MGEA06H3 Lecture 1: Intro to Macro: Lecture 1

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University of Toronto Scarborough
Economics for Management Studies
Iris Au

WEEK 1: CHAPTER 6/7 - GDP Macro is the big picture, study of economy as whole. Focus on: ➔ Interactions of different sectors in econ ➔ Strong policy focus NOTE: Total Spending (TS) on final goods/service = Consumer Spending (CS) + Investment Spending (I) + Government Purchase of goods/services (G) + Exports (E) - Imports (I) TS = GDP = C + I + G + (Ex - Im) THE NATIONAL ACCOUNT GDP: total value of all final goods/services produced in economy during given year ➔ Only includes goods/services sold to end users, ex) intermediate goods not counted ➔ Looks at value of products produced within econ 3 ways to MEASURE GDP: 1) Value-added approach 2) Expenditure approach 3) Income approach VALUE-ADDED APPROACH: focuses on the value added of each producer in econ VA = Value of Sales - Value of Purchases of Intermediate Goods/Services EX) An economy consists of 3 firms only – Canadian Ore, Inc. (CO), Canadian Steel, Inc. (CS), and Canadian Motors, Inc. (CM). Canadian Ore Canadian Steel Canadian Motors (ore – sold to (steel – sold to (car – sold to CS) CM) consumers) Sales $4200 $9000 $21500 Intermediate goods $0 $4200 $9000 Wages $2000 $3700 $10000 Interest payments $1000 $600 $1000 Rent $200 $300 $500 Profit $1000 $200 $1000 · Using the value-added approach to find the GDP. VA of Canadian Ore = 4200 - 0 = $4200 VA of Canadian Steel = 9000 - 4200 = $4800 VA of Canadian Motors = 21500 - 9000 = $12500 GDP = 4200 + 4800 + 12500 = $21,500 EXPENDITURE APPROACH: adds up total expenditure (spending) on domestically produced final goods/services by households, firms, governments, and foreign buyers. Sum of: 1) Consumption (C): spending by households on goods/services 2) Investment (I): spending on goods not for present consumption, building up of physical capital stock. *ALWAYS refers to physical capital stock. 3 types: a) Business fixed - purchase of capital equip, machinery & production plants. b) Residential - building of new houses. *Preowned don’t count c) Inventory - change in quantity of goods that firm hold in storage, including materials/supplies, work in process, and finished goods. 3) Government Spending (G): spending on goods/services by different levels of government, exclusive of gov transfer payments (EI, insurance, benefits, etc;) 4) Net Exports (NX = X - IM): C, I, & G may include imported goods (made in other countries), and these imports shouldn’t be in country’s GDP; thus must be subtracted. **NX is only item that can be negative, C, I, G CANNOT be NEGATIVE. Expenditure Approach: GDP = C + I + G + NX or C + I + G + (X - IM) EX) 1) Referring to example from Value-added approach, GDP = C = $21500 - There is no I, G, or NX, only C INCOME APPROACH: looks at income earned from production of goods/services. 2 sources: 1) Factor Incomes: earned by factors of production or inputs such as wages, salaries, interest, rent, business profits. 2) Non-Factor Incomes: difference between the prices paid for final goods/services & the amount received by production factors before income taxes are removed. Comes in form of net indirect taxes (sales tax - production subsidies), capital depreciation. Difference between the $$ we paid for the product & the amount that we pay to production factor. EX) Using same chart as before. Wages = 2000 + 3700 + 10000 = $15,700 Interest payments = 1000 + 600 + 1000 = $2,600 Rent = 200 + 300 + 500 = $1,000 Profit = 1000 + 200 + 1000 = $2,200 Income Approach, GDP = $21,500 **GDP MUST BE THE SAME… why? One person’s spending is another person’s income. So if you add up everyone’s spending it must equal total income. What GDP Tells Us: ➔ Most commonly used measure of size of economy, just an estimate never a perfect measure because it doesn’t include: - Inputs & intermediate goods/services, we only count the final product (value of intermediate good is already taken into consideration when firm prices product). - Used goods, since NO NEW production is happening production already taken into consideration for. - Financial assets such as bonds, stocks, mutual funds since no production involved. - Foreign-produced goods/services since not produced in our country. - Household production/Volunteer work since won’t go through the market. - Underground econ & illegal transactions. - Harm done on environment, pollution. GDP vs GNP GDP: sum of final goods/services produced within a country. “Made in Canada” GNP: sum of final goods/services produced by country’s residents. “Made by
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