Topic 1

Macroeconomics 33040 - Spring 2015
Topic 1: Intro to Macro and Measurement
Loukas Karabarbounis
University of Chicago, Booth School of Business
What is Macro?
GDP and Expenditure Components
Real vs. Nominal Variables, Prices, and Inflation
Interest Rates
Employment and Unemployment
Inequality
Summary, Readings, and Exercises
What is Macro?
Definition
Macroeconomics: is the study of the economic performance of
national economies and of the policies that affect performance.
What causes long-run economic growth?
What causes short-run fluctuations of economic activity (business
cycles)?
What causes unemployment?
What causes inflation?
What causes inequality?
Can governments do something about these?
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Long-Run Performance: US Real GDP

Real Gross Domestic Product
18,000
(Billions of Chained 2009 Dollars)
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
1950
1960
1970
1980
1990
2000
2010
Source: US. Bureau of Economic Analysis

Shaded areas indicate US recessions - 2015 research.stlouisfed.org
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US Real GDP per Capita (Online Reading 1.1)

Real gross domestic product per capita
52,000
48,000
(Chained 2009 Dollars)
44,000
40,000
36,000
32,000
28,000
24,000
20,000
16,000
12,000
1950
1960
1970
1980
1990
2000
2010

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US Real GDP per Worker

1000000*Real Gross Domestic Product, 3 Decimal/All Employees:
Total nonfarm
(1000000*Bil. of Chn. 2009 $/Thous. of Persons)
120,000
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000
1950
1960
1970
1980
1990
2000
2010
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Business Cycles
Definition
Business Cycles: are fluctuations of the aggregate economic activity
around a long-term trend
We care about aggregate economic activity as measured by various

indicators and not only GDP.
Key characteristics of business cycles are periods of expansion and

periods of contractions.
Business cycles are typically characterized by sectoral comovement.
Business cycles are recurrent but not periodic.

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Business Cycles vs. Growth
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NBER Dating of Recessions

NBER stands for the National Bureau of Economic Research.
A recession is a period between a peak and a trough (declining
economic activity).
An expansion is a period between a trough and a peak (rising
economic activity).
Rule of thumb: recession is two consecutive quarters of negative
real GDP growth.
NBER Business Cycle Dating Committee (Great Recession).
NBER uses variety of economic variables to date recessions:
real GDP, economy-wide employment, real sales etc.
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Procyclical vs. Countercyclical Macroeconomic Variables

A variable is procyclical if, on average, it co-moves positively with
GDP along the business cycle (i.e. increases in expansions and
decreases in recessions).
employment, consumption, investment
A variable is countercyclical if, on average, it co-moves negatively

with GDP along the business cycle (i.e. decreases in expansions
and increases in recessions).
unemployment, net exports (imports decrease more than exports in
recessions)
Inflation is relatively acyclical.
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Business Cycles: Growth of US Real GDP

Real Gross Domestic Product, 3 Decimal
15.0
(Percent Change from Year Ago)
12.5
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
1950
1960
1970
1980
1990
2000
2010

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US Unemployment Rate
Civilian Unemployment Rate
11
10
9
(Percent)
8
7
6
5
4
3
2
1950
1960
1970
1980
1990
2000
2010
Source: US. Bureau of Labor Statistics

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US Inflation
Consumer Price Index for All Urban Consumers: All Items
15.0
12.5
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
1950
1960
1970
1980
1990
2000
2010

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Great Moderation
1984-2007: 17 months of recession; In the previous 24 years: more
than 50 months of recession.
Great Moderation: Macroeconomic variables became less volatile.
1
Good luck hypothesis

economies hit by smaller shocks (e.g. oil shocks) and good luck
ended with the current financial crisis
Better monetary policy

Feds commitment to a low and stable inflation and Feds faster
response to macroeconomic shocks
More efficient credit and housing markets

but recent waves of volatility seem related to unregulated financial
development
Improved inventory management policies and smoother inventory

adjustment
inventories account for large fraction of GDP volatility
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What is Macro?
Interest Rates
Inequality
GDP: Three Equivalent Approaches
Product approach
emphasizes the value-added of domestic producers
Expenditure approach
emphasizes spending on final goods and services produced
domestically
Income approach
emphasizes income earned by factors operating in domestic markets
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GDP: Product Definition

