CLASSROOM EXAMPLES Ch 4: Macroeconomic Measurements

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CLASSROOM EXAMPLESCh 4 Macroeconomic
Measurements
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What goods and services does the CPI cover?

• The CPI represents all goods and services
  purchased for consumption
• BLS has classified all expenditure items into
  more than 200 categories, arranged into eight
  major groups.
• Major groups and examples of categories in each
  are as follows
• FOOD AND BEVERAGES (breakfast cereal, milk,
  coffee, chicken, wine, service meals and snacks)
• HOUSING (rent of primary residence, owners'
  equivalent rent, fuel oil, bedroom furniture)
• APPAREL (men's shirts and sweaters, women's
  dresses, jewelry)
• TRANSPORTATION (new vehicles, airline fares,
  gasoline, motor vehicle insurance)
• MEDICAL CARE (prescription drugs and medical
  supplies, physicians' services, eyeglasses and
  eye care, hospital services)
• RECREATION (televisions, pets and pet products,
  sports equipment, admissions)
• EDUCATION AND COMMUNICATION (college tuition,
  postage, telephone services, computer software
  and accessories)
• OTHER GOODS AND SERVICES (tobacco and smoking
  products, haircuts and other personal services,
  funeral expenses).

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What goods and services does the CPI cover?

• Also included various government-charged user
  fees, such as water and sewerage charges, auto
  registration fees, vehicle tolls, taxes (such as
  sales and excise taxes) that are directly
  associated with the prices of specific goods and
  services.
• The CPI excludes investment items, such as
  stocks, bonds, real estate, and life insurance.
  (These items relate to savings and not to
  day-to-day consumption expenses.), taxes (such as
  income and Social Security taxes) not directly
  associated with the purchase of consumer goods
  and services.

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CPI Exercise
Calculate CPI2005
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CPI from 2001 to 2006
Base period December 1999100
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• Boston CPI2006223.1
• Dallas CPI2006190.1
• Los Angeles CPI2006210.4
• New York CPI2006220.7
• Base period 1984100

Your salary in Dallas is 30,000. What salary
should you request in Boston to maintain the same
living standard (purchasing power)?
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• Boston CPI2006223.1
• Dallas CPI2006190.1
• Los Angeles CPI2006210.4
• New York CPI2006220.7
• Base period 1984100

Your salary in Los Angeles is 40,000. What salary
should you request in New York to maintain the
same living standard (purchasing power)?
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Self-Test

• In year 1, your annual income is 45,000 and the
  CPI is 143.6 in year 2, your annual income is
  51,232 and the CPI is 150.7. Has your real
  income risen, fallen, or remained constant?
  Explain your answer.

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Self-Test

• What is the major difference between a person who
  is frictionally unemployed and one who is
  structurally unemployed?
• If the cyclical unemployment rate is positive,
  what does this imply?

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Exercise

• If the full-employment rate of unemployment is 5
  percent, and the economy is experiencing a 7
  percent unemployment rate, what is the rate of
  cyclical unemployment?

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• Population 500
• Non institutionalized civil population 350
• Employed 250
• Unemployed 75
• Not in labor force 25
• Calculate Unemployment Rate, Employment Rate,
  Labor Participation Rate.

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Value Added Approach
Lumber Mill
Paper Mill
Office Supplies Manufacturer
Wholesaler
Retailer
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• To build a table, a furniture company buys 50
  worth of wood from a lumber company and 20 worth
  of hardware from a metal products firm. If the
  value added by the furniture company is 200,
  what price would the table sell for according to
  the value added approach to GDP?

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• If total imports for 2004 were 850 billion and
  total exports were 700 billion, the number that
  would enter the GDP expenditure equation is

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• Consumption spending 1,000
• Wages and salaries 800
• Rent 100
• Government purchases 200
• Profit 300
• Exports 400
• Interest 250
• Investment 400
• Imports 550
• Using the information above, calculate GDP by
  expenditures approach.

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Calculate Nominal GDP and Real GDP for 2005.
Base year is 1990.
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• For the year X, Nominal GDP is 50,000 and GDP
  Deflator is 125. Calculate Real GDP for the year
  X.

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• Real GDP in January 2006 is 11239 bln
• Real GDP in January 2007 is 11413 bln
• Calculate Growth Rate

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• What fraction of the labor force is cyclically
  unemployed if structural unemployment is 2
  percent, frictional unemployment is 2.5 percent,
  seasonal unemployment is 1 percent, and the
  overall unemployment rate is 8 percent?