Answers to Textbook Questions and Problems CHAPTER 2 The Data of Macroeconomics Questions for Review 1. GDP measures the total income earned from the production of the new final goods and services in the economy, and it measures the total expenditures on the new final goods and services produced in the economy. GDP can measure two things at once because the total expenditures on the new final goods and services by the buyers must be equal to the income earned by the sellers of the new final goods and services. As the circular flow diagram in the text illustrates, these are alternative, equivalent ways of measuring the flow of dollars in the economy. 2. The four components of GDP are consumption, investment, government purchases, and net exports. The consumption category of GDP consists of household expenditures on new final goods and services, such as the purchase of a new television. The investment category of GDP consists of business fixed investment, residential fixed investment, and inventory investment. When a business buys new equipment this counts as investment. Government purchases consists of purchases of new final goods and services by federal, state, and local governments, such as payments for new military equipment. Net exports measures the value of goods and services sold to other countries minus the value of goods and services foreigners sell us. When the U.S. sells corn to foreign countries, it counts in the net export category of GDP. 3. The consumer price index (CPI) measures the overall level of prices in the economy. It tells us the price of a fixed basket of goods relative to the price of the same basket in the base year. The GDP deflator is the ratio of nominal GDP to real GDP in a given year. The GDP deflator measures the prices of all goods and services produced, whereas the CPI only measures prices of goods and services bought by consumers. The GDP deflator includes only domestically produced goods, whereas the CPI includes domestic and foreign goods bought by consumers. Finally, the CPI is a Laspeyres index that assigns fixed weights to the prices of different goods, whereas the GDP deflator is a Paasche index that assigns changing weights to the prices of different goods. In practice, the two price indices tend to move together and do not often diverge. 4. The CPI measures the price of a fixed basket of goods relative to the price of the same basket in the base year. The PCE deflator is the ratio of nominal consumer spending to real consumer spending. The CPI and the PCE deflator are similar in that they both only include the prices of goods purchased by consumers, and they both include the price of imported goods as well as domestically produced goods. The two measures differ because the CPI measures the change in the price of a fixed basket whereas the goods measured by the PCE deflator change from year to year depending on what consumers are purchasing in that particular year. 5. The Bureau of Labor Statistics (BLS) classifies each person into one of the following three categories: employed, unemployed, or not in the labor force. The unemployment rate, which is the percentage of the labor force that is unemployed, is computed as follows: Number of Unemployed Unemployment Rate = ·100. Labor Force Note that the labor force is the number of people employed plus the number of people unemployed. 6. Every month, the Bureau of Labor Statistics undertakes two surveys to measure employment. First, the BLS surveys about 60,000 households and thereby obtains an estimate of the share of people who say they are working. The BLS multiplies this share by an estimate of the population to estimate the number of people working. Second, the BLS surveys about 160,000 business establishments and asks how many people they employ. Each survey is imperfect; so the two measures of employment are not identical. Problems and Applications 1. From the main bea.gov Web page click on the interactive data tab at the top, select GDP, begin using the data, section 1, and then table 1.1.1. Real GDP grew at a rate of 2.2 percent in quarter 4 of 2014. When compared to growth rates of −2.1 percent, 4.6 percent, and 5 percent for the first three quarters of 2014, the rate of 2.2 percent was slightly below average. From the main bls.gov Web page select the data tools tab, then top picks. Check the box for the unemployment rate and retrieve the data. The unemployment rate in March 2015 was 5.5 percent, which was about equal to the natural rate of unemployment, or the long run average rate. From the main bls.gov page, select the economic releases tab, then inflation and prices. Access the report for the CPI. In February 2015, the inflation rate for all items was 0 percent, and if food and energy were excluded the rate was 1.7 percent. The inflation rate was below average and below the Federal Reserve’s target of 2 percent. 