Macroeconomic Concepts

Total Output: Gross Domestic Product

A. GDP is the market value of all goods and services
produced
in an economy in a year.
B. Real GDP is GDP adjusted for price changes.
C. We often use expenditure categories to help us calculate
and understand Real GDP.
1. Personal Consumption Expenditures.
2. Purchases of new capital goods: Gross Private
Domestic
Investment,
3. Government purchases of consumables and of new
capital goods.
4. Exports and Imports
a) Exports are goods and services produced in a
country and
sold to buyers in other countries.
b) Imports are goods and services produced in other
countries
and purchased here.
c) Exports count as an addition to GDP and imports

Real GDP per Capita

$47,500
$45,000
$42,500
$40,000
$37,500
$35,000
$32,500
$30,000
$27,500
$25,000
$22,500
$20,000
$17,500
$15,000
$12,500
$10,000
$7,500
$5,000
$2,500
$0
1780179018001810182018301840185018601870188018901900191019201930194019501960197019801990200020102020

Real GDP per Capita (logarithmic)

11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1780 1790 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Annual Growth, 10-Year Average Annual Growth, and Average Annual Growth 1790-2010 in Real GDP Per Capita
18%
17%
16%
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1780 1790 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
-1%
-2%
-3%
-4%
Annual % Change, RGDP Per Capita
Average Annual % Change, Real GDP Per Capita (Rolling 10-Year Periods)
Average Annual % Change, 1790-2010

Macroeconomic Concepts
Total Output: Gross Domestic Product (continued)
E. Is Real GDP Per Capita a useful measure of how well off we
are?
1. Changes in RGDP per capita over time.
a) Real GDP per capita in the US was about $1,000 in
1790 and
about $42,000 in 2010 (adjusted for inflation).
b) Are we 42 times as well off now as in 1790?
i) Life expectancy.
ii) Annual hours worked.
iii) Intensity of work effort.
2. Differences in Real GDP per capita across countries.
a) In 2010, the Democratic Republic of the Congo had
a real GDP
per capita of about $355, compared with about $42,000
in the US. Are people in the US, on average, 120 times as
well off as people in the DRC?

Macroeconomic Concepts
The General Level of Prices
A) The Consumer Price Index
1. Measures prices paid by consumers for a wide range of the
goods and services they buy.
B) The Wholesale Price Index (Producer Price Index)
1. Measures prices paid to producers by (for example) retail
stores/chains.
C) The Gross Domestic Product Deflator
1. A more comprehensive measure of prices, including
(conceptually)
prices of all goods and services included in GDP (including
prices
of goods sold to other countriesexportsand produced
in other
countries and sold to buyers in the USimports).
D) The CPI (or a variant) is probably the most widely used
measure of
the general level of prices.
E) Issues with price indexes:
1. New goods appear and some old goods disappear.
2. Quality changessuppose that the average price of a new

The US Consumer Price Index, 1774 - 2010)

240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
1760

1780

1800

1820

1840

1860

1880

1900

1920

1940

1960

1980

2000

2020

US CPI, 1774-2010 (logrithmic transformation)

6.00
5.75
5.50
5.25
5.00
4.75
4.50
4.25
4.00
3.75
3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
1760

1780

1800

1820

1840

1860

1880

1900

1920

1940

1960

1980

2000

2020

US CPI, 1774-1900 (logrithmic transformation)

3.00

2.75

2.50

2.25

2.00

1.75

1.50

1.25

1.00

0.75

0.50

0.25

0.00
1760

1770

1780

1790

1800

1810

1820

1830

1840

1850

1860

1870

1880

1890

1900

1910

US CPI, 1900-2010 (logrithmic transformation)

6.00
5.75
5.50
5.25
5.00
4.75
4.50
4.25
4.00
3.75
3.50
3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

Macroeconomic Concepts

The General Level of Prices (continued)

F) Calculating the rate of inflation. Suppose we know the
price index for
1990 and the price index for 1991. Then the rate of
inflation is
roi = (PI1991/PI1990) 1, or
roi = (136.2/130.7) 1 = 0.0406, or 4.1%
What if we want to know the average rate of inflation
between 1990
and 2010? Thats more complicated. Its

Thats the 20th root. Using logarithms, and using excel,

we could do it like this
average annual roi = exp(ln(PI2010/PI1990)/20) -1

Annual Inflation in the 19th Century

30%
28%
26%
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1770
-2%
-4%
-6%
-8%
-10%
-12%
-14%
-16%
-18%
-20%

1780

1790

1800

1810

1820

1830

1840

1850

1860

1870

1880

1890

1900

1910

Annual Inflation in the 20th Century

20%
19%
18%
17%
16%
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1890
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
-10%

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

Macroeconomic Concepts
Unemployment: How fully are we using the available labor?
A) The unemployment rate (UR) is defined as
(# of People Unemployed) divided by (Number of People
Unemployed + Number of People Employed)
UR = U/(U+E)
B) What do we mean by unemployed? Available to work
and willing
work at the prevailing wage. As we measure it now, we
count
people as unemployed if they are actively seeking work.
C) Unemployment data (or estimates) are almost impossible
to find
before the 20th century.

Unemployment Rate Estimates, 1890-2010 (1948-2010 from the current method of calculating the unemployment rate)
26%
25%
24%
23%
22%
21%
20%
19%
18%
17%
16%
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
-1%