2.

Macroeconomic data
2.1 Aggregation: the value of many things
2.2 Output, income, and spending
2.2 Prices and the cost of living index
2.3 Joblessness and unemployment
2.1 Aggregation
You cant add chicken and
rice
Output
Combination Rice (tons) Chicken (kg)
A 2 5
B 4 8
C 8 3
E pluribus unum:
valuing many goods using prices
Chicken
Point B is obviously better
than A, since it contains more
of both goods.

Answer: we use price as the criterion

B and value the outputs

VB > VC > VA >

A But how does A compare

with C? There is more rice but
C less chicken.
Rice
Using prices to value output

Suppose the prices of the two goods are

PC and PR.
Then the value of the amounts QCA and QRA at
point A is
V A = P CQ CA + P RQ RA
This is represented by a straight line going
thorugh Point A with slope PR/PC.
Aggregation
In short, instead of speaking of many different
objects, one can speak of their total value in
terms of money by using their prices.
This allows us to speak of many things as if they
were only one thing aggregation, e.g.,
the amount spent daily by a UP student
the monthly sales of a department store
annual value of goods produced by all factories in the
entire country
value of goods exported and imported by the country
Different prices will give different
values to output
Chicken

Green prices give VC > VB

Orange prices give VB > VC

C
Rice
The value of income,
expenditure, and output
Households own factors of production (land, labour, capital)
and rent these out to firms to earn factor incomes (rent,
wages, interest, and profits).
Firms use the factors to produce goods and services. The
value of output equals the payment to the factors (plus
profits retained by firms).
Households use incomes to spend on goods to be used by
households and by firms. The value of spending equals the
value of output.
Output = Income = Expenditure
2.2 Output, income, spending
 Circular flow
Incomes Expenditure

Households
Factor services

Income = Spending = Output Markets

Markets
for factors for goods

Output
Firms

Factor payments Sales receipts

Rules for computing GDP

1. Use market prices to value goods and services

2. Do not include the sale of used goods.
3. Include unsold inventories.
4. Include only the value of final goods (or alternatively,
include only value-added at each step).
5. Impute values even to goods that are produced but not
for sale (e.g., residential housing, production for own
use).
GDP is the value of final goods
or the sum of value-added
The rice industry Inputs Final demand
sells inputs to
itself Rice Poultry Food
Rice P 8 P 12 P 30
The rice industry
Poultry P 5
sells inputs to
--- P 50
the poultry-
Labour Praisers
17 P 38
and sells rice
as food to final
Value added P 30 P 50
consumers.
P 80

The sum of value-added equals

the value of demand for final goods.
Nominal and real GDP
Nominal GDP is the value of output of a given
period using prices prevailing in the same period:
GDP0 = P10 X10 + P20 X20 + = P0X0
GDP1 = P11 X11 + P21 X21 + = P1X1
Real GDP is the value of output of a given period
using prices prevailing in a base or reference
period, say period 0:
Real GDP1 = P10 X11 + P20 X21 + = P0X1
Measuring changes in output
Use Real GDP to determine whether the value of
production in one period is higher than in another.
Example:
If Real GDP2 > Real GDP1
then we say output has increased in real terms.
This is because the above implies that
P0 X2 > P0 X1.
The value of output in period 2 is higher than that in
period 1 using the prices of the base period.
Measuring changes in output
Chicken

Real GDP2

Real GDP1

Here, real GDP is

greater in period 2
than in period 1
X1

X2

Rice
GDP Deflator
The GDP Deflator is the ratio of nominal GDP
to Real GDP. That is,
GDP Deflator1 = Nominal GDP1/Real GDP1
= P1X1/ P0X1 x 100
Obviously, in the base-year 0:
GDP Deflator0 = P0X0/ P0X0 x 100 = 100.
(For convenience the GDP Deflator is often multiplied by
100, so that GDP0 = 100, and so on.)
GDP deflator
The GDP deflator allows one to convert nominal
to real GDP:
Real GDP1 = GDP1/ GDP Deflator1.
Then it is also true that:
% Real GDP = % GDP % GDP Deflator.
Example