2. Value added by each person is equal to the value of the good produced minus the amount the person paid for the materials needed to make the good. Therefore, the value added by the farmer is $1.00 ($1 – 0 = $1). The value added by the miller is $2: she sells the flour to the baker for $3 but paid $1 for the flour. The value added by the baker is $3: she sells the bread to the engineer for $6 but paid the miller $3 for the flour. GDP is the total value added, or $1 + $2 + $3 = $6. Note that GDP equals the value of the final good (the bread). 3. When a woman marries her butler, GDP falls by the amount of the butler’s salary. This happens because GDP measures total income, and therefore GDP, falls by the amount of the butler’s loss in salary. If GDP truly measures the value of all goods and services, then the marriage would not affect GDP since the total amount of economic activity is unchanged. Actual GDP, however, is an imperfect measure of economic activity because the value of some goods and services is left out. Once the butler’s work becomes part of his household chores, his services are no longer counted in GDP. As this example illustrates, GDP does not include the value of any output produced in the home. 4. a. The airplane sold to the U.S. Air Force counts as government purchases because the Air Force is part of the government. b. The airplane sold to American Airlines counts as investment because it is a capital good sold to a private firm. c. The airplane sold to Air France counts as an export because it is sold to a foreigner. d. The airplane sold to Amelia Earhart counts as consumption because it is sold to a private individual. e. The airplane built to be sold next year counts as investment. In particular, the airplane is counted as inventory investment, which is where goods that are produced in one year and sold in another year are counted. 5. Data on parts (a) to (f) can be downloaded from the Bureau of Economic Analysis. Go to the bea.gov Website, click on the interactive data tab at the top, select GDP, begin using the data, section 1, and then table 1.1.5. Choose the “modify the data” option to select the years you in which you are interested. By dividing each component (a) to (f) by nominal GDP and multiplying by 100, we obtain the following percentages: 1950 1980 2014 a. Personal consumption expenditures 64.0% 61.3% 68.5% b. Gross private domestic investment 18.8% 18.5% 16.4% c. Government consumption purchases 16.9% 20.6% 18.2% d. Net exports 0.2% –0.5% 3.1% e. National defense purchases 7.6% 6.3% 4.4% f. Imports 3.9% 10.3% 16.5% (Note: The above data was downloaded April 3, 2015, from the BEA Web site.) Among other things, we observe the following trends in the economy over the period 1950–2015: a. Personal consumption expenditures have been around two-thirds of GDP between 1980 and 2015. b. The share of GDP going to gross private domestic investment remained fairly steady. c. The share going to government consumption purchases rose sharply from 1950 to 1980. d. Net exports, which were positive in 1950, have been negative since that time. e. The share going to national defense purchases has fallen. f. Imports have grown rapidly relative to GDP. 6. a. GDP measures the value of the final goods and services produced, or $1,000,000. b. NNP is equal to GNP minus depreciation. In this example, GDP is equal to GNP because there are no foreign transactions. Therefore, NNP is equal to $875,000. c. National income is equal to NNP, or $875,000. d. Employee compensation is equal to $600,000. e. Proprietors’ income measures the income of the owner, and is equal to 150,000. f. Corporate profit is equal to corporate taxes plus dividends plus retained earnings, or $275,000. Retained earnings is calculated as sales minus wages minus dividends minus depreciation minus corporate tax, or $75,000. g. Personal income is equal to employee compensation plus dividends, or $750,000. h. Disposable personal income is personal income minus taxes, or $550,000. 7. a. i. Nominal GDP is the total value of goods and services measured at current prices. Therefore, Nominal GDP2010 = (Photdogs2010 ·Qhotdogs2010 )+(Pburgers2010 ·Qburgers2010 ) = ($2 200) + ($3 200) = $400 + $600 = $1,000. Nominal GDP2015 = (Photdogs2015 ·Qhotdogs2015 )+(Pburgers2015 ·Qburgers2015 ) = ($4 250) + ($4 500) = $1,000 + $2,000 = $3,000. ii. Real GDP is the total value of goods and services measured at constant prices. Therefore, to calculate real GDP in 2015 (with base year 2010), multiply the quantities purchased in the year 2015 by the 2010 prices: Real GDP2015 = (P2010hotdogs ·Q2015hotdogs )+(P2010burgers ·Q2015burgers) = ($2 250) + ($3 500) = $500 + $1,500 = $2,000. Real GDP for 2010 is calculated by multiplying the quantities in 2010 by the prices in 2010. Since the base year is 2010, real GDP2010 equals nominal GDP2010, which is $10,00. Hence, real GDP increased between 2010 and 2015. iii. The implicit price deflator for GDP compares the current prices of all goods and services produced to the prices of the same goods and services in a base year. It is calculated as follows: Nominal GDP2010 = 1 Implicit Price Deflator2015 = Real GDP2010 Using the values for Nominal GDP2015 and real