MGEA06H3 Lecture Notes - Open Market Operation, Gdp Deflator, Bank Reserves

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Published on 12 Apr 2013
School
UTSC
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Week 1
To measure GDP:
1) Expenditure approach
- GDE = C + I + G+ NX
- I = Business fixed/residential/inventory
2) Income approach
- Factor/non-factor payments
3) Value-added approach
- Output/revenue intermediate
Issues related to national income
1) Excludes NNP = GNP depreciation/CCA
2) GDP - within country GNP by a countrys residents
GNP = GDP + Net Factor Income earned abroad -> (factor income Canadians outside-
factor income foreigners inside)
3) Does GDP really measure the countrys output?
- GDP only sold through the market
- Excludes: Pollution, illegal, volunteer, etc
4) Nominal GDP VS Real GDP
Nominal today = Pn x Qn
Real constant = Pb x Qn
5) GDP Deflator = Nominal/ Real (PnQn)/(PbQn)
6) Correcting for price changes GDP b x (Price Index a/ Price Index b)
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Week 2
Inflation period - % change in price
Cost of bundle quantity doesnt change
1) GDP Deflator bundle produced within Canada change current year bundle
(Understate)
2) CPI by a typical Canadian households base year bundle (Overstate)
GDP Deflator changes when prices of goods bought by firms or government changes
CPI changes when prices of imported goods changes
Issues with inflation
1) Reduces purchasing power of money
2) Reduces the real value of anything
3) Redistribution of wealth
4) Inefficiency Solution: Indexation (increases the monthly payment by the rate of inflation
rate)
Unemployment is NEVER 0! Frictions
1) Industries expand/contrast
2) Some do well and some dont
3) People move in and out of Labor Force
Natural UE (NRU)
- Always positive
- Always someone who quits and actively look for a new job
- When the UE % increases, understates
1) Underemployment workers have jobs but their skills are not fully utilized
2) Discouraged workers those who want a job but after unsuccessful searches,
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have given up looking for one. (NILF)
Therefore, interpret the UE % with caution!
Week 3
Consumption (C ) is Positively related to DI
Investment (I) is inversely related to r
When r increases, cost of borrowing increases, which in turn makes I less attractive and
decreases the level of I
Fiscal policy government intervention to help or shock the economy
Firms notices inventories decreases unexpectedly. Firms increases Production, Y increases.
Continues until Y gets closer to the equilibrium
Paradox of Thrift households save -> NS doesnt change -> income decreases
Fallacy of composition what holds true for an individual doesnt hold true for everyone, the
economy. Consumption decreases savings increases but NS doesnt change
Week 5
Labour market dynamic (in and out of LF)
Frictional UE (move between jobs)
Structural UE (mismatch, not fit for the job)
Frictions some induestries expand but some contrast
Structural deficit bad! when Y= Y(FE)
Cyclical deficit this is natural! BB=0 when Y= Y(FE). Government runs occasional budget
deficit when Y < Y(FE)
Counter-Cyclical Fiscal Policy running exansionary and contractionary
Fiscal policy is for big events. Its hard to forecast!
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Document Summary

Gde = c + i + g+ nx. Issues related to national income: excludes nnp = gnp depreciation/cca, gdp - within country gnp by a country"s residents. Gdp only sold through the market. Excludes: pollution, illegal, volunteer, etc: nominal gdp vs real gdp. Real constant = pb x qn: gdp deflator = nominal/ real (pnqn)/(pbqn, correcting for price changes gdp b x (price index a/ price index b) Cost of bundle quantity doesn"t change: gdp deflator bundle produced within canada change current year bundle (understate, cpi by a typical canadian households base year bundle (overstate) Gdp deflator changes when prices of goods bought by firms or government changes. Cpi changes when prices of imported goods changes. Issues with inflation: reduces purchasing power of money, reduces the real value of anything, redistribution of wealth. Inefficiency solution: indexation (increases the monthly payment by the rate of inflation rate)

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