Definition
Gross Domestic Product: is the market value of final goods and
services newly produced in a nation during a given period of time
Why do we care?
GDP is a measure of the goods and services that an economy
produces in a given period of time.
GDP is the measure of economic activity mostly discussed in the
popular press.
Correlated with other macroeconomic variables that we care about
(e.g. with unemployment and with consumption).
Still, GDP is an imperfect indicator of well-being or standard of
living (we discuss below for what GDP does not measure).
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GDP: Product Definition (1)

Market Value
Goods and services measured at current prices (i.e. at market
determined prices)
This allows us to add different goods and services
Economy produces 2 cars and 1,000 apples
The price of a car is 10,000$ and the price of an apple is 5$
Therefore, GDP = 2 10, 000 + 1, 000 5 = 25, 000
Governments production of goods and services (non-market

output, e.g. defense, education, health) is measured at cost of
production (compensation of government employees, depreciation
of government capital)
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Newly Produced Goods and Services

GDP includes goods and services produced in given period
GDP excludes goods and services produced in the past
Example:
House constructed in 2011 and sold in 2011: house value is included
in 2011 GDP
House constructed in 2010 and sold in 2011: house value is included
in 2010 GDP but the salary of real estate agent is included in 2011
GDP
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Only Final Goods Included (Value-Added Approach)
Intermediate Goods (e.g. raw materials): not included in GDP.
They are produced but used as inputs in current production of other
goods. To avoid double-counting we exclude them from GDP.
Example: flour used to produce bread is an intermediate good.
Final Goods: included in GDP. Their value already embeds the

value of intermediates and thats why we exclude intermediates.
Final goods are the end products of production. Example: bread.
Capital (or Investment) Goods: included in GDP. There is no

double-counting because they are not used in current production.
Example: baker starts with 1,000$ worth of flour and ends with
1,100$ worth of flour. GDP increases by 100$ (inventories).
Example: computers produced in 2013 are part of 2013s GDP. They
are not excluded from 2014 Gross Domestic Product (GDP). If we
exclude their depreciation, we get Net Domestic Product (NDP).
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GDP: Value Added

GDP excludes intermediate goods to avoid double-counting.
Example:
Firm X uses workers and machines to produce 100$ worth of oranges.
It sells 20$ of oranges to consumers and 80$ of oranges to Firm Y.
Firm Y uses oranges as an intermediate good (input) to produce
orange juice. It sells 150$ worth of juice to consumers.
GDP is 170$ because the market value of the final goods is: 20$ of
oranges + 150$ of orange juice.
Value-added measures sectoral/firms contribution to GDP:
Firm Xs value added is 20 + 80 = 100
Firm Ys value added is (150 80) = 70
GDP equals the sum of all values added. Note that we subtract 80$
from firm Y since this intermediate good was produced by firm X.
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What GDP Does Not Measure (Online Reading 1.2)

1
Goods and services not sold at market

E.g. home production, child care (but nanny services are counted)
E.g. benefits of clean air (price?)
Underground economy
legal activities hidden from government (e.g house painter paid in
cash); statistics try to adjust for that
illegal activities (e.g illegal cigarettes)
Natural resource depletion

oil extracted is counted in GDP
there is no offsetting for the depletion of this nonrenewable resource
Welfare/Utility Functions U vs. GDP

U defined over consumption, leisure, home production etc.
U can also include health, safety, quality of education, pollution etc.
U not perfectly correlated with GDP
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GDP and Welfare Relative to the US (Line: = GDP)