GDP2015 calculated above: $ , Implicit Price Deflator2015 = $ , = 1.50. This calculation reveals that prices of the goods produced in the year 2015 increased by 50 percent compared to the prices that the goods in the economy sold for in 2010. (Because 2010 is the base year, the value for the implicit price deflator for the year 2010 is 1.0 because nominal and real GDP are the same for the base year.) iv. The consumer price index (CPI) measures the level of prices in the economy. The CPI is called a fixed-weight index because it uses a fixed basket of goods over time to weight prices. If the base year is 2010, the CPI in 2015 is measuring the cost of the basket in 2015 relative to the cost in 2010. The CPI2015 is calculated as follows: (P2015hotdogs ·Q2010hotdogs) + (P2015burgers ·Q2010burgers) CPI 2015 = (P2010hotdogs ·Q2010hotdogs) + (P2010burgers ·Q2010burgers) $16,000,000 = $10,000,000 = 1.6. This calculation shows that the price of goods purchased in 2015 increased by 60 percent compared to the prices these goods would have sold for in 2010. The CPI for 2010, the base year, equals 1.0. b. The implicit price deflator is a Paasche index because it is computed with a changing basket of goods; the CPI is a Laspeyres index because it is computed with a fixed basket of goods. From (7.a.iii), the implicit price deflator for the year 2015 is 1.50, which indicates that prices rose by 50 percent from what they were in the year 2010. From (7.a.iv.), the CPI for the year 2015 is 1.6, which indicates that prices rose by 60 percent from what they were in the year 2010. If prices of all goods rose by, for example, 50 percent, then one could say unambiguously that the price level rose by 50 percent. Yet, in our example, relative prices have changed. The price of hot dogs rose by 1020 percent; the price of hamburgers rose by 33.33 percent, making hamburgers relatively less expensive. As the discrepancy between the CPI and the implicit price deflator illustrates, the change in the price level depends on how the goods’ prices are weighted. The CPI weights the price of goods by the quantities purchased in the year 2010. The implicit price deflator weights the price of goods by the quantities purchased in the year 2015. Since the quantity of the two goods was the same in 2010, the CPI is placing equal weight on the two price changes. In 2015, the quantity of hamburgers was twice as large as hot dogs, so there is twice as much weight placed on the hamburger price relative to the hot dog price. For this reason, the CPI shows a larger inflation rate – more weight is placed on the good with the larger price increase. 8. a. The consumer price index uses the consumption bundle in year 1 to figure out how much weight to put on the price of a given good: CPI2 = ($2·10)+($1·0) ($1·10)+($2·0) (P2 ·Q1 = green green) = 2. According to the CPI, prices have doubled. b. Nominal spending is the total value of output produced in each year. In year 1 and year 2, Abby buys 10 apples for $1 each, so her nominal spending remains constant at $10. For example, Nominal Spending2 = (P2red ·Q2red )+(P2green ·Q2green) = ($2 0) + ($1 10) = $10. c. Real spending is the total value of output produced in each year valued at the prices prevailing in year 1. In year 1, the base year, her real spending equals her nominal spending of $10. In year 2, she consumes 10 green apples that are each valued at their year 1 price of $2, so her real spending is $20. That is, Real Spending2 = (P1red ·Q2red )+(P1green ·Q2green) = ($1 0) + ($2 10) = $20. Hence, Abby’s real spending rises from $10 to $20. d. The implicit price deflator is calculated by dividing Abby’s nominal spending in year 2 by her real spending that year: Nominal Spending Implicit Price Deflator2 = 2 Real Spending2 $10 = $20 = 0.5. Thus, the implicit price deflator suggests that prices have fallen by half. The reason for this is that the deflator estimates how much Abby values her apples using prices prevailing in year 1. From this perspective green apples appear very valuable. In year 2, when Abby consumes 10 green apples, it appears that her consumption has increased because the deflator values green apples more highly than red apples. The only way she could still be spending $10 on a higher consumption bundle is if the price of the good she was consuming fell. e. If Abby thinks of red apples and green apples as perfect substitutes, then the cost of living in this economy has not changed—in either year it costs $10 to consume 10 apples. According to the CPI, however, the cost of living has doubled. This is because the CPI only takes into account the fact that the red apple price has doubled; the CPI ignores the fall in the price of green apples because they were not in the consumption bundle in year 1. In contrast to the CPI, the implicit price deflator estimates the cost of living has been cut in half. Thus, the CPI, a Laspeyres index, overstates the increase in the cost of living and the deflator, a Paasche index, understates it. 9. a. The labor force includes full time