Chapter # 2 of macroeconomics by mankiw 9th edition. Measurements of national income in a small and large economy. Different concepts of national income are explained such as gdp, gnp, gni, disposable income, personal disposable income etc. Additionally, concepts such as depreciation and its impact on national income is also explained. The national income identity is elaborated along with 3 different methods to measure national incomes

1. Chapter Two 1
®
CHAPTER 2
The Data of Macroeconomics
A PowerPointTutorial
To Accompany
MACROECONOMICS, 7th. Edition
N. Gregory Mankiw
Tutorial written by:
Mannig J. Simidian
B.A. in Economics with Distinction, Duke University
M.P.A., Harvard University Kennedy School of Government
M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management

2. Chapter Two 2
Gross Domestic Product (GDP) is the dollar
value of all final goods and services
produced within an economy in a given
period of time.
The consumer price index (CPI) measures
the level of prices.
The unemployment rate tells us the fraction
of workers who are unemployed.

3. Chapter Two 3
Gross Domestic Product is the best measure of how
well the economy is performing. The Bureau of
Economic Analysis (part of the U.S. Dept. of
Commerce) calculates GDP via administrative data,
which are byproducts of government functions such as
tax collection, education programs, defense, and
regulation, and statistical data, which come from
government surveys of, for example, retail
establishments manufacturing firms and farm activity.

4. Chapter Two 4
Two ways
of viewing GDP
Total income of everyone in the economy
Total expenditure on the economy’s
output of goods and services
Households Firms
Income $
Labor
Goods
Expenditure $
For the economy as a whole, income must equal expenditure.
GDP measures the flow of dollars in the economy.
Income, Expenditure,
And the Circular Flow

5. Chapter Two 5
1) To compute the total value of different goods and services, the
national income accounts use market prices.
Thus, if:
$0.50 $1.00
GDP = (Price of apples  Quantity of apples)
+ (Price of oranges  Quantity of oranges)
= ($0.50  4) + ($1.00  3)
GDP = $5.00
2) Used goods are not included in the calculation of GDP.
3) The treatment of inventories depends on if the goods are stored or
if they spoil. If the goods are stored, their value is included in GDP.
If they spoil, GDP remains unchanged. When the goods are finally sold
out of inventory, they are considered used goods (and are not counted).

6. Chapter Two 6
4) Intermediate goods are not counted in GDP– only the value of
final goods. Reason: the value of intermediate goods is already
included in the market price. Value added of a firm equals the
value of the firm’s output less the value of the intermediate goods
the firm purchases.
5) Some goods are not sold in the marketplace and therefore don’t
have market prices. We must use their imputed value as an estimate
of their value. For example, home ownership and government services.

7. Chapter Two 7
The value of final goods and services measured at current prices is
called nominal GDP. It can change over time, either because there is a
change in the amount (real value) of goods and services or a change in
the prices of those goods and services. Real GDP is the value of goods
and services measured using a constant set of prices.
If all prices doubled without any change in quantities, nominal GDP
would double. Yet it would be misleading to say that the economy’s
ability to satisfy demands has doubled because the quantity of every
good produced remains the same.
This distinction between real and nominal can also be applied to other
monetary values, like wages. Nominal (or money) wages can be denoted
by W and decomposed into a real value (w) and a price variable (P).
This conversion from nominal to real units allows us to eliminate the
problems created by having a measuring stick (dollar value) that
essentially changes length over time, as the price level changes.

8. Chapter Two 8
Let’s see how real GDP is computed in our apple and
orange economy.
For example, if we wanted to compare output in 2009 and output
in 2010, we would obtain base-year prices, such as 2009 prices.
Real GDP in 2009 would be:
(2009 Price of Apples  2009 Quantity of Apples) +
(2009 Price of Oranges  2009 Quantity of Oranges).
Real GDP in 2010 would be:
(2009 Price of Apples  2010 Quantity of Apples) +
(2009 Price of Oranges  2010 Quantity of Oranges).
Real GDP in 2011 would be:
(2009 Price of Apples  2011 Quantity of Apples) +
(2009 Price of Oranges  2011 Quantity of Oranges).
Note that 2009 prices are used to compute real GDP for all three
years. Because prices are held constant from year to year,
real GDP varies only when the quantities produced vary.

9. Chapter Two 9
Nominal GDP measures the current dollar value of the output of
the economy.
Real GDP measures output valued at constant prices.
The GDP deflator, also called the implicit price deflator for GDP,
measures the price of output relative to its price in the base year. It
reflects what’s happening to the overall level of prices in the economy.
GDP Deflator = Nominal GDP
Real GDP
THE IMPLICIT PRICE DEFLATOR FOR GDP

10. Chapter Two
Interpretation of GDP
DEFLATOR
• If the GDP deflator increases over time, it
suggests that prices have risen, and some
portion of the nominal GDP growth may be
attributed to inflation.
• If the GDP deflator decreases, it implies that
prices have fallen, and the real GDP may be
growing at a faster rate than the nominal
GDP.
10

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In some cases, it is misleading to use base-year prices that
prevailed 10 or 20 years ago (i.e., computers and
college). In 1995, the Bureau of Economic Analysis
decided to use chain-weighted measures of
real GDP. The base year changes continuously
over time. This new chain-weighted
measure is better than the more
traditional measure because it
ensures that prices will not be
too out of date.
Average prices in 2009
and 2010 are used to measure
real growth from 2009 to 2010.
Average prices in 2010 and 2011
are used to measure real growth from
2010 to 2011, and so on. These growth
rates are united to form a “chain” that is
used to compare output between any two
dates.

