National Income and Components

Real GDP:

Real GDP per Worker:

National Income Components as Shares of Potential GDP

Investment as a Share of Potential GDP:

Consumption as a Share of Potential GDP:

Gross Exports as a Share of Potential GDP:

Imports as a Share of Potential GDP:

Net Exports as a Share of Potential GDP:


Price Level:

Inflation Rate:

Interest and Exchange Rates

Nominal Short-Term Safe Rate:

Long-Term Real Safe Rate:

**Long-Term Real Risky Rate:

Real Exchange Rate (Value of Foreign Goods/Currency):

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Notes on Figures

Real GDP

  • Real GDP: labor productivity times employment
  • The principal aspect of this graph is long-run growth: the American economy today is eight times the size of the economy of 1950
    • 2.5 times as many workers
    • 3.1 times output per worker
  • The secondary aspect is the business cycle
  • The tertiary aspect is speedup and slowdown in the growth trend


Real GDP per Worker

  • Real GDP per worker (in 2009 dollars) was $45,000 per year in 1950 and is $115,000 today
  • Note the productivity growth speedup of the mid-1990s
  • And note the productivity growth collapse since 2000


Investment Spending as a Share of Potential GDP

  • The major driver of the business cycle is fluctuating investment spending
  • This is investment spending as a share of potential GDP
  • In our simple macro model, I/Y☆
  • These waves are the business cycles
  • Note the anemic investment recovery of 2009-present


Personal Consumption Expenditures as a Share of Potential GDP

  • In the language of our simple macro model, this is C/Y☆
  • When Y is low relative to Y☆, C/☆ is low as well
  • C/Y☆ was low in the business cycle troughs of 2009, 1992, 1982, 1975, 1970, 1960, etc.
  • The medium-term rise in C/Y☆ as the U.S. becomes a save-and-invest-less country


Gross Exports

  • Demand for U.S. exports has risen massively since 1950: from 5% to 13% of national income and product
  • When the value of foreign currency/bonds is high, exports boom
  • When the value of foreign currency/goods is low, exports are depressed


Gross Imports

  • Imports have risen from 4% to 16% of national income and product since 1950
  • “Globalization” and “hyperglobalization”
    • The coming of the container ship
    • The tripling of world oil prices in the 1970s a big moment
    • As is the great expansion of world trade with the coming of the internet
      • Value chains
      • The China shock


The Trade Balance

  • Net exports are a balancing item: you have to add them to C+I+G to get total spending on domestically-produced goods
  • The high interest rates of the 1980s that drove the value of foreign currency up led to a large negative swing in net exports
  • So did the optimism about America of the dot-com boom, and the so-called “strong dollar policy”
  • Most of all, however, the medium-term shift in the trade balance is due to the savings shortfall
    • Largely induced by large government deficits


Short-Term Safe Nominal Interest Rate: Treasury Bills

  • The interest rate the Federal Reserve can nail: the short-term safe nominal interest rate
  • Note the regular cycles as the Federal Reserve tries to “lean against the wind”
  • Note the impact of the inflationary wave of the 1970s on the Treasury bill rate the Fed thought was appropriate
  • Note the extended time at the zero lower bound in the 2010s


Long-Term Safe Real Interest Rate

  • Subtract the current inflation rate and add on the term premium—the difference between the 3-mo. T-bill and the 10-yr. T-bond rate—and get what current and expected future Federal Reserve policy have on incentives for investment
  • Note the:
    • Substantial tightening of the early 1970s
    • Loosening of the mid 1960s
    • Volcker disinflation of the early 1980s
    • The Greenspan preemption of the mid 1990s
    • The great easing of policy at the end of the 2000s


Long-Term Risky Real Interest Rate

  • But the interest rate that actually matters for the determination of investment is the long-term real risky interest rate
  • The safe rate plus the risk premium assigned by financial markets
  • See the sharp tightenings coming from Federal Reserve policy and the financial system in:
    • the late 2000s,
    • the early 1980s, and
    • the early 1970s


Real Exchange Rate

  • Dollar pegged to other currencies under the Bretton Woods system until the early 1970s
  • Since then, three major dollar cycles
  • Exports drop (and manufacturing hammered) when the value of foreign currency/goods falls
    • Reagan deficits
    • Internet/China
    • “Taper tantrum”
    • Trumpenomics


Price Level

  • Headline and core
  • Cumulative and compounded 7.5-fold inflation since 1950
    • Consumer prices today 2.5 times what they were in 1984
    • Consumer prices in 1950 1/3 what they were in 1984
  • 2.5% per year


Inflation Rate

  • Consumer Price Index
    • Not PCE…
  • “Headline” and “core”
    • Current core a better forecast of future headline than current headline is
  • Korean War
  • Mid-50s to late 60s
  • The 70s inflation
  • “Opportunistic” disinflation
  • The era of the zero lower bound