Source: Chad Jones and Pete Klenow.
Welfare,
1
1/4
1/16
1/64
1/256
1/1024
Germany U.S.
France
Greece
Hong Kong
Malta
Ireland
Portugal
Singapore
Mauritius
Poland
South Korea
Tunisia
Bahamas
Chile
Bosnia
Malaysia
Venezuela
Jordan
Brazil
Albania
Russia
Moldova
Algeria
Vietnam
China
South Africa
Tajikistan
India Bolivia
Uzbekistan
Djibouti
Mongolia
Guyana
Botswana
Yemen
Guinea
Namibia
Benin Kenya
Cameroon
Madagascar
Gambia Lesotho Cote dIvoire
Niger Mali
Ethiopia
Nigeria
Zimbabwe
Tanzania
Sierra Leone
Central African Republic
Burundi
Rwanda
Somalia
Zambia
1/64
1/32
1/16
1/8
Luxembourg
1/4
1/2
1
GDP per person (US=1)
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GDP: Expenditure Definition
Y = C + I + G + (X M)
Final Product = Expenditure on Final Goods and Services
C : consumption spending on goods and services
I : investment spending on new capital goods and change in
inventories
G : government expenditure (consumption and investment) on
goods and services
NX = X M: net exports is exports (X ) of goods and services
minus imports (M) of goods and services
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GDP: Expenditure Approach (US, 2009)

Billions of Dollars
%GDP
Consumption
Category
10001
70.8
Durables
1026
7.3
Non-durables
2204
15.6
Services
6770
47.9
1589
11.3
Business Fixed Investment
1364
9.7
Residential Investment
352
2.5
Change in Inventories
-127
-0.9
2914
20.6
368
2.6
Investment
Government Spending
Federal Non-defense
Federal Defense
771
5.5
State and Local
1775
12.6
Net Exports of Goods & Services

Exports
Imports
Total
-386
-2.7
1578
11.2
1964
13.9
14119
100
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Expenditures: Consumption
(Note: includes purchases of foreign-produced goods and services. NX
adjusts for that.)
1
Household Spending on Durables

e.g.: cars, TVs, furniture, appliances
Household Spending on Non-durables

e.g.: food, fuel, clothing
Household Spending on Services

e.g.: transportation, financial services, education, health care,
housing, recreational services
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Growth of US Real Consumption vs. GDP

Real Personal Consumption Expenditures
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
1960
1970
1980
1990
2000
2010
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Growth of US Durables, Nondurables, and Services

Real Personal Consumption Expenditures: Nondurable Goods
Real Personal Consumption Expenditures: Durable Goods
Real Personal Consumption Expenditures: Services
15
10
-5
-10
-15
2002
2004
2006
2008
2010
2012
2014
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Expenditures: Investment
(Note: includes purchases of foreign-produced capital goods. NX
adjusts for that.)
1
Business Fixed Investment (Nonresidential investment)

spending on capital goods e.g. equipment, machines, vehicles, and
non-residential structures (factories, offices etc.)
Residential Investment
spending on construction of new houses and apartments
Change in Inventories
inventories are unsold produced goods held in stock by firms
the change in inventories is included in GDP because whatever is
produced must be spent
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Growth of US Real Investment vs. GDP

Real Gross Private Domestic Investment, 3 decimal
40
30
20
10
-10
-20
-30
1960
1970
1980
1990
2000
2010
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Growth of US Residential and Nonresidential Investment

Real Private Nonresidential Fixed Investment
Real Private Residential Fixed Investment
20
10
-10
-20
-30
2000
2002
2004
2006
2008
2010
2012
2014
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Expenditures: Government
(Note: includes purchases of foreign-produced goods and services. NX
adjusts for that.)
1
Government Consumption of Goods and Services (85% of G )

education, health care, defense, judicial, policing: these goods and
services are produced by the government (non-market output)
as a matter of accounting, the value of these goods and services less
partial payments of households is recorded as G consumption
Government Investment (15% of G )

e.g.: acquiring buildings or machines
Transfers: not included in GDP

welfare benefits, unemployment insurance, and pensions are not paid
in exchange for goods and services
in general, a transfer from person A to person B (including financial
transactions) does not change GDP, it only affects the distribution
of income and assets
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Expenditures: Net Exports
Imports M of Foreign Produced Goods and Services

subtracted from GDP because C , I and G already include spending
on foreign-produced goods and services
Exports X of Domestic Produced Goods and Services

added to GDP so that total expenditure reflects spending on
domestically produced goods and services
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Gross National Product/Income (GNP)

