Macroeconomics: Questions and Methods

A First Look at Macro Data

Measuring the Macroeconomy

Macroeconomics: Introduction

Alan G. Isaac

American University

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

Preliminaries

These lecture slides indicate the talking points covered in class. They
are not a substitute for the lectures.
I will appreciate learning of any typos and/or errors.

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

Macroeconomics vs. Microeconomics

macroeconomics economy-wide variables (aggregates)

microeconomics individual markets
microfoundations of macro underlying behavior of indviduals
macrofoundations of micro institutional and environmental setting

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

Macroeconomic Inquiries

All macro textbooks address the causes of

growth
business cycles
inflation
We hope that understanding these can help us implement better
policies---policies that can improve human well-being by
promoting growth,
moderating business cycles,
constraining inflation.
Question:
Do you think there are other major macroeconomic inquiries?

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

Other Inquiries

Might involuntary unemployment deserve to be listed separately

from business cycles?
Might we be interested in the causes of the distribution of income
and wealth?
What role should environmental constraints play in macro policy
planning?
Question:
What role does ideology play in determining which questions we find
interesting, or are even willing to discuss?

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

Background of the Class

Question:
What have you learned to view as determinants of inflation,
unemployment, business cycles, growth, and the distribution of income
and wealth?
Question:
Do you think government policy can influence inflation, unemployment,
business cycles, growth, and the distribution of income and wealth?

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

Course Approach

In this course, we try to answer such questions by collecting evidence

on the relationships between macroeconomic variables.
macroeconomic (aggregative) variables measurable aggregate
quantities such as GDP or unemployment that we
attempt to relate to macroeconomic concepts.
When then build a model in an attempt to explain our observations.

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

Investigative Strategy

ask a macroeconomic question (“why are we richer today than a

century ago”)
document stylized facts relevant to the question
develop a simple model that incorporates certain stylized facts
check predictions of model against other stylized facts
use novel predictions of models to search for new facts
revise model

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

The Structure of Economic Models

Types of Varaibles
Endogenous
Exogenous
Parameters (like exogs but less “variable”)
Types of Equations
Identities
Behavioral
Technological
Equilibrium

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

The Structure of Economic Models

Source: Jones (2011)

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Macroeconomic Inquiries
A First Look at Macro Data
Macroeconomic Modeling
Measuring the Macroeconomy

The Use of Economic Models

Models can be used to explore counterfactual scenarios and to predict

the effects of policy changes.
Comparative statics: how do the final values of the endogenous
variables respond to the exogenous variables?
Comparative dynamics: how does the path of the endogenous
variables respond to the path of the exogenous
variables?
The predictions of economic models are usually qualitative.
A truly successful model makes quantitative predictions as well. (Very
hard!)

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Three Views of Growth

Real GDP: http://research.stlouisfed.org/fred2/
graph/?chart_type=line&width=
800&height=480&preserve_ratio=
true&id=GDPCA
Logarithm of Real GDP:
http://research.stlouisfed.org/fred2/
graph/?chart_type=line&width=
800&height=480&preserve_ratio=
true&id=GDPCA&transformation=log
Annual Percentage Change in Real GDP:\
http://research.stlouisfed.org/fred2/
graph/?chart_type=line&width=
800&height=480&preserve_ratio=
true&id=GDPCA&transformation=pc1
Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Real GDP

Source: http://research.stlouisfed.org/fred2
Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Population Growth: Linear Scale vs. Ratio Scale

It is usually more informative to display series that grow exponentially
with a ratio scale rather than a linear scale.

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Real GDP (Ratio Scale)

Source: http://research.stlouisfed.org/fred2
Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Real GDP (Ratio Scale)

Source: ERP 2011, Fig 3-1

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Real GDP per capita (US): Linear Scale

Most real income growth has been extremely recent. (But watch out:
this is a linear scale, not a ratio scale.)

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Trends and Deviations

When we look at the level of real GDP over time, out attention is drawn
to an apparent long-run trend.
From this perspective, short-run fluctuations are swamped by long-run
growth.
potential output flexible trend
cost of recession 1982: 5% of potential output ($1500 per family)

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Real GDP per capita (US): Ratio Scale

Figure: Real GDP per capita (US): Ratio Scale

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

GDP, GDP p.c., and Population (US)

Figure: GDP, GDP p.c., and Population (US)

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

AR vs. US: Real GDP p.c. (Ratio Scale)

AR
US
104

103 1850 1900 1950 2000

Data Source: http://www.ggdc.net/maddison/

Units: 1990 Dollars (PPP)Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Real GDP per capita (7 countries)

Figure: Real GDP per capita (7 countries)

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Real GDP p.c.: Levels (2000) and Growth Rates

(1960--2000)

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

World Income Distribution

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Annual Percentage Change of Real GDP

Figure: Annual Percentage Change of Real GDP

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Great Recession

Source: ERP 2011 Fig 2-1

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

US Unemployment Rate

Source: http://research.stlouisfed.org/fred2/
series/UNRATE?cid=12
Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Unemployment Questions

What caused the Great Depression, with peak unemployment of

25% in the US?
Until 1980, Europe had lower unemployment than the US! Why
the change?