12. Chapter Two 12
Government
purchases of goods
and services
Y = C + I + G + NX
Total demand
for domestic
output (GDP)
is composed
of
Consumption
spending by
households
Investment
spending by
businesses and
households Net exports
or net foreign
demand
This is the called the national income accounts identity.

13. Chapter Two 13
GDP and Its
Components
In 2007, U.S. GDP totaled about 13.8 trillion.
This number is incomprehensible. So, if we
divide this number by the total population of
$302 million, we get GDP per person—the
amount of expenditure for the average
American– which equaled $45,707 in 2007.
Let’s break it down visually on the next slide.
A Mankiw
Macroeconomics
Case Study

14. Chapter Two
Consumption = $32,144
Investment = $7,052
Government Purchases =
$8,854
Net Exports = $2,343
GDP (Y) was $45, 707 per person
Here are the Components of Y in 2007:
Y = C + I + G + NX
$45,707 = $32,144 + $7,052 + $8,854 + $2,343
Remember that these
calculations are
performed per person
just for
comprehension
purposes.
Note: The numbers above must be multiplied by the U.S. Population
302 million to obtain the totals for the above national income
accounts identity Y = C + I + G + NX.

15. Chapter Two 15
To see how the alternative measures of income relate to one
another, we start with GDP and add or subtract various quantities.
To obtain gross national product (GNP), we add receipts of factor
income (wages, profit, and rent) from the rest of the world and
subtract payments of factor income to the rest of the world.
GNP = GDP + Factor Payments from Abroad - Factor Payments to Abroad
Whereas GDP measures the total income produced domestically, GNP
measures the total income earned by nationals (residents of a nation).
To obtain net national product (NNP), we subtract the depreciation of
capital—the amount of the economy’s stock of plants, equipment, and
residential structures that wears out during the year:
NNP = GNP – Depreciation
In the national income accounts, depreciation is called the consumption
of fixed capital. It equals about 10% of GNP. Because depreciation of
capital is a cost of producing the output of the economy, subtracting
depreciation shows the net result of economic activity.

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Net National is approximately equal to another
measure called national income. The two differ by
a small correction called the statistical
discrepancy, which arises because different data
sources may not be completely consistent.

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The Consumer Price Index (CPI) turns the prices
of many goods and services into a single index
measuring the overall level of prices. The Bureau
of Labor Statistics weighs different items by
computing the price of a basket of goods and
services produced by a typical customer. The CPI
is the price of this basket of goods relative to the
price of the same basket in some base year.

18. Chapter Two 18
Let’s see how the CPI would be computed in our
apple and orange economy.
For example, suppose that the typical consumer buys 5 apples and 2
oranges every month. Then the basket of goods consists of 5 apples
and 2 oranges, and the CPI is:
CPI = ( 5  Current Price of Apples) + (2  Current Price of Oranges)
( 5  2009 Price of Apples) + (2  2009 Price of Oranges)
In this CPI calculation, 2009 is the base year. The index tells how
much it costs to buy 5 apples and 2 oranges in the current year relative
to how much it cost to buy the same basket of fruit in 2009.

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The GDP deflator measures the prices of all goods produced, whereas
the CPI measures prices of only the goods and services bought by
consumers. Thus, an increase in the price of goods bought only by firms
or the government will show up in the GDP deflator, but not in the CPI.
Also, another difference is that the GDP deflator includes only those
goods and services produced domestically. Imported goods are not a
part of GDP and therefore don’t show up in the GDP deflator.
The final difference is the way the two aggregate the prices in the
economy. The CPI is computed using a fixed basket of goods,
whereas the GDP deflator allows the basket of goods to change over
time as the composition of GDP changes.

20. Chapter Two
Example
Suppose that major frosts destroy the nation’s orange
crop. The quantity of oranges produced falls to zero,
and the price of the few oranges that remain on
grocers’ shelves is driven sky-high. Because oranges
are no longer part of GDP, the increase in the price of
oranges does not show up in the GDP deflator. But
because the CPI is computed with a fixed basket of
goods that includes oranges, the increase in the price
of oranges causes a substantial rise in the CPI.
20

21. Chapter Two 21
The labor force is defined as the sum of the employed and
unemployed, and the unemployment rate is defined as the
percentage of the labor force that is unemployed.
The labor-force participation rate is the percentage of the adult
population who are in the labor force.
Unemployment Rate = Number of Unemployed
Labor Force
 100
Labor-Force Participation Rate = Labor Force
Adult Population
 100

22. Chapter Two 22
The Bureau of Labor Statistics (BLS) computes these statistics for the
overall population and for groups within the population: men
and women, whites and blacks, teenagers and prime-age workers. In
2008, the statistics broke down as follows:
Labor Force = 145.0 + 10.1 = 155.1 million
Unemployment rate = (10.1/155.1) x 100 = 6.5%
Labor-Force Participation Rate = (155.1/234.6) x 100 = 66.1%
Hence, about two-thirds of the adult population was in the labor force,
and about 6.5 percent of those in the labor force did not have a job.

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The BLS conducts two surveys of labor market,
and therefore produces two measures of total
employment. The establishment survey estimates the
number of workers firms have on their payrolls.
The household survey estimates the number of people who
say they are working.
Two measures of employment are not necessarily identical,
although positively correlated. The reason? The surveys
measure different things and the surveys in general, are
imperfect.
Some economists believe that the establishment survey is
more accurate because it has a larger sample size. Bottom
line: all economic statistics are imperfect!

24. Chapter Two 24
National income
Consumption
Investment
Government purchases
Net exports
Labor force
Labor-force participation rate
Gross domestic product (GDP)
Consumer Price Index (CPI)
Unemployment rate
National income accounting
Value added
Nominal versus real GDP
GDP deflator