Of the six key macroeconomic variables, we finished up looking at all of them in some degree of detail. We talked about:
- The stock market: We covered the major indices (DJIA and S&P 500), some of the differences between the two, including their constituents and the criteria used to add a company to each index. I posted earlier about this as well.
- The exchange rate: We talked about the relationship between two exchange rates and what happens when a currency appreciates/depreciates. We also talked about purchasing power, and how to calculate the real exchange rate.
- The price level: Specifically, the index used to measure the price level, or the Consumer Price Index (CPI). We created a mini-index and calculated the price level used to compare prices in one year versus another year.
- The real GDP: We created a mini- (fruits only!) economy and calculated the real and nominal GDPs for two years. Dividing the real and nominal GDP gives us the GDP deflator, which is another measure of inflation.
The two measures of inflation – the CPI and the GDP deflator – vary in that the CPI is a Laspeyres index, while the GDP deflator is a Paasche index. Each has its advantages, but they also have a few problems (substitution bias for the former, utility issues with the latter).
I also wanted to talk a little bit about the components of GDP, and I’ll touch it in (very) briefly in class on Thursday. I will try and discuss Okun’s Law in the discussion sections, but we’ll see if we have time. In the meantime, I encourage you to read that part of Chapter 2 on your own.