Lesson 1 Output Gap
Building the AS-AD Curve
- The level of Real GDP can be divided into four components: spending by households, spending by firms, spending by government, and spending on foreign goods. Y = C + I + G + NX
Building the AS-AD Curve
Output Gap The output gap is strongly, negatively correlated. u tilda = m y tilda + b In other words, increasing unemployment is related to a decreasing output gap.
Building the AS-AD Curve
Output Gap and Other Measures Crime over time in the US specifically seems to have no relationship to the Output Gap. Recession years don't mean more crime, boom years don't mean less.
Building the AS-AD Curve
Output and Other Measures Inequality over time in the US specifically seems to have no relationship to the Output Gap. Recession years don't mean more inequality, boom years don't mean less, with one noted exception (2020).
Building the AS-AD Curve
Output and Other Measures The output gap is not related to other social measures. - Crime c tilda = b + m y tilda
Building the AS-AD Curve
Output and Unemployment As with the output gap, the unemployment gap measures the deviation of the unemployment rate from the trend. Positive means higher than trend unemployment. Negative means lower than trend unemployment.
Building the AS-AD Curve
Output and Unemployment Frictional Unemployment- due to job search. Structural Unemployment- persistent mismatch of skills of workers and requirements of available jobs. Cyclical Unemployment- unemployment due to seasonal trends or business cycles.
Building the AS-AD Curve
Output and Unemployment If m > 0 then "positive correlation" between x and y. If m < 0 then "negative correlation" between x and y. y = mx + b We can quantify (measure the quantity or amount of something) the relationship between two variables.
Building the AS-AD Curve
Output and Unemployment Recall the old "slope" equation relating to x and y coordinates. y = b + mx If your slop coefficient, m, is greater than zero then y goes up as x goes up. If less than zero, then y goes down as x goes up. If zero, then y and x have no relationshp.
Building the AS-AD Curve
Output and Unemployment The NAIRU, or natural rate of unemployment, is the lowest level of unemployment possible without leading to inflation. - Considered the potential rate of unemployment if there is no structural or seasonal unemployment. - FRED tag NROU.
Building the AS-AD Curve
Output and Unemployment The unemployment Gap, u tilda, is the difference in the growth of unemployment, u, and the natural rate of unemployment (potential unemployment), u^P. u tilda = u - u^P.
Building the AS-AD Curve
Output and Unemployment There is a strong relationship between the output of an economy and the willingness and ability of workers to find jobs. This is called "Okun's Rule" after Arthur Okun.
Building the AS-AD Curve
Output and Unemployment Unemployment is the percentage of willing and able workers seeking a job but unable to find one. - "in the labor force" - Actively submitting resumes and interviewing in last three months. - U3 Unemployment - FRED tag UNRATE.
Building the AS-AD Curve
Output and Unemployment When we talk about the output gap, we are also talking about the job market. Our AS-AD model condenses a lot of information into one simple, two-dimensional graph.
Building the AS-AD Curve
The Output Gap - An aggregate price level can be measured as the ratio of Nominal to Real GDP. GDP Deflator Equation:
Building the AS-AD Curve
The Output Gap - Firm Consumption, I, of final goods and services has taken an increasing share of GDP over time.
Building the AS-AD Curve
The Output Gap - Focus on the growth rate, or y.
Building the AS-AD Curve
The Output Gap - Government Consumption, G, of final goods and services has been falling as a share of Real GDP.
Building the AS-AD Curve
The Output Gap - Gross Domestic Product is the market value of all final goods and services produced in a country in a given quarter. - Final goods and services are purchased for end-use consumption. - Intermediate goods and services are inputs for manufacture of final goods and services. Two parts for value: price and quantity
Building the AS-AD Curve
The Output Gap - Household Consumption, C, of final goods and services is the largest component of GDP.
Building the AS-AD Curve
The Output Gap - Note the scale as "Billions of Chained 2012 Dollars." To adjust for inflation Real GDP is calculated in constant 2012 prices. - Nominal GDP would be GDP in "Current" prices of the given year (not adjusted for inflation); 2008 prices with 2008 goods and services.
Building the AS-AD Curve
The Output Gap - Output is defined as the Real Gross Domestic Product, or the inflation adjusted value of all final production/expenditure within the borders of a country over a give timer period. - Need to construct the output gap as our horizontal axis for the Keynesian model. (y tilda)
Building the AS-AD Curve
The Output Gap - The value of exports less imports, NX, of final goods and services has been negative due to large expenditure on imports relative to the value of exports.
Building the AS-AD Curve
The Output Gap GDP Does Not Measure: 1. Non-Market transactions 2. Leisure 3. Illegal transactions 4. Crime and safety 5. Equality 6. Pollution
Building the AS-AD Curve
The Output Gap Note the scale as "Billions of Chained 2012 Dollars." To adjust for inflation Real GDP is calculated in constant 2012 prices.
Building the AS-AD Curve
The Output Gap Real Potential Output is defined as the Real Potential Gross Domestic Product, or the inflation adjusted value of Output if the economy were operating at full employment of all factors of production. FRED tag GDPPOT. The year over year growth of output is denoted at Y^p.
Building the AS-AD Curve
The Output Gap Real Potential Output is determined by full employment of all factors of production. - Labor, Physical Capital, Human Capital, Technology, Organizational Capital. Y^p = F(L, K, H, A, O)
Building the AS-AD Curve
The Output Gap The Output Gap is the difference between the growth of Real GDP and Potential Real GDP.
Building the AS-AD Curve
The Output Gap To wrap up: our first important macroeconomics indicator is the output gap, which is our horizontal axis variable for the AS-AD model we are constructing.
Building the AS-AD Curve
The Output Gap We want to compare the Real Potential Growth Rate to our observed Real GDP Growth Rate.