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Unemployment Since 1960: US, Europe, and Japan

Figure: Unemployment Rates since 1960: US, Europe, and Japan

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Recent Unemployment Comparisons

Source: http://www.bls.gov/fls/intl_unemployment_
rates_monthly.htm
Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Recent Unemployment Comparisons

Source: http://www.bls.gov/fls/intl_unemployment_
rates_monthly.htm Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

US Inflation

Source: http:
//research.stlouisfed.org/fred2/graph/?chart_
Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Inflation Rates since 1960

Figure: Inflation Rates Since 1960: US, Europe, and Japan

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Inflation Questions

What are the causes of inflation?

How do monetary and fiscal policy contribute to inflation?
Why has rich-country inflation been falling since the early 1980s?
Why do some countries experience hyperinflation?

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

US Income Shares (by Quintile)

Figure: Income Shares (by Quintile)

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Tax Rates

Source: ERP (2010, Figure 5.7)

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Income Mobility

Figure: Income Shares (by Quintile)

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Notable Crisis Events

2007
July: 2 Bear Stearns hedge funds collapse (subprime related
losses)
Sep: run on Northern Rock (British Bank)
Sep 18: first fed funds rate cut

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Notable Crisis Events ...

2008
Feb: nationalization of Northern Rock
Mar 16: Bear Stearns acquired by JP Morgan
Jul 11: Indymac fails
Sep 15: Lehman Brothers files for Banruptcy
Sep 16: Reserve Primary Fund “breaks the buck”; run on money
market funds
Sep 19: US Treasury offers insurance to money market funds
Sep: GSE conservatorship; Merril Lynch acquire, Washington
Mutual acquired
Jan 2007--Sep 2009: US and European Banks write down $1T; more
than 2/3 is loans. (IMF expects total losses will approach $2.5T.)
Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Spread over 10-Year Treasury Yields

Figure: Spread over 10-Year Treasury Yields

Alan G. Isaac Macroeconomics: Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Interest Rate Questions

Why are interest rates important to the macroeconomy?

What determines interest rates?
How can monetary policy affect interest ratest?

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Housing Prices

Source: ERP 2010, Fig 1-1

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
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Financial Markets
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Stock Prices

Source: ERP 2010, Fig 2-6

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
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Financial Markets
Open Economy

Some policy responses

2008-09-07: Fannie Mae and Freddie Mac placed in conservatorship

2008-09-16: Fed extends $85B line of credit to AIG
2008-09-19: Treasury announces temporary guarantee progrm for
money market mutual funds
2008-10-03: Congress passes and Bush signs Emergency Economic
Stabilization Act of 2008 (EESA), including up to $700B
for the Troubles Asset Relief Program (TARP). The initial
TARP tranche of $350B used to purchase preferred
equity shares in financial institutions.

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Some policy responses ...

2008-12 -- 2009-06 Bush extends $17.4B through Auto Industry

Financing Program and another $7.5B to GMAC and
Chrysler Financial. Obama provides almost twice that
as GM and Chrysler go through bankruptcy (to promote
“orderly restructuring”.
2009-02-17: Obama signs American Recovery and Reinvestment Act
of 2009 (ARRA), containing $787B in tax cuts and
spending increases, making it the largest US fiscal
stimulus (about 2% of GDP in 2009 and 2.25% in 2010).
2009-06: Car Allowance Rebate System (CARS)

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Monetary Stimulus

Alan G. Isaac Macroeconomics: Introduction

 Growth
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Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
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Discretionary Added Fiscal Stimulus

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
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Measuring the Macroeconomy
Financial Markets
Open Economy

US Fiscal and Current Account Deficits

Budget deficits and trade deficits may affect future living standards.

Figure: US Fiscal and Current

Alan G. Isaac Account
Macroeconomics: Deficits
Introduction
 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

US Exchange Rate

Alan G. Isaac Macroeconomics: Introduction

 Growth
Unemployment
Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
Measuring the Macroeconomy
Financial Markets
Open Economy

Net International Investment Position

NIIP
not the same as wealth!
A rise in the value of our stock market raises our wealth but
emph{reduces} our NIIP (because foreign residents hold US
stock).
2009 US net equity postion: $3T
2009 US net debt postion: -$5T

Alan G. Isaac Macroeconomics: Introduction

 Growth
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Macroeconomics: Questions and Methods
Inflation
A First Look at Macro Data
Inequality
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Financial Markets
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Composition of Assets and Liabilities (US v. RoW)

Figure: Composition of Assets and Liabilities (US v. RoW)

Alan G. Isaac Macroeconomics: Introduction
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Inflation
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Financial Markets
Open Economy

Reversal of Fortune
Capital gains are no longer offsetting our current account deficit.

