Transcript Nominal and Real GDP

Nominal and Real GDP
• While nominal GDP is reported every
month, most of the interest focuses on the
change in real GDP and the change in
prices, known as the implicit deflator
• Inflation is also measured by the
consumer price index (CPI) and the
producer price index (PPI).
Chapter 3
• Key Data Concepts: Inflation,
Unemployment, And Labor Costs
Different Measures of Inflation
• Theoretically, there are three different
ways the government measures inflation.
• Fixed weight: CPI and PPI
• Implicit deflator: calculated indirectly as
current/constant GDP
• Chained deflator: Similar to the implicit
deflator, but the base period is reset every
year.
Fixed Weight Deflators
• For many years, the standard approach.
• However, this method generally overstates
inflation.
• If the price of A rises while the price of B falls,
consumers will buy less A and more B, so the
actual price index will rise less than indicated by
a fixed-weight indicator. Also overstates inflation
if consumers shop more at discount stores.
• Also fails to take account of timely introduction of
new products, and generally omits quality
improvements
Boskin Commission
• Before 1994, CPI overstated inflation by
1.1% per year.
• Interest rates were higher than would have
otherwise been the case
• Social security payments rose more
rapidly, either causing large deficits or
higher tax rates.
• Adjustments since then have eliminated
the overstatement.
Implicit Deflators
• Essentially use current weights, so a shift to a lowerpriced good or service would cause this index to rise less
rapidly than the comparable fixed-weight index.
• Worked fairly well in the pre-computer era
• Computer prices fall about 15% per year, according to
government statistics.
• Thus over several years, even if the actual amount spent
on computers did not change, the constant-dollar
amount would rise sharply and dominate the index.
• As a result, the implicit deflator would understate the true
rate of inflation
Chained Deflators
• Because of this drawback, BEA introduced the
concept of the chained deflator.
• Current weights are still used, but the base is
reset every year, so the extended distortion from
many years of declining computer prices is
eliminated.
• Theoretically the best measure of inflation, but
severe data limitations still apply in terms of
measuring the components of GDP.
Could Inflation Be Understated?
• Medical care costs are actually rising
faster than the government says.
• Insurance costs are not adequately
measured because they are not based on
policy premiums, but only the “net” – i.e.,
the rising cost of accidents is treated as an
intermediate service and not counted.
• Higher property taxes are not included,
and neither are increases in sales taxes.
What Difference does it make to
business managers?
• If inflation is understated, interest rates
and wage gains will generally be lower
than otherwise.
• However, it may appear that your business
is paying more for various goods and
services – such as health care – than the
average. For this reason the various
indexes may not provide valid benchmarks
for your costs.
Defining Unemployment
• Concept should be simple: anyone who wants
to work but cannot find a job is unemployed.
• But what about an MBA who cannot find a job in
finance or consulting and could work flipping
burgers, but turns it down. Is that person
unemployed?
• Or what about inner city residents who turn
down jobs in the suburbs because they don’t
have a car to get to the job?
• Or the person who stops looking because they
can’t find a job, but would be glad to work if
positions were available?
Different Measures of
Unemployment
• To try and sort out these issues, two
methods of classification of unemployment
have been developed.
• The first is theoretical, known as the types
of unemployment.
• The second is empirical, known as the
degrees of unemployment.
Types of Unemployment
• Seasonal – construction workers laid off in the
winters, teachers in the summer, etc. Not
included in most published data.
• Frictional – between jobs. Most of these people
will soon be re-employed.
• Cyclical – auto or computer workers laid off
because of the slump. Generally assumed jobs
will resume when the economy improves.
• Structural – due to changing skill needs, these
people will probably remain unemployed
indefinitely even if the economy prospers.
Degrees of Unemployment
• Long-Term Unemployed. More than 15
weeks.
• Job losers. Excludes those who quit.
• Official rate. The rate quoted in the
financial press every month.
• Above plus discouraged workers
• Above plus marginal workers
• Above plus those working part-time for
economic reasons
Discrepancies Between
Employment and Unemployment
• Over the long run, the labor force grows about
100,000 per month. Taking this into account,
one might expect that the change in
unemployment would be equal to the change in
employment with the opposite sign plus
100,000.
