Thursday, September 26, 2013
• Price level
• Inflation rate
• Price index
• Market basket
• Consumer price index
• Differences between cpi and gdp delfator
Modern economies tend to exhibit inflation, a general rise in prices
Complication: not all prices rise at the same rate.
We need a single number called a price index that measures the overall price level
The inflation rate is the growth rate of the price level
We measure the inflation rate by the growth rate of same price index
We have seen one price index already: the GDP deflator
GDP deflator= nominal gdp/real gdp x 100
= cost of this years production set this years price/ cost of this yeas production
set at base years price
1. Always equals 100 in the base year
2. Weights are based on Canada's production
3. Weights change as production changes
Another price index is the consumer price index (CDI)
CPI= 100 x cost of __________ in current year prices/ cost of ____________ in base year
prices Where the market basket is a fixed list of goods and services constructed to approximate the
purchase of a typical household
1. Always 100 in base year
2. Based on canada's consumption
3. Weights are fixed
Thursday, October 3, 2013
First, a clarification
Y/pop= real gdp per person
=y/L =real gdp per worker(productivity
X L/pop =proportion of population that works
We will generally assume that our propduction function F has two important properties:
1. Constant returns to scale
F(bL,bK,bH,bN)= bf(C,K,H,N) for any b > 0
1. The production function exhibits positive marginal product, but diminishing marginal
product in each factor of production (keeping the ithers fixed).
Cobb- douglas example
Y=L= AK^a L^1-a/L= AK^aL^-a= A(K/L)^a
If k and l go up at the same rate, K/L will be constant
More generally, if Y/L = A(K/L) ^a
1. It is easier for poor economies to grow rapidly than it is for rich countries. 2. High population growth makes productivity growth more difficult.
Sources of productivity growth
Capital investment: production and/or purchase of capital goods.
Requires that resources are used for investment rather than consumption. Y= C+I+G+NX
Benefit: higher future income
Cost: lower current consumption
Subject to diminishing returns, so
• Increased savings leads to temporary increases in productivity growth, and permanent
increase in the level of productivity but not permanent increases in growth.
Forms of capital investment
3 basic forms
• Domestic Domestic Domestic Productivity up wages
investment savings consumption up profits up
• Foreign Foreign None Productivity up wages
direct savings up profits to investors
• Foreign Foreign none Productivity up wages
portfolio savings up profits to investors
Back to growth
Typical estimate: 1 year in school => 10% increase in a workers productivity or wage
Cost of one year in school : opportunity cost
• Foregone wages • Tuition
• Government subsidy
There may also be externalities to human capital accumulation. Those externalities are the
primary argument for government subsidy of education.
Health and nutrition can be very important in poor countries or for poor people.
Consists of the stock of ideas, designs, and methods.
Once created, technology can be shared at no cost. Economists say it is non-rival. That is why
we don’t divide by L
Governments have a significant role to play
• The private sector will invest in developing new technologies only when they are
• When technologies are excludible, they will get shared too little
• When technologies are not excludible, they will not receive enough investment.
So technological progress requires
• Intellectual property law that balances need for investment incentives with need for
sharing of ideas once created.
• Government can also invest directly in research
Property rights and political stability
Growth through K, H, or A requires investment. Requires that someone forgoes current
consumption to get more income in the future.
This is greatly affected by
• Probability of expropriation by criminals or government.
• Contract enforcement
• Stability of regulations
• Stability of government itself
Government effectiveness in providing public goods is also important.
• Inward versus outward policies
Tuesday, October 15, 2013 11:31 AM
A model of the market for loanable funds
Deficits and debt
Chapter 8 is about investment.
First, some accounting
Let's assume we have a closed economy (NX=0) . Then Y=C + I + G
Let T= total tax revenue net of transfer payments and interest payments on government debt
Is defined as income of households minus consumption and taxes
Sp=Y - T - C
Public savings is defined as taxes less government purchases
Spu= T - G
Total savings is just
S= Sp + Spu
The fundamental relationship between savings and investment is very simple (S=I). But the
process by which savings becomes investment is complex and depends on financial institutions.
Financial institutions exist to solve a simple problem :
1. Savers use their savings to purchase assets. Assets include cash, bank deposits,
stocks, bonds, houses, businesses, etc. 2. Savers would like their assets to have
i. High returns
ii. Low risk
iii. High liquidity
iv. Low management cost
Unfortunately most real assets are illiquid, high risk, and cost a lot to manage
Financial institutions address this problem by creating financial assets, which are contractual
claims on real assets.
• Separation of ownership and management => reduced management cost
• Breaking assets into smaller pieces > increased liquidity
• Transparent accounting rules ----------- ^^
• Diversification and limited liability > reduced risk
Creating and trading financial assets is a very large industry. Any small increase in liquidity or
decrease in risk in a market is extremely valuable.
Financial markets are institutions throngs which savers can directly provide funds to borrowers.
