Transcript Mankiw 5/e Chapter 1: The Science of Macroeconomics

U.S. Gross Domestic Product
in billions of chained 1996 dollars
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
1970
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1975
1980
1985
1990
1995
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2000
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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 measure these values using
the prices of a base year.
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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.
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(billions of U.S. dollars)
U.S. Real & Nominal GDP,
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1965
1970
1975
1980
NGDP (billions of $)
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1985
1967-2001
1990
1995
2000
RGDP (billions of 1996 $)
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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
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Exercise: Compute the CPI
The basket contains 20 pizzas and
10 compact discs.
For each year, compute
prices:
2000
2001
2002
2003
pizza
$10
$11
$12
$13
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CDs
$15
$15
$16
$15
 the cost of the basket
 the CPI (use 2000 as
the base year)
 the inflation rate from
the preceding year
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answers:
cost of
basket
CPI
inflation
rate
2000
$350
100.0
n.a.
2001
370
105.7
5.7%
2002
400
114.3
8.1%
2003
410
117.1
2.5%
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The composition of the CPI’s “basket”
Food and bev.
5.8%
17.6%
Housing
5.9%
2.8%
Apparel
2.5%
Transportation
4.5%
4.8%
Medical care
Recreation
16.2%
Education
Communication
40.0%
Other goods and
services
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GDP Deflator
 The inflation rate is the percentage
increase in the overall level of prices.
 One measure of the price level is
the GDP Deflator, defined as
Nominal GDP
GDP deflator = 100 
Real GDP
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Two measures of inflation
Percentage
change 16
CPI
14
12
10
8
6
GDP deflator
4
2
0
-2
1948
1953
1958
1963
1968
1973
1978
1983
1988
1993
1998
Year
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Okun’s Law
 Employed workers help produce GDP,
while unemployed workers do not.
So one would expect
a negative relationship between
unemployment and real GDP.
 This relationship is clear in the data…
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Okun’s Law
Okun’s Law states
that a one-percent
decrease in
unemployment is
associated with two
percentage points
of additional growth
in real GDP
Percentage change
10
in real GDP
8
6
1951
1984
2000
4
1999
1993
2
1975
0
-2
-3
1982
-2
-1
0
1
2
3
4
Change in
unemployment rate
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Marginal product of labor (MPL)
def:
The extra output the firm can produce
using an additional unit of labor (holding
other inputs fixed):
MPL = F (K, L +1) – F (K, L)
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Exercise: compute & graph MPL
a. Determine MPL at each
value of L
b. Graph the production
function
c. Graph the MPL curve
with MPL on the
vertical axis and
L on the horizontal axis
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L
0
1
2
3
4
5
6
7
8
9
10
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Y MPL
0
10
19
27
34
40
45
49
52
54
55
n.a.
?
?
8
?
?
?
?
?
?
?
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answers:
Marginal Product of Labor
MPL (units of output)
Output (Y)
Production function
60
50
40
30
20
10
12
10
8
6
4
2
0
0
0
1
2
3
4
5
6
7
8
9 10
0
1
2
3
4
Labor (L)
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5
6
7
8
9 10
Labor (L)
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The MPL and the production function
Y
output
F (K , L)
1
MPL
MPL
As more labor is
added, MPL 
1
MPL
1
Slope of the production
function equals MPL
L
labor
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Consumption (C)
def: the value of all goods • durable goods
last a long time
and services bought by
ex: cars, home
households. Includes:
appliances
• non-durable goods
last a short time
ex: food, clothing
• services
work done for
consumers
ex: dry cleaning,
air travel.
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U.S. Consumption, 2001
$ billions
Consumption
Durables
$7,064.5
% of
GDP
69.2%
858.3
8.4
Nondurables
2,055.1
20.1
Services
4,151.1
40.7
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Investment (I)
def1: spending on [the factor of production] capital.
def2: spending on goods bought for future use.
Includes:
 business fixed investment
spending on plant and equipment that firms will
use to produce other goods & services
 residential fixed investment
spending on housing units by consumers and
landlords
 inventory investment
the change in the value of all firms’ inventories
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U.S. Investment, 2001
$ billions
Investment
Business fixed
$1,633.9
% of
GDP
16.0%
1,246.0
12.2
Residential fixed
446.3
4.4
Inventory
-58.4
-0.6
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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.
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Government spending, 2001
$ billions
Gov spending
Federal
$1,839.5
% of
GDP
18.0%
615.7
6.0
Non-defense
216.6
2.1
Defense
399.0
3.9
1,223.8
12.0
State & local
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Net exports (NX = EX - IM)
def: the value of total exports (EX)
minus the value of total imports (IM)
$ billions
U.S. Net Exports, 1960-2000
50
0
-50
-100
-150
-200
-250
-300
-350
-400
1960
1965
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1970
1975
1980
1985
1990
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1995
2000
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CASE STUDY
The Reagan Deficits
 Reagan policies during early 1980s:
 increases in defense
spending: G > 0
 big tax cuts: T < 0
 According to our model, both policies reduce
national saving:
S Y  C (Y T )  G
G   S
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T   C   S
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1. The Reagan deficits, cont.
1. The increase in
the deficit
reduces saving…
2. …which causes
the real interest
rate to rise…
3. …which reduces
the level of
investment.
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r
S2
S1
r2
r1
I (r )
I2
I1
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S, I
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Are the data consistent with these results?
variable
1970s
1980s
T–G
–2.2
–3.9
S
19.6
17.4
r
1.1
6.3
I
19.9
19.4
T–G, S, and I are expressed as a percent of GDP
All figures are averages over the decade shown.
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U.S. Unemployment, 1958-2002
11
Percent of labor force
10
9
8
7
6
5
4
3
2
1955
1960
1965
1970
1975
Unemployment rate
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1980
1985
1990
1995
2000
Natural rate of unemployment
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Natural Rate of Unemployment
 Natural rate of unemployment:
the average rate of unemployment around
which the economy fluctuates.
 In a recession, the actual unemployment
rate rises above the natural rate.
 In a boom, the actual unemployment rate
falls below the natural rate.
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Example:
 Each month, 1% of employed workers
lose their jobs (s = 0.01)
 Each month, 19% of unemployed
workers find jobs (f = 0.19)
 Find the natural rate of unemployment:
U
s
0.01


