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Lecture # 1 First Econ Class, for those who missed it.

Course Code
Joseph Dejuan

of 4
ECON 202
Joseph DeJuan
208 Hagey Hall 519-888-4567 ext 33549
Office hour: On ACE
Chapter 1 The Science of Macroeconomics
Macroeconomics, the study of the economy as whole, address many topical issues:
- why does the cost of living keep rising?
-why are millions of people unemployed even when the economy is booming?
-what causes recession?
Can the government do anything to combat recessions?
-what is the government budget deficit?
How does it affect the economy?
-why does the Canadian dollar appreciate?
Economic Models
… are simplified versions of the real world
- irrelevant details are stripped away
… are used to
- show relationships among variables
Example: Supply & Demand for pizza
Assumption: competitive market
Variables: Qd = quantity of pizza that buyers demand
Qs = quantity that producers supply
P = price of pizza
Y = aggregate income
Pf = price of flour (an input)
The demand equation: Qd = D(P,Y)
Shows that the quantity of pizza consumers demand is related to the price of pizza and aggregate
The supply equation: Qs = S(P, Pf)
Shows that the quantity of pizza producers supply is related to the price of pizza and price of flour
Market Equilibrium
Endogenous vs. exogenous variable
Endogenous variables are those variables that a model tries to explain (P, Q)
Exogenous variable are these variables that a model takes as given (Income)
Economists use different models to study different issues
(e.g. unemployment, inflation, long-run growth)
Prices: flexible vs. sticky
Market clearing: an assumption that prices are flexible
In the short run, many prices are sticky sluggish adjustment in response to changes in supply or
In the long run, prices are flexible, markets clear
Chapter 2 Macroeconomics
GDP (gross domestic product)
The value of all final goods and services produced within an economy in a given period of time
The Circular Flow
Value Added (income approach)
Definition: A firm’s value added is the value of its output
the value of the intermediate goods the firm used to produce that output
A farmer grows a bushel of wheat and sells it to a miller for $1.00
The miller turns the wheat into flour and sells it to a baker for $3.00
The baker uses the flour to make a loaf of bread and sells it to an engineer for $6.00
The engineer eats the bread
Value added: Farmers $1
Miller $2
Baker $3
$6, which is the same as
The expenditure components of GDP
Government spending
Net export = export import
Consumption (C) (comprises 2/3 of GDP)
Definition: The value of all goods and services bought by households
- durable goods
last a long time. E.g. cars, home appliances