Note: Please use January 1960 to date as the period of observation for all analy

Question

Note: Please use January 1960 to date as the period of observation for all analysis, unless otherwise stated.

This week’s lesson will examine how economists define and measure Real GDP, the price level and the inflation rate - both of which constitute key variables that describe macroeconomic performance. As such, the overall quantity of production and the overall price level are used to monitor developments in the economy as a whole.

1. Plot the level of real GDP (FRED code: gdpc96). Then, plot the rate of economic growth as the percent change from a year ago of the GDPC1 index.

Describe how real GDP behaves in recessions, which are denoted in the FRED graph by vertical gray bars. If you registered on FRED (as suggested above), save the graph so that you can recall and update it easily when new observations become available.

Hint: To transform a level data to another form, i.e. a percent change from a year ago, scroll down to the dropdown link labeled as "Edit Data Series", to change the Units.

2. On a separate graph, plot nominal GDP (FRED code: GDP) by repeating step #1 in this section.
Based on the figure showing percent change from a year ago, what is special about the behavior of nominal GDP during the financial crisis of 2007-2009 compared to previous decades?

3. On a separate graph, plot the consumer price index (FRED code: CPIAUCSL). Then, plot the inflation rate by transforming the variable to percent change from a year ago.

4. Explain briefly what the consumer price index measures and how it is constructed

5. Economist and Policymakers monitor both the GDP deflator and the Consumer price Index to gauge how quickly prices are rising. These two statistics are typically the same but may diverge for a number of reasons. Briefly discuss the reasons for the divergence.

Explanation / Answer

The World Economic Forum’s System Initiative on Economic Growth and Social Inclusion has taken on this challenge with the release of the “Inclusive Growth and Development Report 2017.” Building on a beta version of a policy framework released in 2015, this Report provides a practical guide for policymakers and stakeholders seeking to build a strategy to capture greater synergy between economic growth and more broadly-based progress in living standards in their countries. In addition to the Report’s policy framework and metrics – which provide a comparative illustration of institutional strength and enabling environment conditions in 15 of the most relevant policy domains for inclusive growth – a new set of national key performance indicators are presented to help countries track progress. These have been compiled into a composite global index, the Inclusive Development Index, measuring the accumulated level as well as the most recent five-year trend of performance for the 109 countries for which such data is available. The former offers a more integrated and holistic picture of the state of economic development of countries than Gross Domestic Product per capita alone. The latter is useful for governments and stakeholders seeking to assess the effect of changes in policy and conditions within a typical political cycle. Together, the policy framework and benchmarking data are intended to provide countries with the practical tools needed to help turn the ambition of inclusive growth into a practical and measurable plan of action. At the same time, they yield several important conclusions for national policy and international economic cooperation, which the Report articulates in considerable depth

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