workers, part time workers, those who run their own business, and those who do not have a job but are looking for a job. The labor force consists of 70 people. The working age population consists of the labor force plus those not in the labor force. The 10 discouraged workers and the 10 retired people are not in the labor force, but assuming they are capable of working, they are part of the adult population. The adult population consists of 90 people, so the labor force participation rate is equal to 70/90 or 77.8 percent. b. The number of unemployed workers is equal to 10, so the unemployment rate is 10/70 or 14.3 percent. c. The household survey estimates total employment by asking a sample of households about their employment status. The household survey would report 60 people employed. The establishment survey estimates total employment by asking a sample of businesses to report how many workers they are employing. In this case the establishment survey would report 55 people employed. The 5 people with 2 jobs would be counted twice, and the 10 people who run their own business would not be counted. 10. As Senator Robert Kennedy pointed out, GDP is an imperfect measure of economic performance or well-being. In addition to the left-out items that Kennedy cited, GDP also ignores the imputed rent on durable goods such as cars, refrigerators, and lawnmowers; many services and products produced as part of household activity, such as cooking and cleaning; and the value of goods produced and sold in illegal activities, such as the drug trade. These imperfections in the measurement of GDP do not necessarily reduce its usefulness. As long as these measurement problems stay constant over time, then GDP is useful in comparing economic activity from year to year. Moreover, a large GDP allows us to afford better medical care for our children, newer books for their education, and more toys for their play. Finally, countries with higher levels of GDP tend to have higher levels of life expectancy, better access to clean water and sanitation, and higher levels of education. GDP is therefore a useful measure for comparing the level of growth and development across countries. 11. a. Real GDP falls because Disney World does not produce any services while it is closed. This corresponds to a decrease in economic well-being because the income of workers and shareholders of Disney World falls (the income side of the national accounts), and people’s consumption of Disney World falls (the expenditure side of the national accounts). b. Real GDP rises because the original capital and labor in farm production now produce more wheat. This corresponds to an increase in the economic well-being of society, since people can now consume more wheat. (If people do not want to consume more wheat, then farmers and farmland can be shifted to producing other goods that society values.) c. Real GDP falls because with fewer workers on the job, firms produce less. This accurately reflects a fall in economic well-being. d. Real GDP falls because the firms that lay off workers produce less. This decreases economic wellbeing because workers’ incomes fall (the income side), and there are fewer goods for people to buy (the expenditure side). e. Real GDP is likely to fall, as firms shift toward production methods that produce fewer goods but emit less pollution. Economic well-being, however, may rise. The economy now produces less measured output but more clean air. Clean air is not traded in markets and, thus, does not show up in measured GDP, but is nevertheless a good that people value. f. Real GDP rises because the high school students go from an activity in which they are not producing market goods and services to one in which they are. Economic well-being, however, may decrease. In ideal national accounts, attending school would show up as investment because it presumably increases the future productivity of the worker. Actual national accounts do not measure this type of investment. Note also that future GDP may be lower than it would be if the students stayed in school, since the future work force will be less educated. g. Measured real GDP falls because fathers spend less time producing market goods and services. The actual production of goods and services need not have fallen because but unmeasured production of child-rearing services rises. The well-being of the average person may very well rise if we assume the fathers and the children enjoy the extra time they are spending together. IN THIS CHAPTER, YOU WILL LEARN: . . . the meaning and measurement of the most important macroeconomic statistics: ▪ gross domestic product (GDP) ▪ the consumer price index (CPI) ▪ the unemployment rate Gross Domestic Product: Expenditure and Income Two definitions: ▪ Total expenditure on domestically produced final goods and services. ▪ Total income earned by domestically located factors of production. Expenditure equals income because every dollar a buyer spends becomes income to the seller. The Circular Flow Income ($) Firms Households