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Macroeconomics Week 4 Notes

by: Cindy Notetaker

Macroeconomics Week 4 Notes Econ-UA 1

Marketplace > New York University > Econ-UA 1 > Macroeconomics Week 4 Notes
Cindy Notetaker

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These notes cover Chapter 11: Measuring the Cost of Living as well as whatever was mentioned in class. Graphs and examples included
Intro to Macroeconomics
Gerald McIntyre
Class Notes
Macroeconomics, Macro, Economics
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This 9 page Class Notes was uploaded by Cindy Notetaker on Thursday September 29, 2016. The Class Notes belongs to Econ-UA 1 at New York University taught by Gerald McIntyre in Fall 2016. Since its upload, it has received 61 views.


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Date Created: 09/29/16
September 27th, 2016 The case of GDP and Recorded Music --recorded music from $21B in 1999 to $6 B in 2015 -lowest spending in 40 years --some have argued that the recent slowdown is b/c of the internet's free goods --secular stagnation: -some believe this will continue because we're no longer measuring purchases in music (in reality, we're doing much better in the music industry) GDP is a "noisy signal" --but nearly all macroeconomic goods are --we know the limitations and problems with GDP --easy to measure; measured on the income side --it's easy to make cross country and cross time comparison --all alternatives also have their own problems 
 NOTE: we're also interested in happiness and well being --it's a complex issue though Let's look at levels of happiness in two different periods of time.... 1975 vs 1996 --not a big movement in happiness even though they were earning more --within those year, while poorer people were 5x more likely to not be happy, 69% were still happy in bottom quarter in comparison to 94% in top quarter Recent Research: GDP, Life Satisfaction and Happiness Kahnemean and Deaton --emotional well being: emotional quality of a person's everyday life experience --life evaluation: reflecting life satisfaction --surveyed 100 US residents and found that... -emotional well-being is positively correlated to health and care-giving and negatively related to loneliness and smoking -life evaluation is positively correlated to income and education and in- creases steadily with income --emotional well being also rises w/income but STOPS at about $75,000 Cross Country Comparison --as soon as it hits $15 thousand income, happiness levels are about the same --GDP vs Life Satisfaction -the general pattern is upward sloping (there outliers such as Denmark and Bul- garia) -poorer countries are more equal in their dissatisfaction Does money correlate to happiness? To some degree --despite problems, we still use GDP -an increased GDP means citizens can afford better healthcare, better schools, cleaner and a modern healthcare system -poorer countries with a lower GDP have higher child mortality rates, shorter life expectancy and lower literacy rate 
 NOTE: this, in return, can generate higher levels of happiness Chapter 11: Measuring the Cost of Living Dad:1956 Son:2016 -rent was about $50 month in NYC -rent $5000 a month in NYC -wage was about $2 an hour ($4000 a month) -wage $3000 hour ...who's better off? The Consumer Price Index (CPI) --a measure of the overall costs of good --used to monitor changes in the cost of living over time --measures average URBAN consumer's cost of living by measuring the cost of typical URBAN consumer's shopping basket -BLS (Bureau of Labor Statistics) measures the average and what it costs across time and we want to standardize it --the goods in the basket are fixed but prices are allowed to change -this, however, the distorts it what was that good was worth 40 years ago, 20 years ago, now? --the average shopping basket in 1956 was VERY differently than in 2016 Change in CPI is CRUCIAL --when it changes, it indicated that we have recalibrate social security payments --when CPI increases, the payment to social security increase (same with other payment plans) -COLA (cost of living allowance); automatically raises the wage when the CPI ris- es CPI Inflation, Deflation and Dis-Inflation --CPI is used to calculate inflation -inflation: the general increase of ongoing prices (this is in general level of prices not specific things such as prices in milk or gas) -this type of inflation reflects goods and services bought my consumers most accurately) 
 NOTE: it measures some kind of percent change overall in prices in the economy --within a shopping bad you can have variation in how fast prices are changing "Deflation"=negative inflation --it means that prices are falling on average --one year inflation rate is 6%, the next it's 4% "Dis-inflation"=inflation has fallen, but it's still rising and above the 0 What's in CPI shopping basket? --has a base year value of 100 --the "relative importance" column is very important --food away from home (like restaurants) has been rising --energy and gasoline; utility bills --food and energy --unadjusted indexes
 NOTE: food and energy prices are VERY volatile there is a shopping basket just for apparel Inflation is a measure of OVERALL price (P) change --a change in latte prices if scarcity, NOT inflation CPI Continued... --services account for 60% of overall spending Measuring CPI --41% housing, 17% transportation, 15% food and beverages, etc... -it gets very specific --the CPI is a weighted average -not like arithmetic average -differed because it does not use equal weighting -when price (P) of shelter rises-a large impact on CPI