 0.05, or 5%
L s f
0.01  0.19
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Why is there unemployment?
 If job finding were instantaneous (f = 1),
then all spells of unemployment would be
brief, and the natural rate would be
near zero.
 There are two reasons why f < 1:
1. job search
2. wage rigidity
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Job Search & Frictional Unemployment
 frictional unemployment: caused by the time it
takes workers to search for a job
 occurs even when wages are flexible and there are
enough jobs to go around
 occurs because




workers have different abilities, preferences
jobs have different skill requirements
geographic mobility of workers not instantaneous
flow of information about vacancies and job
candidates is imperfect
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Sectoral shifts
 def: changes in the composition of demand
among industries or regions
 example: Technological change
increases demand for computer repair
persons, decreases demand for typewriter
repair persons
 example: A new international trade
agreement causes greater demand for workers
in the export sectors and less demand for
workers in import-competing sectors.
 It
takes time for workers to change sectors,
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Industry shares in U.S. GDP, 1960
57.9%
Agriculture
Manufacturing
Other industry
Services
9.9%
4.2%
28.0%
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Industry shares in U.S. GDP, 1997
72.0%
Agriculture
Manufacturing
Other industry
Services
8.5%
17.8%
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Sectoral shifts abound
 more examples:
 Late 1800s: decline of agriculture, increase
in manufacturing
 Late 1900s: relative decline of
manufacturing, increase in service sector
 1970s energy crisis caused a shift in demand
away from huge gas guzzlers toward smaller
cars.
 In our dynamic economy, smaller (though still
significant) sectoral shifts occur frequently,
contributing to frictional unemployment.
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Unemployment from real wage rigidity
If the real
wage is
stuck above
the eq’m
level, then
there aren’t
enough jobs
to go
around.
Real
wage
Supply
Unemployment
Rigid
real
wage
Demand
Labor
Amount of
labor hired
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Amount of labor
willing to work
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The minimum wage in the real world:
 In Sept 1996, the minimum wage was raised
from $4.25 to $4.75. Here’s what
happened:
Unemployment rates, before & after
Teenagers
Single
mothers
All workers
3rd Q 1996
16.6%
1st Q 1997
17.0%
8.5%
9.1%
5.3%
5.3%
 Other studies: A 10% increase in the
minimum wage increases teenage
unemployment
by 1-3%.
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1 The Science
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Labor unions
 Unions exercise monopoly power to
secure higher wages for their members.
 When the union wage exceeds the eq’m
wage, unemployment results.
 Employed union workers are insiders
whose interest is to keep wages high.
 Unemployed non-union workers are
outsiders and would prefer wages to be
lower (so that labor demand would be
high enough for them to get jobs).
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Union membership and wage ratios by industry, 2001
U % of
total
mining
12.3%
construction
18.4
manufacturing
14.6
transportation
24.1
comm. and pub util
22.6
wholesale trade
5.5
retail trade
4.5
fin, insu, and real
2.1
est
services
5.9
government
37.4
all
13.6
RBU = nonunion workers represented by a union %
industry
#
employed
(1000s)
531
6,881
18,149
4,441
2,981
4,540
20,505
7,648
34,261
19,155
119,092
wage ratio = 100(union + RBU wage)/(nonunion wage)
RBU % wage
of total
ratio
12.9% 103.4
19.0
151.0
15.5
105.9
25.4
127.8
23.7
104.2
5.9
105.8
5.0
117.8
2.8
90.1
6.8
103.3
41.8
121.1
15.0% 118.0
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