Topic 2: Macroeconomics

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Topic 2 Macroeconomics

• GDP
• Unemployment
• Inflation

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Gross Domestic Product (GDP)

• Gross Domestic Product (GDP) is the value of all
  goods and services produced in an economy during
  a given period of time. i.e., what is earned by
  people working in the US.
• Gross National Product (GNP) is the value of all
  goods and services produced by a countrys
  citizens during a given period of time. i.e.,
  what Americans earn supplying labor in the US and
  elsewhere.
• Gross means it doesnt account for wearing out
  (e.g., how many cars die each year?). Net
  accounts for wearing out.

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What we care about, what we observe

• Most policy makers are more concerned with
  National Income (Y) or NDP, rather than GDP
• GDP is easier to measure
• We will refer to any these items as output, and
  treat them as approximate equals

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Guidelines for calculating GDP

1. It must go through the market place. Otherwise,
   ignore it. e.g., the neighborhood babysitter.
2. Should involve the 3 factors of production that
   year. Ignore payments towards future production,
   or things produced last year.
3. Dont include transfers in ownership without
   production, or pure paper money transfers. i.e.,
   buying stock doesnt county, unless there are
   broker fees. Buying a used car from my brother
   doesnt count either.
4. Nothing illegal. Limo driver or mafia wheel man?

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Ways to measure GDP

• Option 1 Count only final sales. (If all
  transactions happen in the same year.)
• Option 2 Count value added (sales - inputs).
  VA final sales - intermediate goods GDP
  SVA
• DONT double count. Avoid counting Value Added
  and Final Sales.

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GDP Example

• In an economy, there are three producers a grape
  farm, a winery, and a liquor store. All
  production goes towards the production of wine.

Buys input at Sells output at VA
Vineyard 0 75k
Winery 75k 200k
Liquor store 200k 300k
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GDP Example

• In an economy, there are three producers a grape
  farm, a winery, and a liquor store. All
  production goes towards the production of wine.

Buys input at Sells output at VA
Vineyard 0 75k
Winery 75k 200k
Liquor store 200k 300k
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GDP Example

• If a thief steals 10k in wine from the liquor
  store
• If the store owner drinks 10k in wine himself
• If the vineyard produced the grapes and sold them
  to the winery in 2007, but the winery and liquor
  store didnt do anything themselves until 2008
• If the liquor store only sells 150k worth of
  wine in 2007, then sells the other 150k worth of
  wine in 2008

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Liquor Store Value Added

• The liquor store bought inputs for 200K, sold
  outputs for 300K, and added value of 100K.
• What did the liquor store produce?
• Is value added equal to profit?

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GDP in the long-run

• Graphing economic growth
• Why do we care about the downturns and upswings?
• Two main macroeconomic dangers?

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Economic Growth

• Economic Growth Sustained rise in real GDP per
  capita
• Causes
• Increased workforce participation
• Increase output per worker hour
• Better quality (education skills) of the work
  force
• More capital
• Better capital (improved technology)
• Declining share in agriculture (can work year
  round)

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Economic Growth

• Representing economic growth on the PPF
• Graph GDP per capital over time

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Unemployment

• Whos considered unemployed? Ask three questions

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Unemployment

• The labor market in a recession
• Demand for workers decreases
• Wages are slow to respond (Sticky wages)
• Why might wages be sticky?

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3 types of unemployment

• Structural comes from the rigidity of the labor
  market
• Frictional the natural flow of people between
  jobs or careers, or transition into the workforce
• Cyclical unemployment resulting from economic
  downturns
• Natural Rate of Unemployment Structural
  Frictional

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Types of unemployment

• A mother returns to work after raising her
  children?
• Graduate from college and must find a job?
• Unemployment caused by a minimum wage law?
• Unemployment resulting from lack of information
  about available jobs? (i.e., bad matching)
• You move to NYC then start looking for a job?

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Types of unemployment

• Real estate brokerage lays off some of its
  agents?
• A steel plant lays off some of its works after
  the government eliminates steel tariffs
• GM lays off workers due to poor economic
  conditions?
• GM lays off workers due to changing production
  technology?

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Inflation

• Inflation An increase in the overall price
  level
• Usually measured by the consumer price index
  (CPI)
• CPI A price index computed each month by the
  Bureau of Labor Statistics using a pre-defined
  market basket purchased monthly by the typical
  urban consumer.

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CPI Example 3 good basket
Good CPI Amount Price 1998 Price 1999 Expend. 1998 Expend. 1999
Gasoline 100 gal 1.40/gal 1.60/gal
Bread 150 loaves 1.30/loaf 1.20/loaf
Milk 300 quarts 0.75/qrt 0.77/qrt
Total
Inflation between 1998 and 1999 Price of
basket in 1999 / Price of basket in 1998
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CPI Example 3 good basket
Good CPI Amount Price 1998 Price 1999 Expend. 1998 Expend. 1999
Gasoline 100 gal 1.40/gal 1.60/gal
Bread 150 loaves 1.30/loaf 1.20/loaf
Milk 300 quarts 0.75/qrt 0.77/qrt
Total
Inflation between 1998 and 1999 Price of
basket in 1999 / Price of basket in 1998 - 1
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CPI Example 3 good basket
Good CPI Amount Price 1998 Price 1999 Expend. 1998 Expend. 1999
Gasoline 100 gal 1.40/gal 1.60/gal
Bread 150 loaves 1.30/loaf 1.20/loaf
Milk 300 quarts 0.75/qrt 0.77/qrt
Total
If 1998 is the base year for the CPI (i.e., the
CPI in 1998 100), then what is the CPI for 1999?
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CPI Example 3 good basket
Good CPI Amount Price 1998 Price 1999 Expend. 1998 Expend. 1999
Gasoline 100 gal 1.40/gal 1.60/gal
Bread 150 loaves 1.30/loaf 1.20/loaf
Milk 300 quarts 0.75/qrt 0.77/qrt
Total
If 1998 is the base year for the CPI (i.e., the
CPI in 1998 100), then what is the CPI for
1999? CPI current year price / base year
price x 100 ______
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CPI Example 2

• Suppose that
• The CPI in 1980 equals 82.4
• The CPI in 1990 equals 130.7
• Inflation between 1990 and 2000 was 31.75
• Questions
• What was inflation between 1980 and 1990?
• What is the CPI in 2000?
• What was inflation between 1980 and 2000?

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Inflation

• Types of Inflation
• Demand-Pull Inflation (increase in demand drives
  up prices)
• Cost-Pull Inflation (wage price spiral)
• Supply-shocks (oil price driven)
• Why does it matter?