GDP (2012) 10,568.4 bn

Real GDP (2012) 6,314.9 bn
GDP Deflator (2000=100) 167.4*

* 167.4 = (10,568.4/ 6,314.9) 100

Example
Year Nominal Real GDP
GDP GDP Deflator
(bn pesos) (bn pesos)
2000 3,354.7 3,354.7 100.0
2008 7,720.9 5,237.1 147.2
2009 ?? 5,297.2 151.5
2010 9,003.5 5,701.5 157.9
2011 9,735.5 5,924.4 164.3
2012 10,568.4 6,314.9 ??
Example

2010 2011 %

GDP 9,003.5 9,735.5 8.1

Real GDP 1,145,802 1,204,535 3.9
GDP Deflator 157.9 164.3 4.0

Note: % GDP %Real GDP + %GDP Deflator

8.1 3.9 + 4.0 (= 7.9)
Aggregate expenditure: who
buys?
Private
Households consumption
Foreigners

Government Exports
consumption
Markets
Government for goods

Investment

Firms
E = C + G + I+ X
Aggregate supply: who
sells?
Households Foreigners

Imports
Government Markets
for goods

Firms
Output
Q = GDP + M
Aggregate spending and
supply

Putting these all together:

supply demand

GDP + M = E
GDP + M = C + G + I + X
GDP = C + G + I + X M
 Where income goes
Income
Households
C
Foreigners

G
Taxes X

Markets
Markets Government for goods
Saving
for factors

Firms
GDP = C + S + T E=C+G+I+X
Income and spending
GDP = C + S + T
C+G+I+XM=C+S+T
(I S) = (T G) + (M X)
G) + (M
I = S + (T investment-saving gap budget
X)surplus current-account deficit

Investment is financed by private domestic saving

government saving, and foreign saving.
GDP by expenditure 2012,
in constant 2000 prices (millions of pesos)

Level GDP Share (%)

Personal consumption 4,450,712 70.4
Government consumption 643,820 10.2
Gross investment 1,222,824 19.4
Exports 3,005,475 47.6
Less: Imports 3,001,758 - 47.7
Statistical discrepancy 3,793 --
GDP 6,314,866 100.0
GNI 8,255,257 131.1
GDP by sector value-added
(2012, in constant 2000 mn pesos and percent)
Agriculture, fishery, forestry. 698,736 11.0
Industry 2,024,580 32.1
Mining 67,883 1.1
Manufacturing 1,396,840 22.1
Construction 345,481 5.5
Electricity, gas, water 215,807 3.4
Services 3,591,549 56.9
Transport, Comm., Storage 487,535 7.7
Trade 1,053,974 16.7
Finance 425,224 6.7
Ownership of dwellings/real estate 694,182 11.0
Private services 667,309 10.6
Government services 264,326 4.2
GDP 6, 314,866 1 00.0
2.3 Prices and cost of living
CPI and inflation
The consumer price index or CPI is a measure of
the level of prices consumers typically face.
Obtain the budget of the typical consumer in the
base year:
B0 = P10C10 + P20C20 + Pn0Cn0
Dividing both sides by B0 gives
1 = b10 + b20 + bn0
where the bs represent the share of the respective
goods in the typical basket.
CPI and inflation
Then the CPI in year k is defined as:

b10P1k + b20P2k + bnk Pnk

CPIk = 100
b10P10 + b20P20 + bn0Pn0

= (b0Pk / b0P0) 100

where obviously in the base year,
CPI0 = 100.
CPI and inflation

Inflation is typically measured as the percentage

change in the CPI.
Between year k and year 0, the rate of inflation is
equal to
CPIk CPI0
CPI0
(multiply this by 100 to get an answer in percent).
CPI and inflation
(1997-2004; 1994 = 100)
CPI Inflation
1997 124.7 --
1998 136.8 9.7
1999 145.9 6.7
2000 152.3 4.4
2001 161.6 6.1
2002 166.4 3.0
2003 171.4 3.1
2004 184.4 5.7
2005 185.5 7.8
CPI Inflation (1981-2005)
50

