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McGill University
Economics (Arts)
ECON 227
Christopher Ragan

Module 6 Lecture 1 November-22-12 4:08 PM -GDP: Gross domestic product -Real GDP: growing at about 3%/year (Q is growing) -From graph: small number of big negatives=recessions -Is GDP the same as "well being"? NO -Production is the same as income -Value of products produced=GDP -Production generates income -GDP measures the value of market based transactions but not things like clean air, clean water, forests, getting along with coworkers/boss, -Recessionary gap: Not everyone fully employed (not where we are now). Currently we are about 1% below potential output. -Potential output cannot be accurately measured. It is a hypothetical concept. It is an estimate based on certain assumptions resulting in slightly different estimates. -GDP not an estimate. Pretty accurate, un-contentious. -Output gap: Real GDP-Potential GDP -Labour force: #people employed and #people looking for a job -Unemployment: -Unemployment will NEVER be 0 (people leave labour force) -Fairly volatile (rises and falls a lot) -In a recession, it's not that every one takes a 3% cut in income, for example, but 95% don't take any cut and the other 5% take the rest. -Productivity: The use of this word is not enjoyed. Measure of output (GDP) per unit of input. -Productivity growth: Not a sexy thing. Means working better, smarter, new skills. Over a long period of time. -Productivity: GDP per work effort (work effort can be per worker or per hour worked) -Price Level: Lecture 2 November-28-12 1:11 PM Intro to Macro -Price level: a measure of the average price of things in the economy. Price levels use average consumption baskets amongst consumers. Ex: set at 100 in 2002. The numbers are unit free and meaningless, what has meaning is how the level changes over time. "The price of the basket of goods has increased by 6 times from 1960 to 2010, with a smooth increasing but an increasing rate of change" (example TRUE statement). -Rate of change=rate of inflation -Rate of inflation of CPI is the rate of change of the CPI from one year to the next. -Inflation rates amongst developed countries (Canada, US, Britain) will be similar. -Average inflation is about 2% per year. -Why is inflation a problem? If all prices are rising and all wages are rising at the same rate it would not be such a problem. This does not happen for everyone, though. Often wages increase less than inflation, meaning in real terms (purchasing power) their income is actually falling. High inflation often becomes unstable (and unpredictable causing a major source of uncertainty in economic studies). -Real VS Nominal interest rates: Nominal=monetary value. Real=Purchasing power (Nominal interest rate value-rate of inflation). As a lender you want purchase power, and borrowers want lower real interest rates. -Exchange rate: How much CDN $'s it takes to purchase one US $. -Commodities (imports and exports) affect the value of the CDN dollar. -Is it good or bad for Canada to have a strong Canadian dollar? When the CDN is at par (strong), CDN exporters are unhappy. When the CDN $ is weak (high) the exporters are happy but the importers are unhappy. -Endogenous variable DO NOT CHANGE -Don’t say PRICES CHANGE (can say price ceilings or price floors but NO PRICE CHANGES) -Value of expenditure would add up to the value of production. -Non-durable good: example fruits and veggies -semi-durable good: Cellphone -Durable good: Cars -Investment: The output today for production tomorrow. -Consumption: 60% +/- a few % -Sum of domestic consumption: (Not imported stuff)=GDP (G+C+I+NX)=aggregate demand. The amount of stuff demanded by groups for Canadian goods. -NX: Net Exports=Exports-imports. (roughly 0%) -C: roughly 60% -I: roughly 20% (flow of investments every year) -G: roughly 20% (Not government spending it's government purchases) -The gap between the output (GDP) and potential output is called the output gap. This drives inflationary pressures. -Where we are now: output is below potential output by about a % or so (underemployment, excess supply, less inflation). Short run VS long run macro -What drives potential output? (Long run) -Labour force growth from population growth (about 1% per year) and a higher labour force participation rate (68%) but expected to decline over the next 20-30 year to about 61% due to baby boomers. -Capital accumulation: The investment done every year (roughly 20%of GDP) is the accumulation of stuff (building capital equipment like buildings, machines). This stuff accumula
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