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Lecture 3

ECO102H1 Lecture Notes - Lecture 3: Real Interest Rate, Inventory Investment, Indirect Tax


Department
Economics
Course Code
ECO102H1
Professor
James Pesando
Lecture
3

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GDP: Market value = price x quantity (only final goods counted)
Intro to Macroeconomics
Three approaches (GDP)
1. Production approach(value added)
Value added= payments to factors of production =( revenue - cost of
inputs or intermediate goods)
2. Expenditure approach
Y= C+ I + G + NX( measuring National Income)
Services
Consumption: (including newly constructed housing )
1. Inventory investment (market value)
2. Business fixed investment ( capital stock [manufacturing
equipment]
3. Residential investment ( building of new house )
Excludes buying of stocks, bonds ; include depreciation of
assets
Investment: not for present consumption ; expenditures on capital goods ;
residential housing
Government : exclude transfer payments& interest payments
Net Exports ( Export- Import )
Add up the amount of spending by purchasers of final goods
3. Income approach
Income generate by production( wages, interest payment)
* Factor incomes
* Net domestic income= 1) Wages and salaries( labor) + 2) Interest ( on
capital loans & bank deposits) +3) Business profits ( dividends & retained
earnings)
*Non-factor payments
* Indirect taxes (PST& GST) or subsidies
* Depreciation (part of gross profit )
+ corporate profit
+ rent+ incorporate profit
+ interest
NDI = wages+salaries+labor
GDP=NDY + indirect tax less subsidy + Depreciation
Corporate profit = Corporate tax + Retained earning + Dividend
Real vs. Nominal GDP
*Nominal : current prices to current production (both price and output change)
*Real : constant base-year prices and current production ( change because
output changes )
GDP deflator (use current production)1.
Two measures of inflation
𝐏𝐜𝐮𝐫𝐫𝐞𝐧𝐭(𝐱(𝐐𝐜𝐮𝐫𝐫𝐞𝐧𝐭(
𝐏(𝐛𝐚𝐬𝐞𝐲𝐞𝐚𝐫(𝐱(𝐐(𝐜𝐮𝐫𝐫𝐞𝐧𝐭
CPI ( fixed baskets of goods& consumed by Canadians) Include imports
both use base year output
1.
= Nominal GDP( current)/ Real GDP (base year) x 100
- Costs of a basket of goods relative to cost of the same basket in the base year
𝐏𝐜𝐮𝐫𝐫𝐞𝐧𝐭(𝐱(𝐐(𝐛𝐚𝐬𝐞𝐲𝐞𝐚𝐫
𝐏𝐜𝐮𝐫𝐫𝐞𝐧𝐭(𝐱(𝐐𝐛𝐚𝐬𝐞𝐲𝐞𝐚𝐫
- Value in current prices/ value in base year x 100
Other Macro Variables
1. Unemployment Rate
U = Number of people unemployed x100
Number of People in the labor force
2. Nominal interest rate
3. Real interest rate } affect investment and consumption decisions
Foreign currency worth less
®
Appreciation: when the value of the exchange rate falls
Foreign currency worth more
®
Depreciation: when the value of the exchange rate rises
4. Exchange rate
Intro'to'Macro
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