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Lecture 27

Lecture 27-Macroeconomics Overview

5 Pages
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Department
Economics
Course Code
ECO102H1
Professor
Jack Carr

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WW&[
Private Goods
PPF: Production Possibilities
Frontier
indicates Potential GDP
Public
Goods
PPF
WW&[EWW&
< = >
Economic Growth
Tuesday, January 26th, 2010.
Macroeconomics: Overview
Microeconomics: focus on individual firms, households
Macroeconomics: focus on entire economy
Motivation
Bank of Canada forecasts, for 1st half of 2007:
x Output will grow by 2.5%
x Inflation will equal 1.0%
Question:
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)
+RZGRHFRQRPLVWVPHDVXUH³RXWSXW´"
Imports: IM (Text)
IN (Lectures)
Issues:
(1) Short-term fluctuations in output and employment
WKH³EXVLQHVVF\FOH´
Output measured by real Gross Domestic Product (GDP)
(2) Inflation (percentage change in average level of prices)
(3) Economic growth (expansion RIHFRQRP\¶VFDSDFLW\WRSURGXFHJRRGVDQGVHUYLFHVDV
evidenced by
www.notesolution.com
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
incomes earned
GDP Expenditure Approach
Consumption (C)
+ Investment (I)
+ Government (G)
+ Exports (X)
- Imports (M)
______
GDP X ± M = Net Exports (NX)
Exclude:
1. Expenditures on intermediate goods, to avoid double counting
Example: 0HQ¶VVXLWDILQDOJRod, 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
previous years.
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.
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Description
WW&[ Private Goods PPF: Production Possibilities Frontier indicates Potential GDP Public Goods PPF WW&[EWW& < = > Economic Growth Tuesday, January 26th, 2010. Macroeconomics: Overview Microeconomics: focus on individual firms, households Macroeconomics: focus on entire economy Motivation Bank of Canada forecasts, for 1st half of 2007: x Output will grow by 2.5% x Inflation will equal 1.0% Question: 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) +RZGRHFRQRPLVWVPHDVXUH³RXWSXW´" Imports: IM (Text) IN (Lectures) Issues: (1) Short-term fluctuations in output and employment WKH³EXVLQHVVF\FOH´ Output measured by real Gross Domestic Product (GDP) (2) Inflation (percentage change in average level of prices) (3) Economic growth (expansion RIHFRQRP\¶VFDSDFLW\WRSURGXFHJRRGVDQGVHUYLFHVDVevidenced by www.notesolution.com 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 incomes earned GDP Expenditure Approach Consumption (C) + Investment (I) + Government (G) + Exports (X) - Imports (M) ______ GDP X ± M = Net Exports (NX) Exclude: 1. Expenditures on intermediate goods, to avoid double counting Example: 0HQ¶VVXLWDILQDOJRod, 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 previous years. 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. www.notesolution.com GDP: Factor Incomes Approach Wages, salaries + *Corporate profits + Interest and miscellaneous investment income + )DUPHU¶VLQFRPH + *Income from non-farm unincorporated business + Indirect taxes less subsidies + Depreciation ____________________________ GDP GHQRWHV³EXVLQHVVLQFRPH´ Observations 1. Because of indirect (sales) taxes, consumers may pay more than producers receive, so must adjust for indirect taxes or subsidies 2. Because investment spending (expenditure approach) includes depreciation, while corporate profits do not, depreciation must be added. Indirect Taxes: Example John pays Joan $50 to mow lawn, plus GST at 7% Note: GSP is Indirect Tax Expenditure (by John) $53.50 ($50.00 + $3.50) Income Earned (by Joan) $50.00 For two approaches to yield the same result, must add Indirect Taxes to factor incomes (income earned by Joan) Real versus Nominal GDP Nominal GDP: use current prices WRYDOXHHFRQRP\¶VSURGXFWLRQRIJRRGVDQGVHUYLFHV www.notesolution.com Real GDP: uses constant base-year prices WRYDOXHWKHHFRQRP\¶s production of good and services 1. Nominal GDP can rise due to: (1) Higher output (2) Higher prices 2. Read GDP rises only if output increases Real verses Nominal GDP: Example Hot Dogs Hamburgers Year Price Quantity Price Quantity 1 $1 100 $2 50 2 2 150 3 100 3 3 200 4 150 Year Calculating Nominal GDP _______________________________________________________________ 1 ($1 per hot dog x 100) + ($2 per hamburger x 50) = $200 2 ($2 per hot dog x 150) + ($3 per hamburger x 100) = $600 3 ($3 per hot dog x 200) + ($4 per hamburger x 150) = $1,200 Year Calculating Real GDP (Year 1 Base) _______________________________________________________________ 1 ($1 per hot dog x 100) + ($2 per hamburger x 50) = $200 2 ($1 per hot god x 150) + ($2 per hamburger x 100) = $350 3 ($1 per hot dog x 200) + ($2 per hamburger x 150) = $500 GDP deflator = Nominal GDP *100 Real GDP Year 1 $200/$200 x 100 = 100 Year 2 $600/$350 x 100 = 171 (+ 71 %) Year 3 $1,200/$500 x 100 = 240 (+140 %) GDP deflator: measures the price level using prices of produced goods www.notesolution.com Determining Real GDP (using GDP deflator) GDP deflator = Nominal GDP *100 Real GDP Real GDP = Nominal GDP * 100 GDP deflator Example: Nominal GDP = 600 GDP deflator = 171 Real GDP = 600/171 * 100 = 350 Implications % ¨Nominal GDP A [market value of output in current prices] ¨5HDO*'3>UHDO[email protected]¨*'3'HIODWRU>[email protected] A³Approximately HTXDO´ Real GDP and Economic Well-Being Real per capita GDP indicates income (and expenditure) Country with high per capita GDP can afford better education, healthy care, environmental protection, etc. Limitations: (examples) 1. Ignores distribution of income 2. Ignores household production (only market activities are included) 3. Ignores quality of the environment 4. Ignores leisure time 5. Ignores underground economy www.notesolution.comTuesday, January 26 , 2010. Macroeconomics: Overview Microeconomics: focus on individual firms, households Macroeconomics: focus on entire economy Motivation st Bank of Canada forecasts, for 1 half of 2007: N Output will grow by 2.5% N Inflation will equal 1.0% Question: 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) +4Z40.4342L89820,8:704:95:9 Imports: IM (Text) IN (Lectures) Issues: (1) Short-term fluctuations in output and employment 9K0-:8L3088..O0 Output measured by real Gross Domestic Product (GDP) (2) Inflation (percentage change in average level of prices) (3) Economic growth (expansion 410.43428.,5,.L994574:.0J448,3807;L.08,8 evidenced by 99[-99 < = > Public Economic Growth Goods PPF: Production Possibilities Frontier indicates Potential GDP 99[ PPF Private Goods www.notesolution.com
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