L2 Measuring Macroeconomic Data

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    2-1

    Measuring

    Macroeconomic

    Data

    2-2

    Today’s Agenda

    1. Measuring Economic Activity

    2. Measuring Inflation

    3. Measuring Unemployment

    4. Measuring Interest Rates

    2-3

    Measuring Economic Activity

    2-4

    Measuring Economic Activity

    • The national income and product accounts are

    an accounting framework used to measure

    economic activity and its components.

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     National Income Accounting

    • Three different approaches:

    1. Product approach: the dollar amount of output

    newly produced.

     2. Expenditure approach: the dollar amount spent

     by purchasers on newly produced output.

     3. Income approach: the dollar incomes earned by

     production of the newly produced output.

    2-6

     National Income Accounting

    • Thus, the fundamental identity of national

    income accounting is:

    Total Production

    Total Expenditure

    Total Income

    2-7

    The Product Approach to GDP

    • Gross Domestic Product, GDP, is defined as:

    1. The current market value of all

     2. final goods and services

     3. newly produced 

     4. in the domestic economy during a

     5. specified period of time.

    2-8

    The Product Approach to GDP

    1. Market value: allows adding together unlikeitems by valuing them at their market prices.

     a. Imputed values are used for some nonmarketgoods and services.

     b. Most nonmarket goods and services are notincluded.

    c. Some market goods and services are notincluded.

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    The Product Approach to GDP

     2. Final goods and services: those goods andservices that are NOT completely used up inthe production process.

     –   Intermediate goods and services are thosecompletely used up in the production of othergoods and services in the same period that theythemselves were produced.

    • Alternatively, adding up value added would work.

    2-10

    The Product Approach to GDP

     2. Final goods and services: Two caveats

     a. Capital goods are used to produce other goods andare treated as final goods because they are NOTcompletely used up in the same period that theyare produced.

     b. Inventory investment —the amount thatinventories of unsold finished goods, goods in process, and raw materials have changed duringthe period—is also treated as a final good.

    2-11

    The Product Approach to GDP

     3. Newly produced : counts only goods and

    services produced in the specified period of

    time.

    2-12

    The Product Approach to GDP

     4. In the domestic economy: counts only goods

    and services produced within the geographical

     boundaries of the country.

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    The Product Approach to GDP

     5. Specified period of time: because GDP is a

    flow concept, it must be measured during a

    specified period of time.

     a. Flows represent an amount per unit of time.

     b. Stocks represent an amount at a particular point

    in time.

    2-14

    The Expenditure Approach to GDP

    • GDP is also defined as:

    1. The total spending on all

     2. final goods and services produced

     3. within the domestic economy during a

     4. specified period of time.

    2-15

    The Expenditure Approach to GDP

    • Four main categories of spending:

    1. Consumption (C )

     2. Investment ( I )

     3. Government purchases, goods and services (G)

     4. Net Exports ( NX )

    2-16

    The Expenditure Approach to GDP

    • The national income identity is:

    Y = C + I + G + NX

     – Also called the income-expenditure identity.

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    The Expenditure Approach to GDP

    1. Consumption: spending by domestichouseholds on final goods and services.

     – Three categories:

     a. Durable goods spending, which is spending byhouseholds on goods that last 3 years or longer.

     b. Nondurable goods spending, which is spending byhouseholds on goods that last less than 3 years.

     c. Services spending, which is spending by householdsthat is consumed immediately.

    2-18

    The Expenditure Approach to GDP

    Personal Consumption ExpendituresPercent of GDP

    10505050505050Source: Haver Analytics

    71

    68

    65

    62

    59

    56

    71

    68

    65

    62

    59

    56

    2-19

    The Expenditure Approach to GDP

     2. Investment: spending by domestic businessesfor new capital goods and inventories.

     – Three categories:

     a. Business fixed investment, current spending on (1) newequipment, (2) new structures, and (3) new intellectual

     property products.

     b. Residential fixed investment, current spending on newhousing units.

     c. Inventory investment, current spending on additionalholdings of raw materials, parts, and finished goods.

    2-20

    The Expenditure Approach to GDP

    Gross Private Domestic InvestmentPercent of GDP

    10505050505050Source: Haver Analytics

    20

    18

    16

    14

    12

    10

    20

    18

    16

    14

    12

    10

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    The Expenditure Approach to GDP

     3. Government purchases of goods and services:

    spending by units of government on final

    goods or services.

