PPF: Production Possibilities
indicates Potential GDP
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Tuesday, January 26th, 2010.
Microeconomics: focus on individual firms, households
Macroeconomics: focus on entire economy
Bank of Canada forecasts, for 1st half of 2007:
x Output will grow by 2.5%
x Inflation will equal 1.0%
1. Why does output fluctuate?
(ex. Weak US economy, in near term, will reduce demand for Canadian exports)
2. Why is output growth important?
(ex. If output growth falls sharply, unemployment will rise)
Imports: IM (Text)
(1) Short-term fluctuations in output and employment
Output measured by real Gross Domestic Product (GDP)
(2) Inflation (percentage change in average level of prices)
(3) Economic growth (expansion RIHFRQRP\¶VFDSDFLW\WRSURGXFHJRRGVDQGVHUYLFHVDV
Gross Domestic Product (GDP)
1. GDP: the market value of all final goods and services produced within a country in a
given period of time, usually a year
2. Total expenditures = total incomes earned
2.1 Example: John pays Joan $50 to now his lawn
Expenditure (by John) = $50
Income earned (by Joan) = $50
2.2 Implications: GDP can be measured either by adding expenditures or by adding
GDP Expenditure Approach
+ Investment (I)
+ Government (G)
+ Exports (X)
- Imports (M)
GDP X ± M = Net Exports (NX)
1. Expenditures on intermediate goods, to avoid double counting
Example: 0HQ¶VVXLWDILQDOJRod, is included. Wool used in suit, an intermediate good,
is not included.
2. Expenditures on used (ie. Previously produced) goods, which contributed to GDP in
Example: Expenditure on Chevrolet produced in 1998 is included in GDP for 1998.
Expenditure on 1992 Ford is not included in GDP for 1998.
3. Transfer payments by government (social insurance payments, unemployment insurances
benefits), since are not expenditures for goods or services.