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Lecture

Econ 140 review.docx

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Department
Economics
Course Code
EC140
Professor
Laura Allan

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Econ 120 Chapter 20  Define GDP an explain why GDP equals aggregate expenditure and aggregate income  Explain how statistics Canada measures GDP and real GDP  Describe how real GDP Is used and explain its limitations as a measure of economic well being GDP defined  GDP or gross domestic products is the market of all final goods and services produced in a country in a given time period o This definition has four parts  Market value  Final goods and services  Produced within a country  In a given time period  Market value o GDP is a market value- goods and services are valued at their market prices o To add apple and oranges, computers and popcorn, we add the market values so we have a total value of output in dollars  Final good and services o GDP is the value of the final goods and services produced o A final good (or service) is an item bought by its final user during a specified time period The Circular Flow Diagram  Households o Own the factors of productions, sell/rent them to firms for income o Buy and consume g&s  Firms o Buy/hire factors of production, use them GDP and the circular flow of expenditure and income  Total income of everyone in the economy  Total expenditure on the economy’s output of goods and services  For the economy as a whole, income equals expenditure, because every dollar of expenditure by a buyer is a dollar of income for the seller Approaches to measure GDP 1. The expenditure approach 2. The income approach The expenditure approach  Measures GDP as the sum of Consumption expenditure (c), Investment (I), Government purchases of goods and services (G), and net exports (NX) Consumption Expenditures (C)  Total spending by households on goods and services  Buying and selling houses are not included in this category. The expenditure approach Gross investment expenditures (I)  Total spending on goods that will be used in the future to produce more goods. Includes spending on o Capital equipment o Structures (factories, office buildings, houses) o Inventories (goods produced but not yet sold) Government Purchases (G)  All the goods and services purchased by local, provincial and federal governments Net Exports (NX)  NX= exports-imports  Exports represent foreign spending on domestically produced goods and services  Imports are the portions of C, I and G that are spend on goods and service produced abroad The Income Approach  The income approach measures GDP by summing the incomes that firms pay households for the factors of production they hire Types of Incomes 1. Compensation of employees 2. Net interest 3. Rental income 4. Corporate profits 5. Proprietors income a. the sum of theses five income components is net domestic income/product (NDP) at factor cost Two adjustments must be made to get GDP 1. Indirect taxes minus subsidies (NIBT) are added to NDP 2. Depreciation is added to NDP 3. SO…NDP+NIBT+DEPRECIATION=GDP Nominal GDP and Real GDP  Real GDP is the value of final goods and service produced in a given year when valued at the prices of a reference base year  Currently, the reference base year is 2002 and we describe real GDP as measured in 2002 Dollars.  Nominal GDP is the value of goods and service that prevailed in that same year Statistics Canada uses a measure of real GDP called chained dollar Real GDP  Three steps are needed to calculate this measure o Value production in the prices of adjacent years o Find the average of two percentage changes o Link(chain) to the reference year The uses and limitations of real GDP  To compare the standard of living over time  To compare the standard of living across countries The standard of Living over time  Real GDP per person is real GDP divided by the population  Real GDP per persons tells us the value of goods and services that the average person can enjoy  By using real GDP, we remove any influence that rising prices and a rising cost of living might have had on our comparison Long term Trend  A handy way of comparing real GDP per person over time is to express it as a ratio of some reference year  For example in 1969, real GDP per person was 19000 and in 2010, it was 38,000  So real GDP per person in 2010 was double its 1969 level Two features of our expanding living standards are  The growth of potential GDP per person  Fluctuations of real GDP around potential GDP  The value of real GDP when all the economies labour capital land, and the entrepreneurial ability are fully employed I called potential GDP Lucas wedge is the dollar value of the accumulated gap between what real GDP would have been if the 1960s growth rate had persisted and what real GDP per person turned out to be Real GDP fluctuations- business cycle A business cycle is a periodic but irregular up and down movement of total production and other measures of economic activity Every cycle has two phases 1. Expansion 2. Recession Amd two turning points 1. Peak 2. Trough Expansion is a period during which real GDP increases- from a trough to a peak Recession is a period during which real GDP decreases-its growth ate is negative for at least two successive quarters The standards of