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MACROECONOMICS-WINTER TERM
NEW OFFICE HOURS: Monday 12:30-1:30 Thursday 1-2:20 Tutorial groups begin: week of January 24---more next class-
check web page.
EXAM
December exam grades on WebCT View exams if you want: Office hours
starting NEXT week. Long Answers-Read questions Q2 Hair Salons: Question said: “each salon is different” “a salon that
raises its price will lose some customers but not all” “Free entry and exit”
Development of Macro
Adam Smith: Wealth of Nations-1776 Great Depression: 1929-1937 John Maynard Keynes (CANES) General Theory of Employment
Interest and Money- 1936 Key macro variables are aggregate
output--Gross Domestic Product (GDP), unemployment and inflation.
Circular flow see text
Macro Issues and Variables
Unemployment Fluctuations (Cycles) in GDP (Output) Inflation G Budget Deficits Balance of Payments –International u=U/LF Pdot= %∆P inflation rate GDP = ∑Pi*Qi----$ value of all G&S
Link to PPFGDP = Pcomp*#comp + Pcars*#cars
MACROECONOMICS
Macroeconomics: The study of the economy in the aggregate.---ADDED UP
We begin our study of macroeconomics with the country’s total income and expenditure.
GROSS DOMESTIC PRODUCT
Tutorial groups
See web page-schedule and agenda Groups begin week of January 24 Each group will meet FOUR (4) times
in the Winter term. The 8 week time period does NOT include reading week
Most room numbers have changed Count best 2/3
Groups B01 TUES 1:35 JAN 25 Southam 309 B02 TUES 1:35 FEB 1 313 Southam B03 TUES 1:35 JAN 25 311 Southam B04 THURS 12:35 FEB 3 313 Southam B05 THURS 12:35 JAN 27 311 Southam B06 THURS 12:35 FEB 3 TB431 B07 THURS 4:35 JAN 27 309 Southam B08 THURS 4:35 FEB 3 313 Southam B09 THURS 1:35 JAN 27 TB210 B10 THURS 1:35 FEB 3 TB447 B11 MON 9:35 JAN 24 ME3190
Reading week
J24 ODD1 J31 EVEN 1 F7 ODD2 F14 EVEN 2 F21 RW_________ F28 ODD3 M7 EVEN 3 ETC FOR 4
Measuring a Nation’s IncomeMeasuring a Nation’s Income
What is Gross Domestic Product (GDP)?
How is GDP related to a nation’s total income and spending?
What are the components of GDP?
How is GDP corrected for inflation?
Does GDP measure society’s well-being?
Income and Expenditure
Gross Domestic Product (GDP) measures two things at once:– total income of everyone in the economy. – total expenditure on the economy’s output of
goods & services.
For the economy as a whole,
income equals expenditureincome equals expenditure, because
every dollar of expenditure by a buyer
is a dollar of income for the seller.
Gross Domestic Product (GDP) Is…
…the market value of all final goods & services
produced within a country
in a given period of time.
Goods are valued at their market prices, so: GDP measures all goods using the same
units (e.g., dollars in Canada, Euros--), rather than “adding apples to oranges.”
Things that don’t have a market value are excluded, e.g., housework you do for yourself. (Some bias for poor countries)
Gross Domestic Product (GDP) Is…
the market value of all final goods & services
produced within a country in a given period
of time.
Final goods are intended for the end user. Intermediate goods are used as components
or ingredients in the production of other goods. GDP only includes final goods, as they already
embody the value of ALL the intermediate goods used in their production.
COUNT FINAL OUTPUTS
Wheat steel Flour plastic BREAD CARS
POINT: To avoid double-counting
Two Methods of Computing An Economy’s Income
Expenditure Approach:– Sum the total expenditures by
households (from the top portion of the circular flow).
Resource Cost or Income Approach:– Sum the total wages and profit paid by
firms for resources (from the bottom portion of the circular flow).
A measure of the income and expenditures of an economy is Gross Domestic Product (GDP).
Gross Domestic Product measures:– an economy’s total expenditure on newly
produced goods and services and the total income earned from the production of these goods and services.
The Economy’s Income and Expenditure
Principles of Macroeconomics: Ch 10 First Canadian Edition
Important Features of GDP
Output is valued at market-determined prices.
Output is measured in dollar terms. GDP records only the output of final goods
and services. We want to “count” production only once.
$ GDP represents the amount of money one would need to purchase a year’s worth of the economy’s production of all final goods and services.
Principles of Macroeconomics:
The Components of GDP
GDP (Y) is the sum of:– Consumption (C)
– Investment (I)
– Government Purchases (G)
– Net Exports (NX)
Y = C + I + G + NXNX = X-M
Principles of Macroeconomics:
The Four Components of GDP
Consumption (C):– Is the spending by households on goods
and services e.g. buying clothing, food, movie tickets
Investment (I):– Is the purchases of capital equipment
and structures e.g. machinery, factory, houses, etc.NOT financial assets like stocks, bonds
Principles of Macroeconomics:
The Four Components of GDP Government Purchases (G):
– Includes spending on goods and services by local, provincial and federal governments (e.g. roads, police, etc.).
– Does not include transfer payments, because they are not made in exchange for currently produced goods or services.
Net Exports (NX): NX = X-M– Exports minus imports.
Principles of Macroeconomics: First Canadian Edition
Real versus Nominal GDP
GDP is the market value of the economy’s current production, referred to as Nominal GDP.
Real GDP measures any given year’s total output in “constant” prices.
An accurate view of the economy requires adjusting nominal to real GDP, using the GDP Price Deflator.
GDP and Economic Well-Being GDP Per Person tells us the income
and expenditure of the average person in the economy.– It is a good measure of the material well-
being of the economy as a whole.
– More Real GDP means we have a higher material standard of living by being able to consume more goods and services.
– It is NOT intended to be a measure of happiness or quality of life.
The GDP Deflator
The GDP deflator is a measure of the overall level of prices.
Definition: Index base 100 [YEAR 1]
GDP deflator = 100 x (nominal GDP/real GDP) One way to measure the economy’s inflation
rate is to compute the percentage increase in the GDP deflator from one year to the next.
Simple GDP deflator
Year cars P Y y 1 100 $10 $1000 $1000 2 110 $15 $1650 $1100
GDP deflator price index in year 2 is: Y2/y2*100 =1650/1100 =150 prices increased by 50%
Principles of Macroeconomics: Canadian Edition
GDP and Economic Well-Being Some factors and issues not in GDP
that lead to the “well-being” of the economy:– Factors that contribute to a good life
such as leisure.
– Factors that lead to a quality environment.
– The value of almost all activity that takes place outside of the markets, e.g. volunteer work and child-rearing.
Then Why Do We Care About GDP?
Having a large GDP enables a country to afford better schools, a cleaner environment, health care, etc.
Many indicators of the quality of life are positively correlated with GDP. For example…life expectancy…………literacy.
CHAPTER SUMMARY-5 Gross Domestic Product (GDP) measures a
country’s total income and expenditure. The four spending components of GDP
include: C, I, G, and NX. Nominal GDP is measured using current
prices. Real GDP is measured using the prices of a constant base year, and is corrected for inflation.
GDP [ per capita] is the main indicator of a country’s economic well-being, even though it is not perfect.
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