ECON 295 Lecture Notes - Canadian Dollar, Money Supply, Factor Cost

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Class Notes (1) 4/27/2012 1:54:00 PM
LECTURE 1 12/01/12
Output and Income
Production of output generates income
To measure total output in dollars, we add up the values of the many different goods produced.
You produce Hockey sticks, Hot dogs, and Halter tops. You can‟t just add up these items to find your
output. But you can add up the dollar-worth of all these products.
Aggregate level of income
Results in the nominal national income
o Sum of all production in one year GDP
o Canadian GDP: $ 1.6 Trillion
o Quadrupled in the last 40 years
In a typical year, the GDP value goes up on average 5% per year.
Q goes up more than P (3% and 2% respectively)
We‟re concerned with the level of activity: Q
How productivity is increasing, How many people we‟re hiring, etc.
With base-period prices, we get real national income
When the P goes up, you know the productivity is going up in [real] terms
Recession defined as a period where GDP actually falls; “negative growth”
E.g -3% in 2009
Macroeconomists analyze…
Long-term growth
Short-run fluctuations
LECTURE 2 17/01/12
Real GDP fluctuates around a rising trend:
The trend shows long run economic growth
The short run fluctuations show the business cycle
Potential output is what the economy could produce if all resources were employed at their normal levels of
“Full Employment Output”
The output gap measures the difference between
output and
Output Gap = Y Y* Y* is Potential Output, Y is Actual Output
o When Y < Y* … there is a recessionary gap
o When Y > Y*… there is an inflationary gap
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Only way to produce more GDP than potential is to produce over capacity (over time drives
up wages)
Estimates of Potential tend to be debatable because they are based on models.
Average annual rate of Canadian real GDP growth over the past 4 decades has been about +3%
A very deep recession has an annual growth of about -3%
Employment: number of workers (>15) who hold jobs
Unemployment: number who are not employed but are actively looking for work
Labor Force: # employed + # unemployed
Unemployment Rate = ___ Number of People Unemployed___
Number of People in the Labour Force
Even when Y = Y*, some unemployment exists…
Gap between Labour Force and Employment is Unemployment
Rather volatile
Unemployment Rate when Y = Y* is called the natural rate of unemployment (NAIRU)
NAIRU: unemployment existing at potential output
Estimated at below 7% now
Some unemployment is desirable as it reflects the time required for workers and firms to “find” each other
so that good matches are made.
Some unemployment is however associated with human hardship, especially for those individuals with skills
that are not in high demand by firms.
Productivity: measure of output per unit of input
GDP per worker
GDP per hour of work
Increases in productivity are probably the single largest determinant of LR increases in material living
standards (GDP per person; average income)
Real GDP per worker is measured in thousands of dollars
Inflation and the Price Level
Price Level: average level of all prices in the economy
Consumer Price Index
o Based on the price of a typical “consumption basket”, relative to the price in some
base year
o Rate of change represents rate of Inflation
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o Alone is not meaningful. You need two points in time and a difference for it to be
representative of Inflation.
o CPI = Sum of Pt*Q0
Sum of P0*Q1
Inflation: rate at which the price level is changing
Rate of change of prices
In Canada today: 3%
o Bank of Canada aims for 2%
People on fixed income are slowly losing purchasing power because inflation increases but
salary doesn‟t
Inflation generates a lot of uncertainty for the economy
Interest Rates
The interest rate is the price of “credit”, and the flow of credit is crucial to firms and households in a
modern economy.
Nominal Interest Rate: rate expressed in money terms
Real Interest Rate: rate expressed in terms of purchasing power
Burden of borrowing depends on the real interest rate
International Economy
Why do we trade? Because we want stuff we can‟t produce.
Imports are the things we want. In order to get stuff, we need to sell stuff. Exports are the things
we do so that we can afford imports.
Foreign Exchange: foreign currencies or claims on foreign currencies
Exchange Rate: number of Canadian dollars required to purchase one unit of foreign currency
Number of Canadian dollars it takes to buy one American dollar
A depreciation of the Canadian dollar means that it is worth
on the foreign-exchange market.
a Rise in the exchange rate
Today, 1.01 CAD for 1 USD
When CAD is low in value (takes many to buy USD), less purchases in US.
Balance of Payments: accounts that record all payments made in international transactions goods,
services, assets.
Trade balance
Current accounts balance
Capital account balance
For Canada, exports and imports are both very large roughly 35% of GDP but the trade balance is
usually small.
LECTURE 3 19/01/2012
National Output and Value Added
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