GNP is the total income that domestic (national) factors earn:
GNP = W N + r K + GI + K
1
Labor Income (W N): around 60% of GDP in the US

compensation to employees (wages, salaries, bonuses, benefits)
income of self-employed (can be also included in capital income)
Capital Income (r K )
rental income from land and structures, art
corporate profits (retained earnings) and dividends
net interest receipts (interest earned minus interest paid)
Government Income (GI )

indirect business taxes, sales, and excise taxes
Depreciation ( K )
the value of capital that wears out
depreciation is subtracted from corporate profits and earnings of
self-employed, so we add it back
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GDP: Income Definition

GDP = GNP NFP
GNP is the market value of the final goods and services produced
by domestic factors (domestically or in a foreign country)
GDP is the market value of the final goods and services produced
domestically (by domestic and foreign factors)
US factors produce output abroad: this does not count in US GDP
US factors earn income abroad: this counts in US GNP
Net Factor Payments (NFP): (Income of US factors earned
abroad) - (Income of foreign factors earned in US)
In the US, NFP is around 1% of GDP
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Example of Measuring GDP

Firm
OrangeInc
JuiceInc
MacInc
Transactions
Wages Paid to Domestic Employees
Dollars
11
Wages Paid to Foreign Employees
Sales to Domestic Consumers
11
Sales to JuiceInc
25
Value of Unsold Product
Wages Paid to Domestic Employees
32
Taxes Paid to Government
Purchases of Oranges from OrangeInc
25
Purchases of Machines from MacInc
Sales to Domestic Consumers
78
Sales to Domestic Government
Sales to Foreign Consumers
Dividend Distribution
Sales of Machines
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Example (cnt.)
(Note: in this example machines are treated as an intermediate input,
not as a capital good!)
1
Product approach (Value-added of each firm)

GDP = Yo +Yj +Ym = (11+25+2)+(78+5+4254)+(4) = 100
Expenditure approach
C + I + G + X = (11 + 78) + (2) + (5) + (4) = 100
Income approach [Profits = After Tax Revenues - Costs]

GNP = wN + rK + GI = (11 + 32) + [(25 + 25 + 3) + (1)] + (1) = 98
GDP = GNP NFP = 98 (2) = 100
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Examples: Does it Count in 2012 GDP? (1)

(Assume production/transaction takes places in 2012 unless o/w
specified)
Buy 10 gallons of gasoline at 2.80$ per gallon. Gas station
purchased the gasoline during the previous year at a wholesale price
of 2.60$ per gallon.
Expenditure 2$: Consumption of 28$ plus Change of Inventories of
-26$.
Product 2$: Value added of gas station is 2$.
Income approach 2$: paid to factors of production at the gas station
(wages of employees, interest, taxes, profits).
I buy a 500$ Swiss watch

consumption goes up by 500 and imports go up by 500
Win 1m$ in lottery, to be paid immediately

Nothing is produced, not an expenditure (it is a transfer), not a
factor payment
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Examples: Does it Count in 2012 GDP? (2)

(Assume production/transaction takes places in 2012 unless o/w
specified)
Give 10$ to (a) movie ticket; (b) to my brother; (c) to the ATM
machine in my savings account
Transaction (a) is consumption
Transaction (b) is a transfer; it appears in GDP only when brother
spends money
Transaction (c) is savings; it appears in future GDP only when spent
in the future
A French company builds a plant in Illinois for 100m$, using local

labor, capital, and materials
Product: 100m of a capital good
Expenditure: 100m in net exports (would be investment if owned by
US citizens)
Income: 100m go to US factors of production
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What is Macro?
Interest Rates
Inequality
Real vs. Nominal Variables

Until now, Y , C , I etc. have been measured in current market
values. These are called nominal variables.
Market values are useful because we can add apples and oranges
Nominal variables are problematic in comparisons across time
This is because an increase in nominal GDP could be because of
increase in quantity of goods or because of increase in prices of
goods
From a welfare point of view, increasing quantities or increasing
prices are two very different things (U is a function of quantities!)
Definition
Nominal or Current-Dollar Variable X : The value of X when market
determined or current prices are used to compute values.
Real or Constant-Dollar Variable X : The value of X when prices in
some base year are used to compute values.
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Example: Real vs. Nominal GDP

