CHAPTER 2

The Data of Macroeconomics

A PowerPoint Tutorial
To Accompany

MACROECONOMICS, 7th. Edition

N. Gregory Mankiw
Tutorial written by:

Mannig J. Simidian

B.A. in Economics with Distinction, Duke University

1
Chapter Two M.P.A., Harvard University Kennedy School of Government
M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management

Gross Domestic Product (GDP) is the dollar

value of all final goods and services
produced within an economy in a given
period of time.
The consumer price index (CPI) measures
the level of prices.
The unemployment rate tells us the fraction
of workers who are unemployed.

Chapter Two

Gross Domestic Product is the best measure of how

well the economy is performing. The Bureau of
Economic Analysis (part of the U.S. Dept. of
Commerce) calculates GDP via administrative data,
which are byproducts of government functions such as
tax collection, education programs, defense, and
regulation, and statistical data, which come from
government surveys of, for example, retail
establishments manufacturing firms and farm activity.
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Income, Expenditure,
And the Circular Flow
Two ways
of viewing GDP

Total income of everyone in the economy

Total expenditure on the economys
output of goods and services
Income $
Labor

Households

Firms
Goods
Expenditure $

For the economy as a whole, income must equal expenditure.

GDP measures the flow of dollars in the economy.
4
Chapter Two

1) To compute the total value of different goods and services, the

national income accounts use market prices.
Thus, if:
$0.50

$1.00

GDP = (Price of apples Quantity of apples)

+ (Price of oranges Quantity of oranges)
= ($0.50 4) + ($1.00 3)
GDP = $5.00
2) Used goods are not included in the calculation of GDP.
3) The treatment of inventories depends on if the goods are stored or
if they spoil. If the goods are stored, their value is included in GDP.
If they spoil, GDP remains unchanged. When the goods are finally sold
out of inventory, they are considered used goods (and are not counted).
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4) Intermediate goods are not counted in GDP only the value of

final goods. Reason: the value of intermediate goods is already
included in the market price. Value added of a firm equals the
value of the firms output less the value of the intermediate goods
the firm purchases.
5) Some goods are not sold in the marketplace and therefore dont
have market prices. We must use their imputed value as an estimate
of their value. For example, home ownership and government services.

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The value of final goods and services measured at current prices is

called nominal GDP. It can change over time, either because there is a
change in the amount (real value) of goods and services or a change in
the prices of those goods and services.
Hence, nominal GDP Y = P y, where P is the price level and y is real
outputand remember we use output and GDP interchangeably.
Real GDP or, y = YP is the value of goods and services measured using
a constant set of prices.
This distinction between real and nominal can also be applied to other
monetary values, like wages. Nominal (or money) wages can be denoted
by W and decomposed into a real value (w) and a price variable (P).
Hence, W = nominal wage = P w
w = real wage = w/P
This conversion from nominal to real units allows us to eliminate the
problems created by having a measuring stick (dollar value) that
essentially changes length over time, as the price level changes. 7
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Lets see how real GDP is computed in our apple and

orange economy.
For example, if we wanted to compare output in 2009 and output
in 2010, we would obtain base-year prices, such as 2009 prices.
Real GDP in 2009 would be:
(2009 Price of Apples 2009 Quantity of Apples) +
(2009 Price of Oranges 2009 Quantity of Oranges).
Real GDP in 2010 would be:
(2009 Price of Apples 2010 Quantity of Apples) +
(2009 Price of Oranges 2010 Quantity of Oranges).
Real GDP in 2011 would be:
(2009 Price of Apples 2011 Quantity of Apples) +
(2009 Price of Oranges 2011 Quantity of Oranges).
Note that 2009 prices are used to compute real GDP for all three
years. Because prices are held constant from year to year,
real GDP varies only when the quantities produced vary.
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THE IMPLICIT PRICE DEFLATOR FOR GDP

GDP Deflator = Nominal GDP
Real GDP
Nominal GDP measures the current dollar value of the output of
the economy.
Real GDP measures output valued at constant prices.
The GDP deflator, also called the implicit price deflator for GDP,
measures the price of output relative to its price in the base year. It
reflects whats happening to the overall level of prices in the economy.
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In some cases, it is misleading to use base-year prices that

prevailed 10 or 20 years ago (i.e., computers and
college). In 1995, the Bureau of Economic Analysis
decided to use chain-weighted measures of
real GDP. The base year changes continuously
over time. This new chain-weighted
measure is better than the more
Average prices in 2009
traditional measure because it
and 2010 are used to measure
ensures that prices will not be
real growth from 2009 to 2010.
too out of date.
Average prices in 2010 and 2011
are used to measure real growth from
2010 to 2011, and so on. These growth
rates are united to form a chain that is
used to compare output between any two
10
Chapter Two
dates.

YY =
= CC +
+ II +
+G
G+
+ NX
NX
Totaldemand
demand
Total
fordomestic
domestic
for
output(GDP)
(GDP)
output

composed
isiscomposed
of
of

Investment
Investment
spendingby
by
spending
businessesand
and
businesses
households
households

Consumption
Consumption
spendingby
by
spending
households
households

Government
Government
purchasesof
ofgoods
goods
purchases
andservices
services
and

Netexports
exports
Net
ornet
netforeign
foreign
or
demand
demand

This is the called the national income accounts identity.

Chapter Two

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AAMankiw
Mankiw
Macroeconomics
Macroeconomics
Case
CaseStudy
Study

GDP and Its

Components

In 2007, U.S. GDP totaled about 13.8 trillion.

