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Macroeconomic Statistics

Definition of Macroeconomics
Calculating GDP
Statistics & Policy

Statistics & Models


Business Cycle
Calculating Inflation
Calculating Unemployment

Types of Economic Indicators

Macroeconomics - Overview
Macroeconomics is the study of how the economy as a
whole should function. In contrast to microeconomics,
focused on individuals and companies, macroeconomics
focuses on the large economic issues that face society.
Macroeconomics is more than just a study of large-scale
economic systems the aggregate economy, according
to economists. Macroeconomics at its core is debate
about modern philosophy it asks the age-old questions
about how society should operate.
Similar to classical philosophy, the study of
macroeconomics is based on constant questions Why is
something done? Who must bear the costs? Who
receives the benefits? What are the short-run and longrun effects?

Areas of Study
Macroeconomics covers more participants than studied in
microeconomics. While it examines people and
companies, it considers them as groups, not individuals.
The focus of macroeconomics is government policy the
legal system, fiscal policy (taxing and spending) and
monetary policy (money and banking) and how these
things affect companies and individuals.
In addition macroeconomics includes international
economics. The force of globalization have turned issues
of national economies into international issues
governments not only think about exchange rates and
trade in terms of globalization, but also levels of taxation,
spending and banking systems.

Macroeconomic Issues
Macroeconomics is primarily focused on three issues:
Economic Growth both creating opportunities for and
sustaining the growth of economies. The goal of
economic growth is not just to create more stuff, but to
improve peoples standard of living.
Unemployment reducing the economic and social
impact of involuntary unemployment. Economist view
involuntary unemployment as a waste of resources it is
time that wasted.
Inflation control the rate at which money loses its
value in terms of its purchasing power. Inflation robs
people of the value of their money and investments.

Macroeconomic Issues & Statistics


Economist track the three macroeconomic issues using statistics:
Economic Growth Changes in Gross Domestic Product (GDP)
and GDP per capita.
Inflation The rate at which the price level (averaging of prices
in the economy) is changing this involves converting nominal
prices into real prices.

Unemployment The unemployment rate percentage of the


labor force unable to find employment.
Most of the time inflation is an issue at the peak of the business
cycle and unemployment is an issue in the trough of the business
cycle. Simultaneous inflation and unemployment is a clear sign of
a dysfunctional economy such as the Stagflation period in the
1970s.

Economic Statistics & Economic Policy


The core of macroeconomics is the issue of government
policy in the economy should the government be
involved in influencing the economy, if so, how should it
influence the economy and by how much? is the core
question.
This is a philosophical question that has real implications to
how people live their lives. While nobody has a definitive
answer, economists try to answer the question by using
economic theory, models and statistics.
Economic statistics are the way economists measure and
justify macroeconomic policy.
Understanding how and why economist use statistics, and
what are the limitations to these statistics is important to
any fundamental understating of economics.

Economics and Reasoning Skills


When analyzing the economy, economists use the three
basic reasoning skills generalization, cause & effect and
comparison.

Generalization Used in analyzing statistics - How well


do the statistics represent the whole economic
phenomenon being analyzed?
Cause & Effect Used in analyzing economic models How clear are the connections between the two parts of
the economy.
Comparison Used in analyzing economic policy - How
similar, and in what way, is this economic event similar to
other economic events?

Basic Macroeconomic Model


The macroeconomy can be summed up in a basic model that
is comprised of the components of the economy.
This model takes the form:

Y = C + I + G + NX

Y = Gross Domestic Product (Total value of everything produce in the economy)


C = Consumption
I = Investment
G = Government government spending minus taxes
NX = Net Exports exports minus imports

This simple model can be used to gain a number of


insights into the working of the macroeconomy. The model
clearly shows the parts of the economy economists watch
when trying to predict future GDP. If there is a change in
consumption, investment, government spending or net
exports, it will affect GDP.

What do you see in the picture?

Statistics & Models


Economists look at the economy in a
manner similar to how you view this
picture - while the subject of the
picture is not immediately apparent,
you can fit the bits information
available into a mental representation
of the world to figure out it is a
picture of a dog.

This process is similar to how economists analyze the


economy by fitting economic statistics into models they
make of the economy such as the basic
macroeconomic model: Y = C + I + G + NX
Economist can use statistical data in connection with a
model to understand the economy. Models help
separate the signal from the noise in a world with a
lot of noise.

Example of a Complex Economic Model


This is an equation of a economic model of consumption that
explains how people decide to how much to spend on consumption.
Can you understand it and does it make sense? Dont think of it as
a math problem to be solved think of it as a number sentence
that expresses an idea in the language of math.

It explains how peoples current consumption decisions are based on


past and future consumption habits factoring in a willingness to
change their consumption habits in response to interest rates and
future inflation.
This model is useful for Central Banks that control the interest rate
through it they can affect the economy.