Examples are stock and bond markets.
Bond= tradable promise to make a particular sequence of payments.
Stock= a tradable claim to partial ownership of a firm.
Financial intermediaries are institutions through which savers indirectly provide funds to
The market for loanable funds
We will assume that:
• There is a single financial market
• All barrowers take loans out from this market all savers make loans to this market
• There is a common interest rate
Supply of loanable funds
Quantity supplied of loanable funds = S
S = Spu + Sp
We will assume Spu= T-G is fixed
Private savings is chosen by households. They have income and choose how much to spend on • Current consumption
• Savings (S) or future consumption
If I save $1 today and the interest rate is r, I get $(I=R) in extra consumption next year
If r ^ the benefit of savings ^ = S^
Demand for loanable funds\the quantity demanded of loanable funds = I
We can think of I being chosen by firms who face various business opportunities. Suppose each
• Starts today
• Requires a $1 investment
• Pays back $(I+R) in one year, where R varies across projects
Tuesday, October 22, 2013
Main employment statistics come from the labor force survey an ongoing monthly survey of
about 50000 households
These statistics cover the civilian non-institutional adult population
Employed: spent some time in previous week working for pay
Unemployed: on temporary layoff or actively searching for work
Not in labor force: everyone else
The labor force is defined as employed + unemployed
Some standard calculations
Unemployment rate = unemployed/labor force
In our example
Unemp rate = 1.52million/18.37 million = 8.3%
Labour forces participation rate = labour force/pop
= 18.37/27.31 = 67.3%
What does unemployment measure?
We use the unemployment rate as a measure of how difficult it is to find a job. It has some
• Excludes discouraged workers
• Excludes informal work
• Ignores under employment
• Does not distinguish between short-term and long-term unemployment. Long-term
unemployment seems to be much worse.
Determinants of unemployment
Economists think of un employment as being determined in a labour market. In the labour
market, labour is sold by workers to firms at price called the wage. We make our usual
• all LABOUR is the same
• Competitive market
Unemployment occurs when workers are willing to sell labour at the market wage but are unable
to do so.
Unemployment doesn’t exist in our basic model of labour markets.
Unemployment surplus of labour
3 categories of unemployment
1. Frictional unemployment occurs when it takes workers and firms time to find each other.
Most short-term unemployment is frictional. Frictional unemployment is not necessarily a
2. Cyclical unemployment occurs when the wage is above the equilibrium level, and
something temporarily prevents it from adjusting.
3. Structural unemployment occurs when there is a permanent excess supply of labour,
and something permanently prevents the wage from adjusting.
Macroeconomists have a concept called the natural rate of unemployment.
Natural rate=structural + frictional We cannot directly measure the types of unemployment, so our measurement of the natural rate
is just a guess or estimate.
Sources of structural unemployment
1. Minimum wage
3. Efficiency wages
4. Employment insurance
Govts often have laws imposing a minimum wage. Firms are not allowed to pay a lower wage
Do minimum wage laws actually have a big impact on unemployment?
FUCK NO YOU STUPID BITCH
They are too low to affect most workers.
Workers and firms in many industries negotiate wage individually.
In some industries, workers engage in collective bargaining through labour unions.
A union is like a monopoly supplier of labour. It will generally get higher wages than would be
observed in a competitive market.
Firms that choose to pay higher wages than they have to are said to pay efficiency wages.
Why would you do dis?
• Health and nutrition
• Reducing turnover
• Incentives to work hard
• (worker quality)
Chapter 10 Thursday, October 24, 2013
What is money?
Assets vary in liquidity
Liquidity of asset is ease of turning asset into useable stuff (cash)
Money is any asset that can be directly exchanged for goods and services
• Checking acct
• Balances in other accts
Commodity money: when an asset used as money is valued on its own
Fiat money: when it is not.
Banks n shit
Tuesday, October 29, 2013
The bank of Canada
Canada's central bank:
• Sole issuer of Canadian currency
• Main provider of banking services to Canada's commercial banks and to the government
• Is the entity responsible for monetary policy in Canada
The Bank can 'create' money either by
• Printing and issuing currency
• Crediting the accounts of commercial banks The monetary base or stock of "high-powered money" is defined as M0= (outstanding currency)
+ (commercial bank deposits with the bank of Canada)
Recall that the money supply is
M= (currency outstanding) + (deposits in commercial banks)
Even M1+ is much larger than M0
The ratio M/M0 is known as the money multiplier. It is quire a bit larger than one because of
fractional reserve banking. Banks only hold a small fraction of their deposits in reserves
Reserve ratio = reserves/deposits
They loan out or invest the rest.
The reserve ratio is closely related to the money multiplier
Let C:currency D=Deposits R=Reserves r=reserve ratio R/D c=currency-deposits ratio = C/D
Then money multiplier = M/M0 = C+D/C+R x (1/D)/(1/D)