This number is incomprehensible. So, if we
divide this number by the total population of
$302 million, we get GDP per personthe
amount of expenditure for the average
American which equaled $45,707 in 2007.
Lets break it down visually on the next slide.
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GDP (Y) was $45, 707 per person

Here are the Components of Y in
2007:
Remember that
these
calculations are
performed per
person just for
comprehension
purposes.

YY =
= CC +
+ II +
+G
G+
+ NX
NX
$45,707
$45,707 =
= $32,144
$32,144 +
+ $7,052
$7,052 +
+ $8,854
$8,854 +
+ $2,343
$2,343
Note: The numbers above must be multiplied by the U.S. Population
302 million to obtain the totals for the above national income
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accounts identity Y = C + I + G + NX.

To see how the alternative measures of income relate to one

another, we start with GDP and add or subtract various quantities.
To obtain gross national product (GNP), we add receipts of factor
income (wages, profit, and rent) from the rest of the world and
subtract payments of factor income to the rest of the world.
GNP = GDP + Factor Payments from Abroad - Factor Payments to Abroad

Whereas GDP measures the total income produced domestically, GNP

measures the total income earned by nationals (residents of a nation).
To obtain net national product (NNP), we subtract the depreciation of
capitalthe amount of the economys stock of plants, equipment, and
residential structures that wears out during the year:
NNP = GNP Depreciation
In the national income accounts, depreciation is called the consumption
of fixed capital. It equals about 10% of GNP. Because depreciation of
capital is a cost of producing the output of the economy, subtracting
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Chapter Two depreciation shows the net result of economic activity.

Net
Net National
National is
is approximately
approximately equal
equal to
to
another
another measure
measure called
called national
national
income.
income. The
The two
two differ
differ by
by aa small
small
correction
correction called
called the
the statistical
statistical
discrepancy,
discrepancy, which
which arises
arises because
because
different
different data
data sources
sources may
may not
not be
be
completely
completely consistent.
consistent.
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The Consumer Price Index (CPI) turns the prices

of many goods and services into a single index
measuring the overall level of prices. The Bureau
of Labor Statistics weighs different items by
computing the price of a basket of goods and
services produced by a typical customer. The CPI
is the price of this basket of goods relative to the
price of the same basket in some base year.

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Lets see how the CPI would be computed in our

apple and orange economy.
For example, suppose that the typical consumer buys 5 apples and 2
oranges every month. Then the basket of goods consists of 5 apples
and 2 oranges, and the CPI is:
CPI = ( 5 Current Price of Apples) + (2 Current Price of Oranges)
( 5 2009 Price of Apples) + (2 2009 Price of Oranges)
In this CPI calculation, 2009 is the base year. The index tells how
much it costs to buy 5 apples and 2 oranges in the current year relative
to how much it cost to buy the same basket of fruit in 2009.
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This statistic measures the increase in the price of a

consumer basket that excludes food and energy products.
Because food and energy prices exhibit substantial short-run
volatility, core inflation is sometimes viewed as a better
gauge of ongoing inflation trends.

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The GDP deflator measures the prices of all goods produced, whereas
the CPI measures prices of only the goods and services bought by
consumers. Thus, an increase in the price of goods bought only by firms
or the government will show up in the GDP deflator, but not in the CPI.
Also, another difference is that the GDP deflator includes only those
goods and services produced domestically. Imported goods are not a
part of GDP and therefore dont show up in the GDP deflator.
The final difference is the way the two aggregate the prices in the
economy. The CPI assigns fixed weights to the prices of different
goods, whereas the GDP deflator assigns changing weights.
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The labor force is defined as the sum of the employed and

unemployed, and the unemployment rate is defined as the
percentage of the labor force that is unemployed.
The labor-force participation rate is the percentage of the adult
population who are in the labor force.
Unemployment Rate = Number of Unemployed 100
Labor Force
Labor-Force Participation Rate =

Chapter Two

Labor Force
100
Adult Population
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The Bureau
Labor
Statistics
Labor Force = 147.4 millio

Unemployment rate =
5.5%
Labor Force Participa

tion Rate = 66.0%

The Bureau of Labor Statistics (BLS) computes these statistics for the
overall population and for groups within the population: men
and women, whites and blacks, teenagers and prime-age workers. In
2008, the statistics broke down as follows:
Labor Force = 145.0 + 10.1 = 155.1 million
Unemployment rate = (10.1/155.1) x 100 = 6.5%
Labor-Force Participation Rate = (155.1/234.6) x 100 = 66.1%
Hence, about two-thirds of the adult population was in the labor force,
and about 6.5 percent of those in the labor force did not have a job.
Chapter Two

21

The BLS conducts two surveys of labor market,

and therefore produces two measures of total
employment. The establishment survey estimates the
number of workers firms have on their payrolls.
The household survey estimates the number of people who
say they are working.
Two measures of employment are not necessarily identical,
although positively correlated. The reason? The surveys
measure different things and the surveys in general, are
imperfect.
Some economists believe that the establishment survey is
more accurate because it has a larger sample size. Bottom
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Chapter Twoline: all economic statistics are imperfect!

Gross domestic product (GDP)

Consumer Price Index (CPI)
Unemployment rate
National income accounting
Stocks and flows
Value added
Imputed value
Nominal versus real
GDP
GDP deflator

Chapter Two

National income accounts identity

Consumption
Investment
Government purchases
Net exports
Labor force
Labor-force participation rate

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