Figure:
Alan G.Reversal
Isaac of FortuneIntroduction
Macroeconomics:
 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Background

One reads with dismay of Presidents Hoover and then

Roosevelt designing policies to combat the Great
Depression of the 1930s on the basis of such sketchy data
as stock price indices, freight car loadings, and incomplete
indices of industrial production. The fact was that
comprehensive measures of national income and output did
not exist at the time. The Depression, and with it the growing
role of government in the economy, emphasized the need for
such measures and led to the development of a
comprehensive set of national income accounts.
[froyen-2005-macrotp], as quoted in
[landefeld.seskin.fraumeni-2008-jep]

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Background ...

Prior to the Great Depression, we had no systematic evaluation of

aggregate output.
The nation was in the midst of the Great Depression, but policymakers
had no comprehensive picture of what was happening to the economy.
In response, Simon Kuznets and his colleagues in the 1930s gave us
our first official measurements [kuznets-1934-gpo].

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Stocks and Flows

Stock: measured at a point in time, does not need to refer to a period

of time
Flow: measured over a period of time
Examples: wealth vs. saving, debt vs. deficits

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Measuring Aggregate Production

GDP: market value of all final goods and services produced by

domestic residents in a given year.
We can look directly at expenditures on final goods and services
(expenditure approach), or we can equivalently look at payments to
the factors of production (income approach).
Households are the owners of the factors of production.
Firms produce goods and use their revenues to pay for the
factors of production.
For simplicity, we aggregate the payments to factors into two
categories: labor income (“wages”) and rent (“profits”).

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Components of GDP
Basic NIPA identity: Y = C + I + G + (IM − EX )
100

80
71
Percent of GDP (2009)

60

40

21
20
11

-3
0
C I G NX

Data Source:
Alan G. Isaac Macroeconomics: Introduction
 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

US Consumption/GDP

Source: ERP 2010, Fig 1-3

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Composition of US GDP

Figure: Composition of US GDP

Alan G. Isaac Macroeconomics: Introduction
 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Composition of US GDP
WWII led to a dramatic increase in G.
Note that C continues on trend, although I collapses.
Data Source: FRED

103

102
Y
101
C
I
G
100

0.8
0.6 C/Y
0.4
I/Y
G/Y
0.2 NX/Y
0.0
1930 1935 1940 1945 1950 1955 1960 1965 1970
Alan G. Isaac Macroeconomics: Introduction
 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Composition of US GDP ...

Source: Jones 2008

Alan G. Isaac Macroeconomics: Introduction
 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Labor’s Share of GDP

Labor’s share of GDP is roughly constant at around 2/3.

Source: Jones 2008

Alan G. Isaac Macroeconomics: Introduction
 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Absorption

We call our aggregate spending “absorption”:

A = C +I +G

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Current Account Determination (view 1):

Y − C − I − G = (IM − EX )
Y − A = (IM − EX )

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Decomposing G

Break up government expenditure:

G = CG + IG

What is government investment (e.g., in basic research)?

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Revised identity:

Y = C + I + G + (IM − EX )
= C + I + C G + I G + (IM − EX )
= C NAT + I NAT + (IM − EX )

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Current Account Determination (view 2):

Y − C NAT − I NAT = (IM − EX )

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

Current Account Determination (view 3):

S NAT − I NAT = (IM − EX )

Alan G. Isaac Macroeconomics: Introduction

 Macroeconomics: Questions and Methods
Section 1
A First Look at Macro Data
National Income Accounting
Measuring the Macroeconomy

References

[froyen-2005-macrotp] Froyen, Richard T. (2005) Macroeconomics:

Theories and Policies. New Jersey: Prentice Hall.

[kuznets-1934-gpo] Kuznets, Simon. (1934) National Income

1929--1932. Washington, DC: U.S. Government Printing Office.

[bls-2005-flsforc] of Labor Statistics, Bureau. 2005. Comparative

Civilian Labor Force Statistics, 10 Countries, 1960-2004.

[landefeld.seskin.fraumeni-2008-jep] Landefeld, J Steven, Eugene P

Seskin, and Barbara M Fraumeni. 2008. Taking the Pulse of the
Economy: Measuring GDP. Journal of Economic Perspectives 22,
193--216.
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