 NOTE: all their factors end up adding to 1 (or in other terms, 100%) -if price (P) levels fall, there is a deflation in housing prices Core CPI (or in other words, CPI excluding food and energy) --a smoother series on a graph --they both have the same long term average --Core CPI is more stable --a better predictor of where CPI inflation will be --if you wanna predict inflation, use Core CPI b/c the CPI itself is very volatile How to Calculate the CPI : 5 Steps, 3 of which we can do 1. Calculate the shopping basket itself --done via survey (but not every year) because we want a FIXED BASE basket --usually every 5-6 years --done for urban consumers -not farmers in the Midwest --we each have our own individualized basket --determine which prices are most important to the typical consumer and weigh them accordingly ex) if someone buys burgers more than hotdogs, then burgers more im- portant given greater weight 2. Find Prices --this is done monthly --collects data on prices of all the goods in the baskets 3. Compute the Cost of the Shopping Basket itself --use data on prices to compare total cost --note that only the prices in this calculation change -but by keeping contents the same (like with hotdogs and burgers), we isolate the effects of these price (P) changes 4. Choose Base Year and Compute Index 5. Compute Annual Basket Compute CPI in each year using 2013 as base year. . 2013: 100*(60/60)=100 2014? 2014: 100*(69/60)=115 2015? 2015: 100*(78/60)=130 Inflation Rate: ((115-110)/100)*100=15% ((130-115)/100)*100=13% To conclude... by following these five steps, the BLS can determine how quickly the cost of living for the typical consumer is rising Problems with CPI 1. substitution bias --some good prices rise faster than others, so people will change what they buy in order to compensate for that but still meet needs --consumers substitute toward goods that have become relatively less expensive --CPI doesn't pick this up and therefore overstates inflation ex) in the base year, peaches are cheaper than pears, so people buy more peaches than pears and there is a larger amount of them recorded in the basket --in the next year, pears are cheaper and so more people buy peaches than pears, therefore larger quantity of pears, but this is not computed because of the FIXED basket from the base year 2. outlet bias --consumers tend to shop more at outlets or discounted stores when prices be- gin to rise --CPI does not take this into account, so prices are slightly higher in the CPI in- dex 3. introduction of new goods --an increase in the variety of goods allows consumers to find products that more closely meet their needs --the dollar becomes more valuable because there is more to choose from ex) $100 gift card at a big store with huge selection vs. $100 at a big store with same stuff but limited selection --going to go with the gift card to the place that offers you more of what you like 4. unmeasured quality change --improvements in the quality of goofs in the basket increase the value of each dollar --if the quality of a good deteriorates from one year to the next, then the value of the dollar decreases --CPI can't keep up with these quality changes 
 NOTE: all of the problems mentioned above suggest that the CPI OVERSTATES the cost of living --Michael Boskin estimates that this overstatement is about 1% per year Why does it matter??? --CPI is used to adjust living conditions --Social security, personal income deductions, etc are larger because CPI is overstated Two Aggregate Price Indexes: GDP vs CPI 1. CPI reflects consumer prices (the typical, average, everyday prices) --reflects all goods and services bought by consumers GDP deflator looks at ALL goods produced in the economy, but does not pick up price on imports ex) Oil: much of the oil we use is imported from other countries, and we use oil for gasoline and heating --as a result, oil and oil products make up a larger amount of consumer spending than of GDP --when the price of oil rises, the CPI rises by much more than the GDP deflator 2. CPI is a fixed basket GDP deflator looks at THIS YEAR'S production
 NOTE: **while CPI is fixed and GDP looks at current prices, both give us the same general reading** ex) Imported Consumer Goods --included in CPI --excluded in GDP Correcting Variables for Inflation --comparing dollar figures from different times -inflation makes it harder to compare dollar amounts ex)** Was gas cheaper back in 1956 than in today's real terms?? In 1956: gas price (P)=23 cents/gallon Is this high or low in comparison to $2.33 today? WE NOW USE THIS EQUATION TO FIND OUT: MEMORIZE FOR EXAM Price (P) in year T=23 cents --CPI=27.3 in T, CPI=240.3 in 2016 23cents*(240.3/24.3)=202 cents Therefore... --the price (P) of gas is $2.02 in 2016 dollars --gasoline was cheaper in REAL TERMS in 1956 ***Something mentioned in textbook only:*** --it is crucial to acknowledge that future dollars could have a different value than today's dollars --if prices have risen while her money was in the bank, each dollar now buys less than it did a year ago --the interest rate that measures the change in dollar amount is called the nominal in- terest rate and the interest rate corrected for inflation is called the real interest rate REAL INTEREST RATE=NOMINAL INTEREST RATE-INFLATION RATE The Size of the US Economy $18.4 Trillion Putting it into perspective... --NYS economy is as large as the economy of all of Brazil --Cali economy as large as France's entire economy --only China rivals the US China's GDP is about equal to the US GDP --HOWEVER, China utilities 4x as many people as the USE -this means that the United States is 4x more productive than workers in China


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