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Economics 102 Notes.docx

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University of Alberta
Andrew Wong

Clinton RichardsonHomehttpwwwapliacomEconomics 102Introduction to MacroeconomicsCourse OutlineChapter 1Ten Principles of EconomicsChapter 2Thinking Like an EconomistChapter 3Interdependence and the Gains from TradeChapter 4The Market Forces of Supply and DemandChapter 5Measuring a Nations IncomeChapter 6Measuring the Cost of LivingChapter 7Production and GrowthChapter 8Saving Investment and the Financial SystemChapter 9Unemployment and Its Natural Rate Chapter 10The Monetary System Chapter 11Money Growth and InflationChapter 12OpenEconomy Macroeconomics Basic ConceptsChapter 13A Macroeconomic Theory of the Small Open EconomyChapter 14Aggregate Demand and Aggregate SupplyChapter 15The Influence of Monetary and Fiscal Policy on Aggregate DemandChapter 16The ShortRun Tradeoff between Inflation andUnemploymentChapter 17Five Debates over Macroeconomic PolicyCHAPTER 5MEASURING A NATIONS INCOMELecture NotesPage 1 of 90Clinton RichardsonHomehttpwwwapliacomMacroeconomicsshorter historyJohn Maynard Keynesmacroeconomics1Measurements2Policytake the economy from where we are to where we want to go better performanceFiscal and monetary policies3Modelshow you know policy is going to workAusteritya saving economy or act of selfdenial especially in respect of something regarded as a luxury cut spending or raise taxesMicro vs MacroMicroeconomicsthe study of how individual households and firms make decisions interact with one another in marketsMacroeconomicsthe study of the economy as a wholeoStudy of macroeconomics with the countrys total income and expenditureInputProductionOutputIncome and ExpenditureGDPmeasures total income of everyone in the countryGDP also measures total expenditure on the economys output of goods and servicesFor the economy as a whole income equals expenditurebecause every dollar a buyer spends is a dollar of income for the sellerThe Expenditure ApproachG7worlds largest industrialized developed countriesThe CircularFlow DiagramSimple depiction of the macro economyIllustrates GDP as spending revenue factor payments and incomePreliminariesoFactors of production are inputs like labour land capital and natural resourcesoFactor Payments are payments to the factors of production ex Wages rentWhat this Diagram OmitsThe governmentcollects taxes buys good and servicesThe financial systemmatches savers supply of funds with borrowers demand for loansThe foreign sectortrades goods and services financial assets and currencies with the countrys residentsConsumption CFor renters consumption includes rent paymentsFor homeowners consumption includes the imputed rental value of the house but not the purchase price or mortgage paymentsInvestment IIs total spending on goods that will be used in the future to produce more goodsIncludes spending onoCapital equipment ex Machines toolsPage 2 of 90Clinton RichardsonHomehttpwwwapliacomoStructures factories office buildings housesoInventories goods produced but not yet soldInvestment does not mean the purchase of financial assets like stocks and bondsGovernment Purchases GInclude spending on goods and services by local territorial provincial and federal governments22It includes the salaries of government workers and spending on public worksG excludes transfer payments such as a Canadian pension plan benefit to an elderly or employment insurance benefitsNet Exports NXNXexportsimportsExports represent foreign spending on the economys goods and servicesImports are the portions of Consumption Investment and Government Purchases that are spent on goods and services produced abroadGDP is all the components added upoYCIGNXReal versus Nominal GDPInflation can distort economic variables like GDP so we have two versions of GDP one is corrected for inflation the other is notNominal GDP values output using current prices It is not corrected for inflationReal GDP values output using the prices of a base year Real GDP is corrected for inflationGDPyear2GDPyear1growthratex100GDPyear1The GDP DeflatorThe GDP deflator is a measure of the overall level of pricesnominalGDPGDPdeflatorx100 RealGDPOne way to measure the economys inflation rate is to compute the percentage increase in the GDP deflator from one year to the nextGDP and Economic WellBeingReal GDP per capita is the main indicator of the average persons standard of livingBut GDP is not a perfect measure of wellbeingRobert Kennedy issued a very eloquent yet harsh criticism of GDPGDP Does Not ValueThe quality of the environmentLeisure timeNonmarket activity such as the child care a parent provides his or her child at homeAn equitable distribution of incomeThen Why Do We Care About GDPHaving a large GDP enables a country to afford better schools a cleaner environment health carePage 3 of 90
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