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Week 1
Measuring Macroeconomic Performance: Output and
Prices
Reference: Bernanke, Olekalns and Frank (BOF) Chapter 1
Key Issues
Indicators of macroeconomic performance
Measuring output (GDP)
Measuring prices and inflation
2
Learning Objectives:
What does GDP mean?
What are the three ways of measuring a countrys GDP?
What is the distinction between nominal and real GDP?
What does the consumer price index (CPI) mean?
How is the CPI measured?
What is inflation and how it is measured?
What are the economic costs associated with inflation?
What is the relationship between rates of interest and the
rate of inflation?
What is deflation and why is it regarded as a problem?
Aug2011
Jul2010
Jun2009
May2008
Apr2007
Mar2006
Feb2005
Jan2004
Dec2002
Nov2001
Oct2000
Sep1999
Aug1998
Jul1997
Jun1996
May1995
Apr1994
Mar1993
Feb1992
Jan1991
Dec1989
Nov1988
Oct1987
Sep1986
Aug1985
Jul1984
Jun1983
May1982
Apr1981
Mar1980
Feb1979
Jan1978
Dec1976
Nov1975
Oct1974
Sep1973
$perquarter
14000
12000
10000
8000
6000
4000
2000
Sep1970
2.0
Jul2011
May2010
Mar2009
Jan2008
Nov2006
Sep2005
Jul2004
May2003
Mar2002
Jan2001
Nov1999
Sep1998
Jul1997
May1996
Mar1995
Jan1994
Nov1992
Sep1991
Jul1990
May1989
Mar1988
Jan1987
Nov1985
Sep1984
Jul1983
May1982
Mar1981
Jan1980
Nov1978
Sep1977
Jul1976
May1975
Mar1974
Jan1973
Nov1971
Yearendedpercentagechange
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
10
11
12
201315
201314
201213
201112
201011
200910
200809
NetDebt
BudgetBalance
200708
200607
200506
200405
200304
200203
200102
200001
2
14
40.0
30.0
20.0
10.0
Net Debt/GDP
Net Equity/GDP
Jun-08
Jun-06
Jun-04
Jun-02
Jun-00
Jun-98
Jun-96
Jun-94
Jun-92
Jun-90
0.0
Jun-88
Per cent
50.0
15
16
17
Sep1969
NationalSaving/GDP
Sep2011
Jul2010
May2009
Mar2008
Jan2007
Nov2005
Sep2004
Jul2003
May2002
Mar2001
Jan2000
Nov1998
Sep1997
Jul1996
May1995
Mar1994
Jan1993
Nov1991
Sep1990
Jul1989
May1988
Mar1987
Jan1986
Nov1984
Sep1983
Jul1982
May1981
Mar1980
Jan1979
Nov1977
Sep1976
Jul1975
May1974
Mar1973
Jan1972
Nov1970
%ofGDP
25.0
20.0
15.0
10.0
5.0
0.0
PrivateInvestment/GDP
18
6. Full Employment
Provision of employment for all individuals seeking work
19
Feb1978
Jan1979
Dec1979
Nov1980
Oct1981
Sep1982
Aug1983
Jul1984
Jun1985
May1986
Apr1987
Mar1988
Feb1989
Jan1990
Dec1990
Nov1991
Oct1992
Sep1993
Aug1994
Jul1995
Jun1996
May1997
Apr1998
Mar1999
Feb2000
Jan2001
Dec2001
Nov2002
Oct2003
Sep2004
Aug2005
Jul2006
Jun2007
May2008
Apr2009
Mar2010
Feb2011
Jan2012
Percent
10.0
8.0
6.0
4.0
2.0
0.0
20
21
Quantity
10 cars
100 apples
Market Price
$20,000 per car
$1 per apple
23
25
26
Problem 1.2
IntelligenceIncorporatedproduces100computerchipsandsells
themfor$200eachtoBellComputers.
Usingthechipsandotherlabourandmaterials,Bellproduces
100personalcomputers.