40

30

20

10

0
81 83 85 87 89 91 93 95 97 99 '01 '03 '05
-10
2.4 Unemployment
Measuring unemployment
Working age population (WAP): 15-64 year
Labour force (LF): employed plus
unemployed
Not in the labour force (NLF): Neither
employed nor unemployed (e.g., students,
home-makers)
Measuring unemployment

Employed (N): worked at least one hour in the

reference week
Unemployed (U): looking for work or not looking
for work because s/he believes no work can be
found but available for work
Under-employed (Ud): employed but looking for
additional work or not working a full week.
Measuring employment

Working-age population

Labour force Nonlabour force

Employed Unemployed

Underemployed
Measuring unemployment

Labour-force participation rate (LFPR)

= LF/WAP
Unemployment rate (u) = U/LF
Employment rate (n) = N/LF
Underemployment rate (ud) = Ud/N
October unemployment and
underemployment (%)
25

Unemployment Underemployment
20

15

10

0
2005 2006 2007 2008 2009 2010 2011 2012
Employment shares (%)
0.6

0.5

0.4

0.3

0.2

0.1

0
88 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10
Agriculture Industry Services
Labour-force statistics
October 2012 and 2010

2012 2010
Labor force participation rate (%) 63.9 64.2
Employment rate (%) 93.2 92.9
Unemployment rate (%) 6.8 7.1
Underemployment rate (%) 19.0 19.4
Memo:
Working-age population (millions) 62,253 59,481
GDP and GNP
Gross domestic product (GDP) the value of final
goods and services produced within the country
in a given period
location of producers as criterion

Gross national product/income (GNP/GNI) the

value of final goods and services produced by
nationals of a country in a given period
nationality of producers as criterion
Factor and nonfactor services
(examples)

Exports Imports
Non-factor e.g., call-centre services; e.g., freight and insurance;
incoming long-distance outbound tourism
services phone calls; inbound
tourism; editorial services;
animation

Factor e.g., overseas workers e.g., interest on foreign

remittances; inward profit loans; profit remittances;
services remittances royalties
Exports
A Goods
semiconductors; wiring harness; canned tuna; coconut oil
B. Nonfactor services
tourism spending by foreigners; incoming long-distance phone
calls; call centers
C Factor services
overseas workers earnings; foreign profits earned by Filipino
corporations; rent from Filipino-owned houses abroad
Let X = A. + B. and X = A. + B. + C.
Imports
A. Goods
petroleum; machinery and equipment; parts for
semiconductor manufacture
B. Nonfactor services
spending by Filipino tourists abroad; outgoing long-
distance calls; freight and insurance paid to foreign firms
C. Factor services
interest paid on foreign loans; profit remittances of
foreign corporations
Let M = A. + B. and M = A. + B. + C.
GDP and GNP

Let X = exports of goods and nonfactor

services
M = imports of goods and nonfactor
services
X = exports of goods, factor and nonfactor
services
M = imports of goods, factor and nonfactor
services
GDP and GNP

GNI + M = C + G + I + X
GDI + M = C + G + I + X
GNI GDP = (X X) (M M)

factor exports - factor imports

net primary income from abroad

GNI GDP = NPIA

Income and investment (Hicks)
Income: that amount which can consumed in the
current period that will leave you no worse off at
the beginning of tomorrow than you were at the
start of today.
Investment: a use for income which raises the
possible level of consumption above the
income in the next period; a use of current
income to increase the production and
consumption possibilities of the next period.
Investment and growth
Investment good A higher rate of
investment in the
present period

leads to a greater
expansion of production
possibilities in the next.

Consumption good