Introduction to Macroeconomics: Math App - Lecture 001

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University of Toronto Scarborough
Economics for Management Studies
Iris Au

7 January 2013 CHAPTER 20: NATIONAL INCOME SUPPLEMENTARY A WHAT IS MACROECONOMICS While microeconomics is about a specific market, macroeconomics is about the economy as a whole, the big picture (IE: the aggregates). In macroeconomics it is not simply a matter of adding things up, because the dynamics are different, so we need a different way than microeconomics to look at aggregate behaviour. There is a different way in calculating supply and demand curves than compared to microeconomics. In macroeconomics, we are interested in issues of national income, unemployment rate, inflation rate, and the exchange rate, etc. The diagram shows that the GDP in Canada rises. This implies that in the past 50 years our country can produce more goods and services than before. When there is a decrease in GDP we refer to this as a recession (early 80s, 90s, 2008, and 2009). The unemployment rates have fluctuated quite a bit. When the unemployment rate is high it implies that jobs are difficult to find, the people seeking cannot get a job. The inflation rate, like the unemployment rate, has fluctuated a lot. In recent years, the inflation rate has been low and stable; this is because the bank of Canada has a 2% inflation target. What causes inflation rate to fluctuate is due to the central bank. How high the inflation rate our country has depends on how much money our central bank wants to print. NATIONAL INCOME [GDP] We want to measure output because it measures the country’s economic activity. There is a positive relationship between income and standard of living (IE: Kind of goods and services produced, levels of production). A simple way to measure standard of living and allows us to compare it to other countries. Aggregated output is referred to as Gross Domestic Product (GDP) which is the total value of goods and services produced in the economy during a given period. There are 3 ways to measure GDP:  Expenditure approach (most commonly used) – what we spend  Income approach (most commonly used) – what we make  Value added approach It does not matter which approach you use as long as you are calculating it properly (they all give the same answer). THE EXPENDITURE APPROACH The expenditure approach, sometime called gross domestic expenditure (GDE), sums up the expenditure needed to purchase the final output produced during a given period. Total expenditure is the sum of 4 major categories:  Consumption (C) – spending by households on goods and services (IE: Money spent on Boxing Day shopping). It is the final product and will not be used in the production of other goods and services  Investment (I) – spending on goods that are not for present consumption. We are talking about real and physical investments, not financial. It refers to the build up the stock of capital of the country (IE: Buying shares of Royal Bank, for the buyer, you are undertaking financial investment, but this investment does not count as investment in this case because it only implies you are the owner of Royal Bank and does not add to the physical stock). In macroeconomic we look at what the output set aside for the building up of capital stock. There are 3 types of investment: o Business Fixed Investment – the purchases of capital equipments, machinery and production plants by the firms o Residential Investment – the building of new houses (IE: We as households contribute to this by buying a new houses) o Inventory Investment – the change in the quantity of goods that firms hold in storage,
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