N. Gregory Mankiw
PowerPoint® Slides by Ron Cronovich
CHAPTER

2

The Science of
Macroeconomics
© 2010 Worth Publishers, all rights reserved

SEVENTH EDITION

MACROECONOMICS

In this chapter, you will learn:
…the meaning and measurement of the most important macroeconomic statistics:

 Gross Domestic Product (GDP)
 The Consumer Price Index (CPI)
 The unemployment rate

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The Data of Macroeconomics

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Gross Domestic Product:
Expenditure and Income
Two definitions:

 Total expenditure on domestically-produced final goods and services.

 Total income earned by domestically-located factors of production.

Expenditure
Expenditure equals equals income income because because every every dollar dollar spent spent by by aa buyer buyer becomes becomes income income to to the the seller. seller. CHAPTER 2

The Data of Macroeconomics

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The Circular Flow
Income ($)
Labor

Firms

Households

Goods
Expenditure
($)
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Value added
Value added:
The value of output minus the value of the intermediate goods used to produce that output

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NOW YOU TRY:

Identifying value-added
 A farmer grows a bushel of wheat and sells it to a miller for $1.00.

 The miller turns the wheat into flour and sells it to a baker for $3.00.

 The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00.

 The engineer eats the bread.
Compute value added at each stage of production and GDP
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Final goods, value added, and GDP
 GDP

= value of final goods produced
= sum of value added at all stages production. of

 The value of the final goods already includes the value of the intermediate goods, so including intermediate and final goods in GDP would be double-counting.

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The expenditure components of
GDP
 consumption, C
 investment, I
 government spending, G
 net exports, NX
An important identity:
Y

=

value of total output
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C

+

I

+

G

+

NX

aggregate expenditure The Data of Macroeconomics

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Consumption (C) definition: The value of all goods and services bought by households. Includes:

 durable goods




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last a long time
e.g., cars, home appliances nondurable goods last a short time
e.g., food, clothing services work done for consumers e.g., dry cleaning, air travel
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U.S. consumption, 2008
$ billions
Consumption

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$ 10,057.9

% of GDP
70.5%

Durables

1,023.2

7.2

Nondurables

2,965.1

20.8

Services

6,069.6

42.6

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Investment (I)
 Spending on goods bought for future use
(i.e., capital goods)

 Includes:
 Business fixed investment
Spending on plant and equipment
 Residential fixed investment
Spending by consumers and landlords on housing units
 Inventory investment
The change in the value of all firms’ inventories
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U.S. Investment, 2008
$ billions
Investment
Business fixed

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$1,993.5

% of GDP
14.0%

1,552.8

10.9

Residential

487.7

3.4

Inventory

–47.0

–0.3

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Investment vs. Capital
Note: Investment is spending on new capital.
Example (assumes no depreciation):
 1/1/2009: economy has $500b worth of capital
 during 2009: investment = $60b
 1/1/2010: economy will have $560b worth of capital

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Stocks vs. Flows
Flow

Stock

A stock is a quantity measured at a point in time.
E.g.,
“The U.S. capital stock was $26 trillion on
January 1, 2009.”
A flow is a quantity measured per unit of time.
E.g., “U.S. investment was $2.5 trillion during 2009.”
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Stocks vs. Flows - examples

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stock

flow

a person’s wealth

a person’s annual saving

# of people with college degrees

# of new college graduates this year

the govt debt

the govt budget deficit

The Data of