Bellsellsthecomputers,bundledwithsoftwarethatBell
licensesfromMacrosoftat$50percomputer,toPCCharliesfor
$800each.
PCCharliessellsthecomputerstothepublicfor$1000each.
CalculatethetotalcontributiontoGDPusingthevalueadded
method.Doyougetthesameanswerbysummingupthemarket
valuesoffinalgoodsandservices?
27
Sales
Cost of inputs Value Added
20,000
0
20,000
5,000
0
5,000
80,000
25,000
55,000
100,000
80,000
20,000
28
29
Expenditure Method
Accounting Identity
Expenditure on goods and services by final users must
equal the value of their production.
Components of Expenditure
Consumption (C) purchases by Households
Investment (I) purchases by Firms
Government (G) Government purchases
Net Exports (NX ) net purchases by foreign sector
NX = Exports Imports
30
31
$ billion
210.0
86.8
85.7
-0.5
76.4
76.0
382.4
-2.8
379.6
32
Income Method
GDP also equals the aggregate incomes paid to
Labour (L)
Capital (K)
in the production of goods and services.
e.g. labour= worker/ salaries
capital = return on investment
33
Taxes Subsidies
GDP (Market Prices)
Statistical discrepancy
GDP
$ Billion
184.0
126.7
30.1
340.8
37.5
378.3
1.3
379.6
34
35
Example
No. of Cars
Price of Cars
2007
10
$20,000
2008
% Change
10
0
$40,000
100
No. of Apples
Price of Apples
100
$1
100
$2
Nominal GDP
$200,100
Real GDP
2007 prices
2008 prices
$200,100
$400,200
$400,200
$200,100
$400,200
0
100
100
0
0
36
Chain Weighting
For any two consecutive years compute the growth rates
of real GDP implied by both the Laspeyres and the
Paasche indexes.
Then take the average of the two growth rates and this is
the chain-weighted growth rate. This can be used to
compute a real chained-weighted GDP.
Finally to compute a change index over a long period, the
above approach is applied on a year-by-year basis.
38
Example
No. of Cars
Price of Cars
2007
10
$20,000
2008
% Change
10
0
$40,000
100
No. of Apples
Price of Apples
100
$10
1000
$25
900
150
Nominal GDP
$201,000
$425,000
111
Real GDP
2007 prices
2008 prices
$201,000
$402,500
$210,000
$425,000
4.5
5.6
39
2008
425,000
211,151 (=201,0001.0505)
40
41
Construct a CPI
Choose a basket of goods and services
Basket
2000 (base)
Rent (2 bedroom flat)
$500
Hamburgers (60)
$150
CDs (2)
$30
Total Expenditure
$680
2008
$630
$150
$70
$850
CPI =
Cost of base-year basket of goods and services in current year
Cost of base-year basket of goods and services in base year
43
2.0
Sep2010
Jan2009
May2007
Sep2005
Jan2004
May2002
Sep2000
Jan1999
May1997
Sep1995
Jan1994
May1992
Sep1990
Jan1989
May1987
Sep1985
Jan1984
May1982
Sep1980
Jan1979
May1977
Sep1975
Jan1974
May1972
Sep1970
AustralianCPI(Yearended%change)
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
46
Costs of Inflation
Important to distinguish between relative price change
and a change in the general price level
Shoe-leather costs inflation reduces the real
purchasing power of a given amount of money
Menu costs real costs of changing prices
Introduces noise into the price mechanism
Distorts tax systems (if not indexed to inflation)
Unexpected re-distributions of wealth
48
r i
r = real interest rate
i = nominal interest rate
= inflation rate
49
50
Fisher Effect
Nominal interest rate = real rate + (expected) inflation
rate
i r
51
Inflation (year-ended)
M ar-08
M ar-06
M ar-04
M ar-02
M ar-00
M ar-98
M ar-96
M ar-94
M ar-92
M ar-90
M ar-88
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
M ar-86
% p er an n u m
52
Link
53