2008 2009 Growth (%)
Apples
Price
10
11
10.0%
Quantity
90
100
11.1%
Current Value
900
1100
22.2%
Constant-2008 Value
900
1000
11.1%
1000 1200
20.0%
Cars
Price
Quantity
20.0%
Current Value
5000 7200
44.0%
Constant-2008 Value
5000 6000
20.0%
Current Value
5900 8300
40.7%
Constant-2008 Value
5900 7000
15.7%
GDP
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Price Index and Inflation

Definition
Inflation: is the change of the price level Pt over a period of time:
t+1 = (Pt+1 Pt ) /Pt
1
Pt measured by GDP Deflator: Value of Current Output at

Current Prices / Value of Current Output at Base Year Prices
In above example: P2009 /P2008 = 8300/7000 = 1.185 and
= 18.5%
Conversely: real GDP is current-value GDP over P2009
Pt measured by CPI: cost of a fixed representative basket of

goods
quality bias, inventions, and substitution bias overstate by 1%
Fed uses core personal-consumption expenditure (PCE) which avoids
substitution bias
core: excludes energy and food (very volatile) but includes
housing (Online Reading 1.3)
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Convention
For the rest of the course, all variables are real unless o/w noted
(e.g. Y denotes real GDP)
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What is Macro?
Interest Rates
Inequality
Interest Rates
Definition
Interest Rate: The rate of return promised by a borrower to a lender
Example: Interest rate on 100$ one-year loan is 8% = borrower repays
108$ in the next year
There are many interest rates in an economy: Fed funds rate,
credit cards, housing loans, corporate bonds, country bonds.
Fed affects the funds rate which is the interest rate at which
banks lend balances (federal funds) to other banks overnight.
Typically (but not always!) interest rates move together.
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Feds Fund Rate

Effective Federal Funds Rate
20.0
17.5
15.0
(Percent)
12.5
10.0
7.5
5.0
2.5
0.0
1960
1970
1980
1990
2000
2010
Source: Board of Governors of the Federal Reserve System (US)

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Euro-Countries Long Term Interest Rates Diverging
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Zero Lower Bound on the Nominal Interest Rate i

Typically, the nominal interest rate i cannot be lower than 0.
If some asset offered a negative nominal interest rate, no one would
hold this asset.
The reason is that there exists an alternative investment strategy
that pays a 0 nominal interest: keep the money under your
mattress or in a vault.
In reality, however, holding currency may be costly (e.g. danger of
theft, fees associated with the vault, other transaction costs).
Therefore, the lower bound for the nominal interest rate may not be
exactly 0, but something slightly lower than 0. This encompasses all
the costs associated with hoarding money (Online Reading 1.4).
In periods of extreme financial distress, negative nominal interest
rates may be observed reflecting flight to safety.
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Real vs. Nominal Interest Rates

Nominal Interest Rate i: the rate at which borrowers repay nominal
loans, i.e. loans written in nominal terms.
Lenders and borrowers make decisions based on real interest rates.
Note: Fed directly affects the nominal interest rate, not the real.
Real interest rate r given by the Fisher equation:
r i
Inflation reduces rate of return because it lowers the value of
holding money.
Example: 2008-loan of 100$ with i = 5%. In 2009 receive 105$.
But if = 5%, the 2008-constant (real) value of the 105$ is
100$. So r = 0%.
Inflation benefits borrowers and hurts lenders.
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Real Interest Rate
(Percent) , (Percent Change from Year Ago) , (%% Chg. from Yr. Ago)
Effective Federal Funds Rate

Gross Domestic Product: Implicit Price Deflator
Effective Federal Funds Rate-Gross Domestic Product: Implicit
Price Deflator
20
15
10
-5
1960
1970
1980
1990
2000
2010
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Expected Real Interest Rate