     – Two categories:

     a. Federal government purchases

     b. State and local government purchases

    2-22

    The Expenditure Approach to GDP

    Government PurchasesPercent of GDP

    10505050505050Source: Haver Analytics

    40

    36

    32

    28

    24

    20

    16

    40

    36

    32

    28

    24

    20

    16

    2-23

    The Expenditure Approach to GDP

     3. Government spending includes:

     a. Government purchases of goods and services (the

    G in C + I + G + NX), and 

     b. Government transfer payments, payments for

    which no goods, services, or uses of factors of

     production are exchanged in the specified time

     period.

    • Transfer payments are NOT included in G.

    2-24

    The Expenditure Approach to GDP

    Goverment Transfer PaymentsPercent of GDP

    10505050505050Source: Haver Analytics

    17

    14

    11

    8

    5

    2

    17

    14

    11

    8

    5

    2

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    The Expenditure Approach to GDP

    Total Government SpendingPercent of GDP

    10505050505050Source: Haver Analytics

    40

    36

    32

    28

    24

    20

    16

    40

    36

    32

    28

    24

    20

    16

    2-26

    The Expenditure Approach to GDP

     4. Net exports: exports minus imports.

     – Two categories:

     a. Exports are goods produced in the country that are

     purchased by foreigners.

     b. Imports are goods produced abroad that are purchased

     by residents in the country.

    2-27

    The Expenditure Approach to GDP

    Exports of Goods and ServicesPercent of GDPImports of Goods and ServicesPercent of GDP

    10505050505050Source: Haver Analytics

    16

    12

    8

    4

    0

    16

    12

    8

    4

    0

    2-28

    The Expenditure Approach to GDP

    Net Exports of Goods and ServicesPercent of GDP

    10505050505050Source: Haver Analytics

    2

    0

    -2

    -4

    -6

    2

    0

    -2

    -4

    -6

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    The Income Approach to GDP

    • GDP is also defined as:

    1. The total income earned from

     2. Newly produced 

     3. final goods and services

     4. in the domestic economy during a

     5. specified period of time.

    2-30

    The Income Approach to GDP

    • Five different income measures

    1. Gross Domestic Product, GDP

    2. Gross National Product, GNP

    3. National income, Y

    4. Private disposable income

    5. Net government income

    2-31

    The Income Approach to GDP

    1. Gross Domestic Product (GDP)

    + Factor income from the rest of the world 

     –  Factor payments to the rest of the world 

    = Gross National Product (GNP)

    2-32

    The Income Approach to GDP

     2. Gross National Product (GNP)

     –  Depreciation

     –  Statistical discrepancy

    = National Income

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    The Income Approach to GDP

     3. National Income

    = Compensation of Employees

    + Corporate Profits

    + Non-Corporate Profits

    + Other Income

    2-34

    The Income Approach to GDP

    GNP, Year-to-Year Percent ChangeGDP, Year-to-Year Percent ChangeNational Income, Year-to-Year Percent Change

    10505050505050Sources: Bureau of Economic Analysis /Haver Analytics

    20

    15

    10

    5

    0

    -5

    20

    15

    10

    5

    0

    -5

    2-35

    The Income Approach to GDP

     4. Private disposable income

    = GDP

    + Net factor income

    + Transfer payments from the government

    + Interest payments on government debt

     – Taxes

    2-36

    The Income Approach to GDP

     5. Net government income (Net tax receipts)

    = (Gross) taxes receipts

     – Government transfer payments

     – Interest payments on government debt

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    2-37

    Real versus Nominal GDP

    •  Nominal variables are measured in current

    dollar terms.

    •  Real variables are adjusted for changes in

     prices to reflect only quantity terms.

    2-38

    Real versus Nominal GDP

    •  Nominal GDP is the dollar value of an

    economy’s final output measured at current

    market prices.

    Nominal GDP = Price Level * Real GDP

    2-39

    Real versus Nominal GDP

    •  Real GDP is an estimate of the value of an

    economy’s final output, adjusted for changes in

    the overall price level .

    Real GDP = Nominal GDP

    Price Level

    2-40

    Measuring Inflation

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    Measuring Inflation

    • A price index measures the weighted average

    level of prices for some specified set of goods

    and services, relative to those prices in a

    specified base year.

    2-42

    Measuring Inflation

    • Three major price indexes:

    1. The Gross Domestic Product (GDP) Deflator

     2. The Personal Consumption Expenditure (PCE)

     Deflator

     3. The Consumer Price Index

    2-43

    Measuring Inflation

    • The inflation rate is calculated as:

     t = ( P t –  P t-1) / P t-1 =  P t / P t-1

     – where

    •   t is the inflation rate in period t, and 

    • Pt is a price index in period t.

