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Lecture

ECON 202 Lecture Notes - Gdp Deflator, Real Interest Rate, Nominal Interest Rate


Department
Economics
Course Code
ECON 202
Professor
Maryann Vaughan

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Chap 1-2 (from Sabrina) 1/17/2013 7:39:00 AM
1
The Focus of Macroeconomics
Macroeconomics focuses on the behavior of key macroeconomic
variables including:
o
???
Since the early 1990s, the inflation rate has been in the narrow
range of 1-3% per year
- consistent with the Bank of Canada target.
3. The unemployment rate the proportion of the labour force out of
work (Fig 1-3)
Canadian Historical Data on the UR
The UR is strangely countercyclical with GDP
o Rising in recessions and falling in expansions
Unemployment was highest in the 1930s
[during the Great Depression] and lowest in the 1940s [during
WWI]
Since 1945, there has been a gradual upward trend in
unemployment, but endence in recent years suggest this trend may
be easing.
4. The interest rate the cost of borrowing and return to saving
5. The (nominal) exchange rate the cost of one currency in terms of
another
Behavior of prices: tlekible (LR) & sticky (SR) D S (many not).
Market clearing (equilibrium)
(ch 7-8) OMIT
(ch 9-13)
Chap 2
(Jan. 10)
(S 6)
Some Rule for Calculating GDP

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

2
1. The importance of inventories. Since we want to measure production
in a given year, we add the value of unsold goods to inventories, and
include this value in the GDP calculation.
2. We add-up the many and varied goods and services by multiplying the
quantity by the market price.
3. Exclude intermediate goods. Count the value of final goods & services
only in the GDP calculation, otherwise, double-counting will occur.
4. If goods or services don’t have a price, use an imputed value
Ex. (1) imputed rent on owner-occupied housing
(2) government services are valued at cost
5. Excluded:
Used goods (b/c been included)
Home production
Underground economy (transaction that don’t go through market)
Services of durable goods
(S 7)
Investment (I) (net financial investment)
i.e. Domino Pizza buying a store
Notes: Investment the purchase of newly produced goods/services to add
to the capital stock.
Purchase made by businesses & firms
By convention, the purchase of new housing stock
The value of inventories
(S 16)
Government (All government levels)
Defn: Transfer Payments
Direct transfers of money from the government to individuals not in
exchange for production. (no production involved)
Net exports: NX = EX IM
GNP everything owned by Canada
GDP everything in Canada
(S 25)

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3
Real vs Nominal GDP
Nominal GDP output valued at current year prices
Nominal _GDP =Q2010
iP
2010
i
i
å
Nominal GDP measures the value of goods & services produced in
Canada
can’t compare nominal GDP annually
Real GDP output valued at constant (base year) prices
Real _GDP =Q2010
iP
2012
i
i
å
Real GDP measures the volume of goods & services produced in
Canada.
(s 30)
GDP Deflator (price index)
Defn: The GDP deflator measures the price of output relative to its level
in the base year.
The GDP deflator is a price index which measures the overall price level.
Calculation:
GDP _Deflator =Nominal _GDP
Real _GDP ´100
EX.
GDP _Deflator =
Q2010
iP
2010
i
i
å
Q2010
iP
2012
i
i
å´100
In this definition of the GDP Deflator, all the quantity terms will be the
same, reflecting only the relative change in prices.
Jan 15, 2013
(s 44)
CPI weights is fixed (csp SR) whereas GDP deflator rate is not.
(s 46)
Canada (0.5% - 1%)
Flexed weight (Laspeyres) CPI
Changing weight (Paasche) GDP deflator
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