Borrowers and lenders do not know future inflation rate and must
formulate expectations
Expected real interest rate r e given by the Fischer equation:
r e i e
Expected inflation (model)
adaptive expectations: based on past inflations, e.g. te = t1
rational expectations: e is the mean inflation generated by an
economic model, e.g. if model says that with probability 1/2
t = 0.02 and with 1/2 t = 0, then people set te = 0.01
Expected inflation (data)

surveys
publicly announced government or private forecasts
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What is Macro?
Interest Rates
Inequality
Measurement
Total adult population: Pop
Employed E : worked in past week
Unemployed U: didnt work in past week but searched for a job
during past four weeks or being on temporary layoff
Labor Force: L = E + U
Not in Labor Force: Pop L (e.g. homemakers, students, retirees)
Definition
Unemployment Rate: u = U/L
captures non-employment conditional on being in the labor force
Definition
Employment-Population Ratio: E /Pop
this includes both unemployed and out of the labor force
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US Employment-Population Ratio (Online Reading 1.5)

Civilian Employment-Population Ratio
65
64
63
62
(Percent)
61
60
59
58
57
56
55
54
1950
1960
1970
1980
1990
2000
2010

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US Labor Force Participation Rate

Civilian Labor Force Participation Rate
68
67
66
(Percent)
65
64
63
62
61
60
59
58
1950
1960
1970
1980
1990
2000
2010

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Types of Unemployment: u = u + (u u)
Definition
Natural Rate of Unemployment u:
The unemployment rate
prevailing when economy is not in recession (e.g. 5-6%)
1
Structural unemployment: part of u (Online Reading 1.6)

long-term mismatch of skills and employer needs (e.g. due to
automation)
industry/product structural change (e.g. US manufacturing decline)
Frictional unemployment: part of u

costly matching process between firms and workers
like a car entering parking lot and not finding space immediately
even though there are vacant spaces
Cyclical unemployment: u u
due to the business cycle; businesses do not hire when output is low
monetary and fiscal policy tries to stabilize cyclical unemployment
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What is Macro?
Interest Rates
Inequality
Increasing Inequality
Inequality between labor and capital: declining labor share of
income (Online Readings 1.7).
Inequality between skills: increasing real wages for skilled labor and
stagnating real wages for the less educated.
Automation, job market polarization with opportunities
concentrated in relatively high-skill, high-wage jobs and low-skill,
low-wage jobs (Online Reading 1.8).
Inequality between top incomes and the rest: increasing
concentration of income to the top 1% and the top 10% (Online
Reading 1.9).
Is there a unifying explanation? Technology? Trade and
globalization? Policies? Unions?
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US Labor Share (Non-Farm Business Sector)

Nonfarm Business Sector: Labor Share/(100/0.6)
0.70
(Index 2009=100/(100/0.6))
0.68
0.66
0.64
0.62
0.60
0.58
0.56
1950
1960
1970
1980
1990
2000
2010
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10
Median Wage (1999 Dollars)

15
20
25
Median Real Wage: College+ vs. Other (Men, 25-55)
1964
1970
1980
Group 1
1990
2000
2007
2012
Group 2
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10
Mean Wage (1999 Dollars)

20
25
15
30
Mean Real Wage: College+ vs. Other (Men, 25-55)
1964
1970
1980
Group 1
1990
2000
2007
2012
Group 2
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Share Of Income to Top 1 Percent
US Top 1 Percent (World Top Incomes Database)
20
15
10
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
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What is Macro?
Interest Rates
Inequality
What Have We Learned?
How to define and measure GDP, inflation, unemployment in the

data
How various expenditures comove with GDP along the business
cycle
Why GDP may be less than perfectly correlated with things we care
about (i.e. with utility)
General trends of macro variables
Why we should care about real variables instead of nominal
variables
Topic 2: first toy model!
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Readings and Exercises
Pre-Course Readings Topic 0
ABC: Chapter 1, Chapter 2, Chapter 3.5 and Chapters 8.1-8.3
Online Readings Topic 0 and Topic 1
Numerical Problems 1.1 and 2.4 in ABC
58 / 62
OPTIONAL MATERIAL
Useful Identities: Division of GNP and Disposable Income