    2-44

    Measuring Inflation

    Inflation Measured by Different Price Indexes 

    10505050505050Sources: BLS, BEA, BEA /Haver 

    16

    12

    8

    4

    0

    -4

    16

    12

    8

    4

    0

    -4

    GDP Price Deflator 

    Personal Consumption Deflator 

    Consumer Price Index

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    Measuring Unemployment

    • The Unemployment Rate is the percentage of

    the civilian labor force who are:

    1. Willing and able to work and

     2. Actively looking for work but

     3. Who do not have jobs.

    2-46

    Measuring Unemployment

    2-47

    Measuring Unemployment

    • The adult population can be categorized as:

    1. Employed 

     2. Unemployed 

     3. Not in the labor force

    • Which includes discouraged workers, those who

    would like to work but have given up looking for work because they do not believe there are any jobs available

    for them.

    2-48

    Measuring Unemployment

    • The (civilian) labor force is given by:

     Labor Force = Employed + Unemployed 

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    Measuring Unemployment

    • The following can be calculated:

    1. Unemployment Rate = Unemployed/Labor Force

     2. Participation Rate = Labor Force/Population

     3. Employment Ratio = Employed/Population

    2-50

    Measuring Unemployment

    Civilian Unemployment RatePercent

    10505050505050Source: Bureau of Labor Statistics /Haver Analytics

    12

    10

    8

    6

    4

    2

    12

    10

    8

    6

    4

    2

    2-51

    Measuring Unemployment

    Labor Force Participation RatePercent

    10505050505050Source: Bureau of Labor Statistics /Haver Analytics

    68

    66

    64

    62

    60

    58

    68

    66

    64

    62

    60

    58

    2-52

    Measuring Unemployment

    Employment-to-Population RatioPercent

    10505050505050Source: Bureau of Labor Statistics /Haver Analytics

    65

    63

    61

    59

    57

    55

    65

    63

    61

    59

    57

    55

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    Measuring Interest Rates

    2-54

    Measuring Interest Rates

    • An interest rate measures:

    1. The cost of borrowing

    • OR 

     2. The return to saving and lending

    2-55

    Measuring Interest Rates

    • There are many different interest rates that

    differ primarily in their:

    1. Maturity

     2. Liquidity

     3. Credit risk

    2-56

    Measuring Interest Rates

    Federal Funds Rate10-Year Treasury Note YieldConventional 30-Year Mortgage Rate

    Moody's Seasoned Baa Corporate Bond Yield

    10505050505050Sources: FRB /Haver 

    20

    16

    12

    8

    4

    0

    20

    16

    12

    8

    4

    0

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    2-57

    Measuring Interest Rates

    • Because interest rates usually move together

    most macroeconomic models only incorporate

    one interest rate— THE interest rate.

    2-58

    Measuring Interest Rates

    •  Nominal interest rate (i): rate at which the

    nominal value of an asset increases over time

    •  Real interest rate (r ): rate at which the real

    value of an asset increases over time

     – Ex ante real rates are based in expected inflation

     – Ex post real rate are based on actual inflation

    2-59

    Measuring Interest Rates

    10-Year Nominal Treasury Note YieldPercent10-Year Real ex-port) Treasury Note YieldPercent

    10505050505050Source: Haver Analytics

    16

    12

    8

    4

    0

    -4

    -8

    16

    12

    8

    4

    0

    -4

    -8

    2-60

    Measuring Interest Rates

    • The importance of real interest rates:

     – When the real interest rate is low

    • There is greater incentive to borrow and invest but

    • There is less incentive to save and lend.

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    Measuring Interest Rates

    • The Fisher Equation is the relationship between nominal and (ex ante) real interestrates:

     – The nominal interest rate is given by:

    i = r + e

     – The real (ex ante) interest rate is given by:

     r = i –   e

    2-62

    Measuring Interest Rates

    • Given nominal and (ex ante) real interest rates,

    expected inflation can be calculated as:

     e = i –  r

    2-63

    Measuring Interest Rates

    Expected 10-Year InflationPercent

    132109876543Source: Haver Analytics

    3.0

    2.5

    2.0

    1.5

    1.0

    0.5

    0.0

    3.0

    2.5

    2.0

    1.5

    1.0

    0.5

    0.0

    2-64

    Measuring Macroeconomic Data

    • Building macroeconomic models requires:

    1. Measuring the macroeconomic data

    2. Looking for patterns in the data

    3. Formulating a theory to explain these patterns

    4. Testing the model against real world experiences