Lecture # 1 First Econ Class, for those who missed it.
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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?
… 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
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
GDP = C+I+G+NX
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
$6, which is the same as
The expenditure components of GDP
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