Expenditure ($) CHAPTER 2 The Data of Macroeconomics Value added Value added: The value of output minus the value of the intermediate goods used to produce that output NOW YOU TRY Identifying value added ▪ A farmer grows a bushel of wheat and sells it to a miller for $1.00. ▪ The miller turns the wheat into flour and sells it to a baker for $3.00. ▪ The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00. ▪ The engineer eats the bread. Compute value added at each stage of production and GDP. Final goods, value added, and GDP ▪ GDP = value of final goods produced = sum of value added at all stages of production. ▪ The value of the final goods already includes the value of the intermediate goods, so including intermediate and final goods in GDP would be double counting. The expenditure components of GDP ▪ consumption, C ▪ investment, I ▪ government spending, G ▪ net exports, NX An important identity: Y = C + I + G + NX value of aggregate total output expenditure Consumption (C) Definition: The value of all goods and services bought by households. Includes: ▪ Durable goods last a long time. E. g., cars, home appliances ▪ Nondurable goods last a short time. E.g., food, clothing ▪ Services are intangible items purchased by consumers. E. g., dry cleaning, air travel U.S. Consumption, 2014 $ billions % of GDP Consumption 12,002 68.2 Durables 1,320 7.5 Nondurables 2,691 15.3 Services 7,990 45.4 Investment (I) ▪ Spending on capital, a physical asset used in future production ▪ Includes: ▪ Business fixed investment Spending on plant and equipment ▪ Residential fixed investment Spending by consumers and landlords on housing units ▪ Inventory investment The change in the value of all firms’ inventories U.S. Investment, 2014 $ billions % of GDP Investment 2,905 16.5 Business fixed 2,244 12.8 Residential 566 3.2 Inventory 94 0.5 Investment vs. capital Note: Investment is spending on new capital. Example (assumes no depreciation): ▪ 1/1/2016: Economy has $10 trillion worth of capital ▪ During 2016: Investment = $2 trillion ▪ 1/1/2017: Economy will have $12 trillion worth of capital Stocks vs. Flows A stock is a quantity measured at a point in time. E.g., “The U.S. capital stock was $10 trillion on January 1, 2016.” A flow is a quantity measured per unit of time. E.g., “U.S. investment was $2 trillion during 2016.” Stocks vs. Flows: Examples Stock Flow a person’s wealth a person’s annual savings # of people with college degrees # of new college graduates this year the govt debt the govt budget deficit Government spending (G) ▪ G includes all government spending on goods and services. ▪ G excludes transfer payments (e.g., unemployment insurance payments) because they do not represent spending on goods and services. U.S. Government Spending, 2014 $ billions % of GDP Govt spending 3,209 18.2 - Federal 1,241 7.1 Nondefense 457 2.6 Defense 784 4.5 - State & local 1,968 11.2 Net exports (NX) ▪ NX = exports – imports ▪ Exports: the value of g&s sold to other countries ▪ Imports: the value of g&s purchased from other countries ▪ Hence, NX equals net spending from abroad on our g&s U.S. Net Exports, 2014 $ billions % of GDP Net exports of g&s –517 –2.9 Exports 2,367 13.4 Goods 1,645 9.3 Services 721 4.1 Imports 2,883 16.4 Goods 2,394 13.6 Services 489 2.8 Why output = expenditure ▪ Unsold output goes into inventory, and is counted as “inventory investment” . . . whether or not the inventory buildup was intentional. ▪ In effect, we are assuming that firms purchase their unsold output. GDP: An important and versatile concept We have now seen that GDP measures: ▪ total income ▪ total output ▪ total expenditure ▪ the sum of value added at all stages in the production of final goods GNP vs. GDP ▪ Gross national product (GNP): Total income earned by the nation’s factors of production, regardless of where located. ▪ Gross domestic product (GDP): Total income earned by domestically-located factors of production, regardless of nationality. GNP – GDP = factor payments from abroad minus factor payments to abroad ▪ Examples of factor payments: wages, profits, rent, interest & dividends on assets Real vs. nominal GDP ▪ GDP is the value of all final goods and services produced. ▪ Nominal GDP measures these values using current prices. ▪ Real GDP measures these values using the prices of a base year. CHAPTER 2 The Data of Macroeconomics Real GDP controls for inflation ▪ Changes in nominal GDP can be due to: ▪ changes in prices ▪ changes in quantities of output produced ▪ Changes in real GDP can only be due to changes in quantities because real GDP is constructed using constant base-year prices. CHAPTER 2 The Data of Macroeconomics GDP deflator ▪ Inflation rate: the percentage increase in the overall level of prices. ▪ One measure of the price level: GDP deflator Definition: Nominal GDP GDP deflator = 100 Real GDP CHAPTER 2 The Data of Macroeconomics Two arithmetic tricks for working with percentage changes 1. For any variables X and Y, percentage change in (X × Y ) ≈ percentage change in X + percentage change in Y