Yp = Y + NFP + Tr + INT T
Yp : private (household+corporate) disposable income
Y : GDP
NFP: net foreign payments
Tr : transfers from the government
INT : interest payments on government debt
T : taxes paid to the government
Yg = T Tr INT
Yg : net government income or governments disposable income
Yp + Yg = GNP
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Useful Identities: Private and Public Savings

Sp : private savings
Cp : private consumption
Sp = Yp Cp
Sg : government saving
Cg : government consumption
Sg = Yg Cg
D: governments budget deficit (D INT is the primary deficit)
Ig : government investment
D = Ig Sg
60 / 62
Useful Identities: National Savings and Current Account
S = Sp + Sg = Yp + Yg Cp Cg = Y + NFP Cp Cg
Y = Cp + Ip + Cg + Ig + NX
Combine these two equations:
Sp + Sg = Ip + Ig + NX + NFP = S = I + NX + NFP
S = I + CA
Current Account = National Savings - National Investment
61 / 62
Measuring GDP in Practice

The Bureau of Economic Analysis (BEA) measures US GDP.
Source data examples: retail sales, manufacturers shipments,
inventories, value of construction put in place, employment
compensation, international trade flows of goods and services,
revenue of services industries, estimates of government outlays, etc.
These sources come from surveys (e.g. annual survey of retail trade
from the Census) or from direct sources (e.g. tobacco shipments).
Services are either imputed (e.g. housing rent) or measured from
government agencies (e.g. financial services) or measured from
revenue data (e.g. transportation).
For most components, estimates are derived from source data that
are value data. In some cases, BEA relies on other methods to
derive appropriate expenditure data, including a quantity times
price method (e.g. for gasoline).
62 / 62

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Macroeconomics 33040 - Spring 2015

Topic 1: Intro to Macro and Measurement

University of Chicago, Booth School of Business

GDP and Expenditure Components

Real vs. Nominal Variables, Prices, and Inflation

Employment and Unemployment

Summary, Readings, and Exercises

Long-Run Performance: US Real GDP

(Billions of Chained 2009 Dollars)

Source: US. Bureau of Economic Analysis

US Real GDP per Capita (Online Reading 1.1)

(Chained 2009 Dollars)

Source: US. Bureau of Economic Analysis

US Real GDP per Worker

Shaded areas indicate US recessions - 2015 research.stlouisfed.org

We care about aggregate economic activity as measured by various

Key characteristics of business cycles are periods of expansion and

Business cycles are typically characterized by sectoral comovement.

Business cycles are recurrent but not periodic.

Business Cycles vs. Growth

NBER Dating of Recessions

Procyclical vs. Countercyclical Macroeconomic Variables

A variable is countercyclical if, on average, it co-moves negatively

Inflation is relatively acyclical.

Business Cycles: Growth of US Real GDP

(Percent Change from Year Ago)

Source: US. Bureau of Economic Analysis

Source: US. Bureau of Labor Statistics

(Percent Change from Year Ago)

Source: US. Bureau of Labor Statistics

Good luck hypothesis

Better monetary policy

More efficient credit and housing markets

Improved inventory management policies and smoother inventory

GDP and Expenditure Components

Real vs. Nominal Variables, Prices, and Inflation

Employment and Unemployment

Summary, Readings, and Exercises

GDP: Three Equivalent Approaches

GDP: Product Definition

GDP: Product Definition (1)

Governments production of goods and services (non-market

GDP: Product Definition (2)

Newly Produced Goods and Services

GDP: Product Definition (3)

Final Goods: included in GDP. Their value already embeds the

Capital (or Investment) Goods: included in GDP. There is no

GDP: Value Added

What GDP Does Not Measure (Online Reading 1.2)

Goods and services not sold at market

Natural resource depletion

Welfare/Utility Functions U vs. GDP

GDP and Welfare Relative to the US (Line: = GDP)

GDP: Expenditure Definition

GDP: Expenditure Approach (US, 2009)

Business Fixed Investment

State and Local

Net Exports of Goods & Services

Household Spending on Durables

Household Spending on Non-durables

Household Spending on Services

Growth of US Real Consumption vs. GDP

(Percent Change from Year Ago)