Measuring GDP
The Gross Domestic Product (GDP) is defined as the total
market value of the final goods and services produced within
the borders of a nation. This number is generally used as a
measure of the total size of an economy. The Gross National
Product (GNP) measures the total output of the citizens of a
country this measure is less used now because of issues of
globalization.
Economists generally focus on GDP because it represents
economic activity in a region, rather than a group of citizens
who might be working in several regions.
GDP is measured in both nominal and real, adjusted for
inflation amounts. Typically, economists pay more attention
to the Real GDP since it more accurately shows changes in
output since it factors out inflation.

Calculating GDP
The United States government
uses national income
accounting to measure GDP.
This method of calculation
involves adding up the total
value of all the final goods and
services produced within the
country in one year.
Source:
FRBSF 8/14
The Bureau of Economic Analysis calculates the GDP for the
United
States.

The current GDP for the United States about $ 17 trillion largest
economy in the world.
The growth of the economy is measured as a percentage of GDP. A
3% growth rate for the United States is a good rate of growth.
In its most recent quarter (Q2), the United States grew at an annual
rate of 4% (note the negative growth in Q1).

Problems with GDP Accounting


GDP accounting provides a rough measure of the economy because
it is incomplete as it does not account for many economic activities
that improve national welfare and does not account for events that
destroy economic welfare. GDP does not account for:

Improved product quality new iphones have the same price as


the iphones sold years ago when they were new. Because the price
has not change GDP counts old and new iphones the same it does
not mark improved quality.
Non-Market transactions work not paid for or part of the
underground economy.
The value of leisure GDP values time working over time not
working even though not working may be more valuable to
national welfare.
Environmental damage GDP does not account for loss of
environmental resources.
Government spending is accounted at cost, not value created.

When making economic predictions economists look at the longterm trend of GDP growth and use that as the basis for future
forecasts. While the future can be different from the historical
trend, this historical trend provides a baseline by which to gauge
growth prospects. The graph below shows a trend line imposed on
historical GDP data.

GDP Data Broken down into Model Components


Basic Macroeconomic Model: Y = C + I + G + NX
Year

GDP
(Y)

Consumption
(C)

Investment
(I)

Government
(G)

Net Exports
(NX)

1940

101.3

71.2

13.6

15.1

1.4

1950

294.3

192.7

54.1

46.9

0.7

1960

527.4

332.3

78.9

113.8

2.4

1970

1,039.7

648.9

152.4

237.1

1.2

1980

2,795.6

1,762.9

477.9

569.7

-14.0

1990

5,803.2

3,831.5

861.7

1,181.4

-71.4

2000

9,824.6

6,883.7

1,755.4

1,751.0

-365.5

2001

10,082.2

6,987.0

1,586.0

1,858.0

-348.9

2002

10,446.2

7,303.7

1,593.2

1,972.9

-423.6

Analysis & Business Cycle


Economic analysis involves using
mathematical models to analyzing
statistics to determine the future
path of the economy.
Models project a growth trend based
on historical evidence that follows
trend for full employment and
non-inflationary growth.
Economists analyze how the economy passes through the business
cycle of recovery and recession by tracking how economic statistics
change in their model of the economy.

The passage of the economy through recession and recovery is


officially done by the National Bureau of Economic Research,
which officially declared the recession over in the second quarter of
2009 the point when GDP was at the bottom of the trough.
Technically, the economy is not in recession. The reason it still
feels like a recession is because economic growth has been so
weak.

The depth of a recession can be measured as the difference between


actual and potential GDP (Based on the historic trend). Economists
call this the Output Gap in GDP. The output gap is shown in the
graph below note the depth of the recession.

Output Gap

Updated Output Gap July 2011


This is the
Congressional Budget
Offices chart of the
output gap based on
the revised July 2011
GDP numbers. The
revised numbers
show the recession
was deeper than
previously reported.

Output Gap Will Actual GDP pull down Potential GDP?

There is a concern among economists that the prolonged


recession that began with the economic crisis in 2008 has
opened up such a large output gap that it may pull down
potential GDP.

Calculating Inflation
The way government calculates inflation is by calculating a
price index based on comparing the nominal prices for the
same basket of goods on different years. In this
calculation, one year is established as a base year and
changes in prices are measured against that year. The
index calculated is a percentage rate of inflation. This is
the equation:
Price Index =Price of Basket - specific year

* 100

Price of Basket - base year


The Bureau of Labor Statistics calculates the Consumer
Price Index (CPI) and the Producer Price Index (PPI),
through price check surveys, that are used to measure
inflation in the United States. This is the equation for
calculating inflation:
Inflation = [(CPI2 CPI1)/ CPI1 ] * 100

CPI Inflation 2003 to 2013

Source: Bureau of Labor Statistics

Inflation measures the percentage increase in the price level.


Inflation has been low throughout this recession and is expected
to stay low. A 2% inflation rate is good. The current rate of
inflation is 2% is the ideal rate

Headline and Core Inflation


Economist separate inflation into two categories:
Headline The measure of inflation that is reported in the news
(hence the name), which is rate of inflation based on the CPI.
Core The measure of inflation that excludes the influence of
energy and food prices. Energy and food prices tend to be more
volatile than prices for other goods and services.
When making policy, economists tend to focus on core inflation
numbers since they indicate the effect on inflation on the whole
economy. While headline inflation can sometimes be an indication
of future inflation, since energy an food prices affect the whole
economy, it takes time for their affects to pass into the wider
economy.