living across countries  Two problems arise in suing real GDP to compare living standards across countries 1. The real GDP of one country must be converted into the same currency units as the real GDP of the other country 2. The goods and services in both countries must be valued at the same prices Real GDP measures the value f goods and services that are bought in markets Some of the factors that influence the standard of living that are not part of GDP ARE  Household production  Underground economic activity  Health and life expectancy  Leisure time  Environmental quality  Political freedom and social justice Ch 21 Employment and unemployment Unemployment results in  Lost incomes and production  Lost human capital The loss of income is devastating fro those who bear it. Unemployment benefits create a safety net but don’t fully replace lost wages, and not everyone receives benefits. Prolonged unemployment permanently damages a person’s job prospect by destroying human capital Labour Force Survey  Every month, statistics Canada conducts a Labour Force Survey I that it asks 54,000 households. o The population is divided into two groups 1. The working age population- the number of people aged 15 years and older who re not in institutional care 2. People too young to work (under 15 years of age) or in institutional care The working-age population is divided into two groups:  People in the labour force  People not in the labour force  The labour force is the sum of employed and employed workers To be counted as unemployed, a person must be in one of the following three categories: 1. Without work but has made specific efforts to find a job within the previous four weeks 2. Waiting to be called back to a job from which he or she has been laid off 3. Waiting to start a new job within four weeks Four labour market indicators  The unemployment rate  Involuntary part-time rate  The labour force participation rate  The employment to population ratio The unemployment rate is the percentage of the labour force that is unemployed The unemployment rate is (Number of people unemployed divided by labour force) x 100 the involuntary part time rate  The involuntary part time rate is the percentage of the labour force who work part time but want full-time jobs  The involuntary part time rate is o (number of involuntary part time workers divided by labour force) x The labour force participation rate  the labour force participation rate is the percentage of the working-age population who are members of the labour force  the labour force participation rate is (labour force divided by working age population) x 100 The employment to population ratio  The employment to population ratio is the percentage of the working age population who hate jobs  The employment to population ratio is (employment divided working age population) x 100 Other definitions of unemployment  The purpose of the unemployment rate is to measure the underutilization of labour resources  Stats Canada believes that the unemployment rate gives a correct measure  But the official measure is an imperfect measure because it excludes o Marginally attached workers o Part time workers who want full-time jobs Marginally attached worker is a person who currently is neither working nor looking for work but has indicated that he or she wants and is available for a job and has looked for work sometime in the recent past. Discouraged worker: is a marginally attached worker who has stopped looking for a job because of repeated failure to find one Part time workers who arent full time jobs  Many part time workers want to work part time, but some part time workers would like full time jobs that can’t find them  In the official stats, these workers are called economic part ime workers and they are partly unemployed Most costly unemployment  All unemployment is costly, but the most costly is long term unemployment that results from job loss Unemployment can be classified into three types:  Frictional unemployment  Structural unemployment  Cyclical unemployment Frictional unemployment:  is unemployment that arises from normal labour market turnover.  The creation and destruction of jobs requires that unemployed workers search for new jobs  Increases in the number of people entering and reentering the labour force and increases in unemployment benefits raise frictional unemployment  Frictional unemployment is a permanent and healthy phenomenon of a growing economy Structural unemployment  Is unemployment created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations or jobs  Lasts longer than frictional unemployment Cyclical unemployment  Is the higher than normal unemployment at a business cycle trough and lower than normal unemployment at a business cycle peak  A worker laid off because the economy is in a recession and is then rehired when the expansion begins experiences cycle unemployment Natural unemployment  Natural unemployment is the employment that arises form frictions and structural change when there is no cyclical unemployment  Natural unemployment is all frictional and structural unemployment  The natural unemployment rate is natural unemployemtn as a perecentage of labour force Full employment  is defined as the situation in which the unemployment rate equals the n
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