Welcome to Macroeconomics.docx

Welcome to Macroeconomics: Economic goals:  Increase Canada's GDP  Decrease unemployment  Decrease inflation  No consistent deficit  Increase exports (have a positive balance in trade). Deficit means spends more than it receives. It leads to debt most of the time, plus we pay interest. Exports - Imports = Net Exports. If Net Exports > 0, then Exports > Imports. If Net Exports > 0, then Imports > Exports. Fiscal Policy: Responsibility of the government. Anything to do with taxes, and expenditures. Monetary Principle: Responsibility of the central bank. Anything to do with interest rates. (Carney). GDP: Gross Domestic Product. 1. GDP is the market value of all final goods and services produced in the economy within one year; it is always measured in monetary terms. Quantity x Price = Value 2. Only goods and services transacted through the market are included. we have 3 exclusions that have no records whatsoever. a) barter transactions are excluded because there are no records b) unpaid work, where no money has changed, is excluded. c) Illegal transactions, which are underground, are excluded. 3. Only Goods (G) and services (S) produced this year are included. we also have 3 exclusions because they are logical exclusions (left out to avoid repetitions). a) Re-sales are excluded. used books for instance. b) Intermediate goods are excluded. (these goods are used to produce something else, therefore we only acknowledge the final form). cotton to make shirts ex. c) purely financial transactions which involve only money exchanging are excluded. like welfare, student grants, etc... GDP is used for an international comparison of how we are doing, but it is not an adequate measure. 8 reasons are: 1. Barter transactions ignored 2. unpaid work ignored 3. underground transactions ignored 4. quality and composition of goods ignored 5. leisure is ignored 6. environmental costs ignored 7. GDP ignores population size: 8. per capita GDP ignores distribution of income. Per capita GDP: GDP/Population. better indicator of how the country is doing. We have 2 types of GDP: Nominal GDP: current Q x current P  ex: GDP 2009Q 2009x P2009 IF Nominal GDP increases that means, Q or P have increased.  Real GDP: current Q x Base year P ex: GDP 2010= Q 2010 P2009 Price remains constant at the base year, therefore we know if GDP increases, then quality has increased. Circular Flow: Let's assume we have: 1. we have no savings in the economy, so everything households make, are spent on goods n services. 2. closed economy. people sell what people produce, no imports nor exports. 3. no government, no one takes taxes from you. if only. C + I + G Households --------> Government Injection, then we have recession If the leakage < Injection, the economy grows and expands. if the producers are able to keep up with it, great, if not, it will lead to inflation, and prices will inflate. If Leakage = Injection, the economy is at equilibrium.. The theory of the leaky bucket! yay. GDP has two sides. the income side, and the expenditure side. we could calculate income from either side, but the expenditure is preferable. GDP from expenditure side: 1. Household Expenditures (C) 2. Business Expenditures (I) 3. Government Expenditures (G) 4. Foreigner's Expenditures (X-M) Net Export. GDP expenditure side: C + I + G + (X-M) GNP: Gross national product, product BY Canadians where the GDP is production IN Canada. GNP = GDP + Canadian income abroad - Foreigner's income in Canada GDP - depreciation = NDP (Net domestic product) NDP - Indirect taxes + subsidies = NI (national income) NI - (undistributed profits + social security contributions) + transfer payments from G = PI PI ( personal income received) - Direct taxes = DI (disposable income) At the disposable income, we consume or save. We have three macroeconomics instabilities: 1. Business cycle 2. Unemployment 3. Inflation 1. Fluctuations in business cycles. where the economy is never stable! we have four phases in the business cycle. a) Peak or Prosperity or BOOM! b) Recession c) Trough or Depression or BUST! d) Recovery. We identify recessions by doing quarterly GDP's. If its low on 2 consecutive quarters then we go into recession. 2. Unemployment Anyone who is over 15 and is currently looking for work, are considered unemployed. Population Labor age population under 15 Participation Rate: LF/LAP x 100% Labor force Dont want to work Employed Full time Labor Force: everybody over 15 who want to work. unempl