• In the short run, the two series are not highly
correlated. Unemployment is collected from the
household survey. Employment is collected
from the payroll survey; although an alternative
measure is also collected by the household
survey, it is generally ignored.
Discrepancies (Slide 2)
• If someone works at two jobs, they are counted
as 2 employed people in the payroll survey but
only 1 in the household survey.
• If someone is laid off, they may not immediately
start looking for work.
• Undocumented aliens are more likely to be
counted in the payroll than the household
survey.
• New businesses are not included in the payroll
employment survey.
The BLS “Fudge Factor”
• That latter point means that the actual data
collected from the employment survey would
generally underestimate the growth in jobs, so
BLS adds a “fudge factor” to provide more
accurate estimates.
• However, fewer new businesses are created in
recessions, so the fudge factor varies cyclically.
• Eventually, accurate data are obtained from the
Censuses of Business, taken once every 5
years. But in the meantime, BLS is simply
offering informed guesses about the change in
employment.
Different Measures of Labor Market
Conditions
• Hours worked per week is a leading indicator
• Employment is a coincident indicator
• The unemployment rate is a lagging indicator.
That is because when business conditions start
to improve, some people who had stopped
looking for jobs re-enter the labor force again.
• As a result, the unemployment rate invariably
rises during the beginning stages of recovery.
By itself, that is NOT a sign that the recovery is
weak. That can be better measured by the
change in employment.
Duration of Unemployment
• If someone is unemployed for one week, that is
far less serious than if they are unemployed for a
year.
• Hence the average duration of unemployment is
also an important indicator of labor market
conditions.
• In recent years, the duration has risen faster
than the unemployment rate itself. Once
unemployed, it takes longer to find another job.
Interpreting Labor Market Statistics
• Monthly changes in both employment and
unemployment are dominated by random
factors and erratic seasonal adjustment.
• Generally, a trend in either direction is not
apparent until three months have passed.
• The unemployment rate is the most
politically sensitive indicator but actually
contains the least useful information
because it is a lagging indicator.
The Concept of Full Employment
• Generally defined – at least theoretically – when
the number of people who are looking for work is
equal to the number of jobs vacancies.
• This rate changes over time; in the U.S., it has
fluctuated from 3 ½% to 6%.
• Full-employment rate depends on demographic
factors and the long-term growth rate; faster
growth creates more job opportunities.
• Currently that rate is near 4%.
Unit Labor Costs
• Defined as total compensation – including fringe
benefits, bonuses, stock options, etc. – divided
by employee-hours.
• Usually tracks very closely with inflation, but in
the late 1990s, rose much faster. The result was
a decline in profit margins even though the
economy was booming.
• It is a better measure of labor market pressures
than base wage rates, especially in this era of
increasing technology.
Index of Leading Indicators
• Supposed to predict turning points.
• Never misses a downturn, but gives many false
signals.
• In recent years, dominated by stock market
fluctuations.
• Monthly data are erratic, 3 months necessary to
determine a trend.
• Useful in the sense you won’t be caught off
guard if a recession does occur; danger is
reacting to false signals.
Index of Coincident Indicators
• Consists of employment, industrial
production, real business sales, and real
personal income excluding transfer
payments.
• Does not get much publicity, but a
valuable guide of where the economy is
right now. More accurate than real GDP,
and appears every month.
Seasonally Adjusted Data
• Almost all government data are seasonally
adjusted.
• In general that is a worthwhile idea; otherwise
data would be dominated by swings such as the
surge in sales in December.
• However, seasonal patterns do change over
time. Methods to measure these factors are not
flawless and sometimes lead to inaccurate data
before the glitches are corrected.
Preliminary and Revised Data
• GDP estimates are released for each quarter.
The first estimate appears about 30 days after
the quarter ends. About 50% of the input for the
advance reports are estimated. As a result, that
number is often substantially revised.
• Initial reports for employment, production, and
retail sales are also based largely on estimated
data.
• Data for unemployment and inflation are
generally subject to much smaller revisions.