Ex.: If your hourly wage rises 5% and you work 7% more hours, then your wage income rises approximately 12%. Two arithmetic tricks for working with percentage changes 2. Percentage change in (X/Y ) ≈ percentage change in X − percentage change in Y Ex.: GDP deflator = 100 × NGDP/RGDP. If NGDP rises 9% and RGDP rises 4%, then the inflation rate is approximately 5%. Chain-weighted real GDP ▪ Over time, relative prices change, so the base year should be updated periodically. ▪ In essence, chain-weighted real GDP updates the base year every year, so it is more accurate than constant-price GDP. ▪ Your textbook usually uses constant-price real GDP because: ▪ the two measures are highly correlated ▪ constant-price real GDP is easier to compute Consumer price index (CPI) ▪ A measure of the overall level of prices ▪ Published by the Bureau of Labor Statistics (BLS) ▪Uses: ▪ tracks changes in the typical household’s cost of living ▪ adjusts many contracts for inflation (“COLAs”) ▪ allows comparisons of dollar amounts over time How the BLS constructs the CPI 1. Survey consumers to determine composition of the typical consumer’s “basket” of goods 2. Every month, collect data on prices of all items in the basket; compute cost of basket 3. CPI in any month equals Cost of basket in that month 100 Cost of basket in base period Why the CPI may overstate inflation ▪ Substitution bias: The CPI uses fixed weights, so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen. ▪ Introduction of new goods: The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI because the CPI uses fixed weights. ▪ Unmeasured changes in quality: Quality improvements increase the value of the dollar but are often not fully measured. CHAPTER 2 The Data of Macroeconomics The size of the CPI’s bias ▪ In 1995, a Senate-appointed panel of experts estimated that the CPI overstates inflation by about 1.1% per year. ▪ So the BLS made adjustments to reduce the bias. ▪ Now, the CPI’s bias is probably under 1% per year. CHAPTER 2 The Data of Macroeconomics NOW YOU TRY Discussion Questions 1. If your grandmother receives Social Security, how is she affected by the CPI’s bias? 2. Where does the government get the money to pay COLAs to Social Security recipients? 3. If you pay income and Social Security taxes, how does the CPI’s bias affect you? 4. Is the government giving your grandmother too much of a COLA? 5. How does your grandmother’s “basket” differ from the CPI’s? Does this affect your answer to Q4? CPI vs. GDP deflator Prices of capital goods: ▪ included in GDP deflator (if produced domestically) ▪ excluded from CPI Prices of imported consumer goods: ▪ included in CPI ▪ excluded from GDP deflator The basket of goods: ▪ CPI: fixed ▪ GDP deflator: changes every year CHAPTER 2 The Data of Macroeconomics The PCE deflator ▪ Another measure of the price level: Personal Consumption Deflator, the ratio of nominal to real consumer spending ▪ How the PCE is like the CPI: - only includes consumer spending - includes imported consumer goods ▪ How the PCE is like the GDP deflator: - the “basket” changes over time ▪The Federal Reserve prefers PCE. CHAPTER 2 The Data of Macroeconomics Categories of the population ▪ Employed working at a paid job ▪ Unemployed not employed but looking for a job ▪ Labor force the amount of labor available for producing goods and services; all employed plus unemployed persons ▪ Not in the labor force not employed, not looking for work CHAPTER 2 The Data of Macroeconomics Two important labor force concepts ▪Unemployment rate percentage of the labor force that is unemployed ▪Labor force participation rate the fraction of the adult population that “participates” in the labor force, i.e. is working or looking for work CHAPTER 2 The Data of Macroeconomics The establishment survey ▪ The BLS obtains a second measure of employment by surveying businesses, asking how many workers are on their payrolls. ▪ Neither measure is perfect, and they occasionally diverge due to: ▪ treatment of self-employed persons ▪ new firms not counted in establishment survey ▪ technical issues involving population inferences from sample data CHAPTER 2 The Data of Macroeconomics 58 C H A P T E R S U M M A R Y ▪ Gross domestic product (GDP) measures both total income and total expenditure on the economy’s output of goods & services. ▪ Nominal GDP values output at current prices; real GDP values output at constant prices. Changes in output affect both measures, but changes in prices only affect nominal GDP. ▪ GDP is the sum of consumption, investment, government purchases, and net exports. 60 C H A P T E R S U M M A R Y ▪ The overall level of prices can be measured by either: ▪ the consumer price index (CPI), the price of a fixed basket of goods purchased by the typical consumer, or ▪ the GDP deflator, the ratio of nominal to real GDP. ▪ The unemployment rate is the fraction of the labor force that is not employed. 61 Solution Manual for Macroeconomics Gregory N. Mankiw 9781464182891, 9781319106058
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