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Topic 16 - Intro to Macroeconomics.pdf

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University of Toronto St. George
James Pesando

Topic 16: Macroeconomics: Introduction Jan 26 -31 st Outline: 1. Macroeconomics: Overview 2. GDP 2.1 Expenditure Approach 2.2 Factor Incomes Approach 3. Real Versus Nominal GDP 4. Real GDP and Economic Well-being 5. Consumer Price Index  Overview Microeconomics: focus on individual firms, households; Macroeconomics: focus on entire economy -- IMF: Projections of Real GDP (percentage increase) 2008 2009 2010 2011 Canada 0.4 -2.6 2.7 2.4 US -0.4 -2.5 2.7 2.4 China 9.6 8.7 10.0 9.7 Russia 5.6 -9.0 3.6 3.4 World 3.0 -0.8 3.9 4.3 Questions (mainly US): 1. Why the dramatic decline in 2009? 2. Why the improvement in 2010 and 2011? 3. In 2011 and 2011, will unemployment fall? (no; US needs at least 3% economic growth to absorb the increase of workers);  GDP – Gross Domestic Product Questions: How do economists measure “output”? Answers: GDP (Gross Domestic Product) -- measure of output and of incomes earned to produce output; -- Insight: 1. Production of output generates income; 2. National Product =(by definition) National Income; 2. Total expenditures on output = Total incomes earned to produce output; -- Measure using: Expenditure Approach; Factor Incomes Approach -- 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 income earned;  GDP: Expenditure Approach Consumption (C) + Investment (I) + Government (G) + Exports (X) - Imports (M/IM) *X-M = Net Exports (NX) GDP Exclude: 1. Expenditures on intermediate goods, to avoid double counting (e.g. suit VS wool used to produce suit); 2. Expenditures on used (i.e., previously produced) goods, which contributed to GDP in previous years. 3. Transfer payments by governments (social insurance payments, unemployment insurance benefits), since are not expenditures for goods or services.  GDP: Factor Incomes Approach Wages, salaries +Corporate profits (Business Profits) +Interest and miscellaneous investment income + Farmers' income (Business Profits) +Income from non-farm unincorporated business (Business Profits) +indirect taxes less subsidies +depreciation GDP Observations 1. Because of indirect (sales) taxes, consumers may pay more than producers receive, so must adjust for indirect taxes or subsidies. (e.g. John pays Joan $50 to mow lawn, plus GST 7% (GST is indirect tax); Expenditure (By John): $53.50 ($50,00 + $3.5) Income earned (by Joan): $50.00) 2. Because investment spending (expenditure approach) includes depreciation, while corporate profits do not, depreciation must be added  Real versus Nominal GDP Nominal GDP: uses current pri
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