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.