Historic Relationship - Headline and Core Inflation

Notice that the core price index reflects the overall


price index, but is less volatile.

Calculating Real GDP and Per Capita GDP


The price index can be used to calculate real GDP.
Basically, this is adjusting nominal GDP for the effects of
inflation. The equation for doing this is:
Real GDP = nominal GDP

price index (in hundredths)


Real Per Capita GDP, which measures GDP in relation to the
population is calculated by dividing GDP by the population:
GDP per Capita = GDP / Population
This number can be a truer measure of economic growth
because is accounts for inflation and population change it
shows whether a population is really materially better off.

Unemployment
Unemployment is a psychological, social and economic
problem. The economic problem is that it represents
economic resources (human labor) that are not being utilized,
which means that society is poorer than it otherwise would
have been.
Unemployment statistics are based on the number of people
in the labor force not the population. The Bureau of Labor
Statistics calculates the unemployment rate for the United
States based on interviews with 60,000 households. It sorts
the respondents into three categories:
Employed person who has a job
Unemployed did not have a job, but was actively looking.

Not in Labor Force students, non-working spouses, retires


and discouraged workers gave up on finding a job.

Calculating the Rate of Unemployment


The unemployment rate only accounts for the number of
people in the labor force who are actively seeking
employment but cannot find a job. The labor force is the
sum of people employed and unemployed. Discouraged
workers do not count as unemployed since they are not in
the labor force. For this reason, the unemployment rate
may understate the level of unemployment.

The unemployment rate is calculated by dividing the


number of unemployed by the number of people in the
labor force.
Unemployment Rate = Number of Unemployed

Labor Force

Unemployment 2003 to 2014

Most economists consider a 4% unemployment rate to be the full


employment rate for the economy. Currently the unemployment
rate is 6.1% - significantly higher than full employment 6 years
after the beginning of the financial crisis. Why? is the big
question and debate among economists.

Types of Unemployment
Economists divide unemployment into four categories.
Frictional unemployment created by people quitting
to find better jobs or employers fire people to find
better employees.
Seasonal unemployment caused by seasonal
variation in industries (i.e. life guards and ski
instructors)
Cyclical unemployment caused by changes in the
business cycle when cyclical unemployment is zero,
the economy is considered at full employment.

Structural unemployment caused by structural


changes in the economy that affect entire industries or
types of jobs.
Macroeconomic policy focuses on the last two types of
unemployment Cyclical and Structural.

Employment, Unemployment & the Whole Population

Job Recovery - Weak


Millions of jobs have been
created since the recession
ended however, this is
only part of the millions
more that were lost in the
recession the number of
currently employed is still
less than that in 2008

Persistent high unemployment has been a major problem in


the current recession the reason the feeling of recession has
continued for so long is that job growth has been very low
the debate hinges on whether the economy has undergone a
structural change in which they types of new jobs are
different than the old types of jobs which were lost.
How to jump-start job growth is a major point of debate.

Types of Economic Indicators


The difficulty in using economic statistics in predicting the
future of the economy is that the data is old the
economy has changed by the time the data has been
reported. Because of the time lag in getting data, policy
based on old data can be poorly timed.
For this reason, economists use specific types of statistics as
indicators or where the economy is going, is, and has been.
These statistics are categorized as:

Leading indicators statistics that turn in advance of


changes in the economy
Coincidence indicators statistics that change with the
economy and can be used as a reference point for the
business cycle
Lagging indicators statistics that follow changes in the
economy.

Leading Indicators Statistics that indicate the future


The Conference Board releases a monthly index of ten
statistics that provide indications of future changes in GDP.
These are indicators and relationship to changes in GDP:
Length of average workweek - Positive
Initial claims for unemployment Negative

New orders for consumer goods - Positive


Vendor performance or Timeliness of Deliveries - Negative

New orders of capital goods - Positive


Building permits for new houses - Positive
Stock prices - Positive

Money Supply (M2) - Positive


Consumer Expectations - Positive

Other Sources of Leading Economic Indicators


Beige Book - Federal Reserve Board publishes this document
eight times a year in preparation for the Federal Open
Market Committee meeting. It contains a mixture of
statistics and anecdotal evidence from around the United
States.
Business Outlook Survey - Federal Reserve Bank of
Philadelphia
Existing Home Sales - National Association of Realtors
Stock and Bond Markets
and interest rates

can show the business cycle.

Coincidence Indicators
These statistics move in time with the business cycle
and are indicators of current change.
Employees on nonagricultural payrolls

Personal income
Index of industrial production
Manufacturing and trade sales
These statistics can be found on the web pages for the
Bureau of Labor Statistics and the Bureau or Economic
Analysis.

Lagging Indicators
These are indicators that follow behind the business cycle
and are useful for confirming that a change in economy
has happened i.e. past the worst point in a recession.

Average duration of unemployment


Ratio of business inventories to sales

Change in manufacturing cost per unit of output


Average prime interest rate changed by banks
Value of commercial and industrial loans outstanding

Consumer Price Index for services