure the earnings or income generated by selling the output produced in the economy

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b.  Characteristics

• Market value

- Monetary measure

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• Final goods and services

- Sold to end users

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• Currently produced

- Used products not counted

- Products produced but not sold counted

- Financial securities transactions not counted

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• Within a nation

- Measures production within a country's borders, regardless of who produces the products

- Gross National Product (GNP) - market value of final goods and services produced by a nation's resources, regardless of location

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• During a period of time

- Flow variable

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• Nonmarket transactions not counted

- Legal (e.g., housework) and illegal (e.g., drug trafficking), cash economy

- Imputed value of some nonmarket transactions included

Ex.- Owner-occupied housing

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• Transfer payments not counted

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• Leisure and quality of life not considered

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•  Harmful and dangerous output counted the same as useful output

- Natural disasters, wars, environmental disasters counted as increasing GDP

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c.  Real  vs. nominal GDP

• Real GDP - takes price changes into account

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• GDP deflator - used to measure changes in prices (inflation)

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d.  Expenditure or output approach

• Calculated by the Bureau of Economic Analysis

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(1)  Personal consumption expenditures (C)

• Durable goods - last more than three years

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• Nondurable goods - last less than three years

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• Services - noncommodity items

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(2)  Gross private domestic investment spending (I)

• Business fixed investment

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• Residential fixed investment

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• Changes in business inventory

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(3)  Government consumption expenditures and gross investment (G)

• Federal vs. state and local

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• Consumption vs. investment

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(4)  Net exports (F)

• Exports (X)

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• Imports (M)

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e.  Income or earnings approach

• National income - income generated from the sale of goods and services produced in an economy and paid to the factors of production

(1) Compensation of employees - wages, salaries, beneftis

(2) Proprietor's income

(3)  Rental income

(4)  Corporate profits

(5) Net interest - interest earned minus interest paid

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2.  Price level measures

• Inflation - a sustained increase in the price level over time

• Deflation - a sustained decrease in the price level over time

a.  Inflation measures

(1)  GDP Price Deflator

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(2)  Consumer Price Index

• Measure of the weighted-average change in prices for a market basket of goods and services purchased by a typical urban family of four 

• Compare prices in given year to prices in a base year

(a)  Calculation

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• Bureau of Labor Statistics

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(b) Problems with using the CPI

i)  Substitution bias

• Different products used when price increases

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ii) Inadequate treatment of quality changes

• Part of price increase due to increase in quality

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iii) New products not counted

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(c)  Core rate of inflation

• Take food and energy out of market basket

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(3)  Producer Price Index

• Measures price changes at the wholesale level

• Measures prices firms pay for:

- Crude materials for further processing

- Intermediate materials, supplies, and components

- Finished goods

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• Calculated by the Bureau of Labor Statistics

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(4)  Employment Cost Indexes weighted-average cost of an hour of labor

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(5)  Personal Consumption Expenditure Price Index

• Measures changes in domestic consumer goods and services purchased by household sector

• Federal Reserve now uses PCE as target instead of CPI

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b.  Real values

• Adjust nominal values for inflation

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3.  Measures of employment and unemployment

• Calculated by the Bureau of Labor Statistics

- Current Population Survey (Household Survey) - monthly survey of 60,000 households to estimate unemployment rate

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-  Establishment Survey - monthly survey of 160,000 businesses and government agencies from a database of 400,000 existing worksites to estimate employment growth

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a.  Unemployment rate

• Unemployed - not working, available to work, actively seeking employment in last four weeks

• "Actively seeking employment" - register at a public or private employment office, meet with prospective employers, place or answer job advertisement, write letters of application, be on a union or professional register, or check with friends and relatives for job opportunities

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• Employed - persons who did any work as paid employees, worked in own business, worked in nonpaying family business at least 15 hours per week, and those temporarily absent from jobs

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• Labor force = employed + unemployed

- Excludes people in institutions, children, people in armed forces, those not seeking work (homemakers, students, etc.)

- Excludes discouraged workers - people who previously worked but are not currently seeking work because of economic concerns

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• Unemployment rate = number of unemployed / labor force * 100

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b.  Labor force participation rate

• Proportion of the working age population that is in the labor force

• Labor force participation rate = employment-population ratio = labor force / noninstitutional population 16 and over

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• Natural rate of unemployment - minimum level of unemployment that can be achieved without causing inflation to accelerate

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4.  Macroeconomic policy issues

a.  What factors influence the spending behavior of different sectors of the economy?

 

b.  How do behavior changes in these sectors influence the level of output and income in the economy?

 

c.  Can policy makers maintain stable prices, full employment, and adequate economic growth over time?

 

d.  How do fiscal, monetary, and balance of payments policies influence the economy?

 

e.  What impact do macro changes have on different firms and industries?