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Macro Review ECON 1000D Class 11 Tuesday, April 1, 2014 Measuring National Income • GDP: value of all __________________ produced ____________ a country in a given period of time • Nominal GDP: ___________ prices and quantities • Real GDP: ________________ prices and quantities • GDP Deflator: index of ___________ level increases • GDP Deflator = A P R I L 2 0 1 3 E X AM: Computing GDP Suppose that Nova Scotia produces cheese and fish. In 2010, 20 units of cheese are sold at $5 each and 8 units of fish are sold at $50 each. In 2006, the base year, the price of cheese was $10 per unit, and the price of fish was $75 per unit. What can we conclude? a. Nominal GDP is $500, Real GDP is $800, and the GDP Deflator is 62.5 b. Nominal GDP is $500, Real GDP is $800, and the GDP Deflator is 160 c. Nominal GDP is $800, Real GDP is $500, and the GDP Deflator is 160 d. Nominal GDP is $800, Real GDP is $500, and the GDP Deflator is 62.5 Nominal GDP in 2010: Real GDP in 2010, using 2006 as the base year: GDP Deflator, 2010:  Answer: Shortcomings of GDP as a Measure of Well-being GDP neglects to measure: – _______________________ – _______________________ – _______________________ – _______________________ – _______________________ Consumer Price Index  overall cost of the G&S of a typical ___________________________________ Steps to calculate:  1. Determine the _______________: • ____________ consumers to find out the ________ of G&S the _____________ _________________ buys  set _______________ for goods  2. Find the ______________: for each good in the basket at each point in time  3. Compute the Basket’s _____________: at different times  4. Designate a _____________Year (benchmark) and compute the Index as: CPI = 3 Upward Biases • __________________ Bias – consumers substitute toward goods that become relatively less expensive over time (e.g., flatscreen vs. tube TVs) • _________________________ Change - improvements in the quality of goods in the basket increase the value of each dollar (e.g., cell phones more reliable connections) • Introduction of __________________ – increases variety allowing consumers to find products that more closely meet needs at lower cost (digital picture frames)  all lead CPI to _______________ increases in the cost of living Y/L Long-Run Growth Driven by ______________ Improvements:  average quantity of G&S produced from a _________________________  central determinant of a country’s living standard 4 Determinants of Productivity: ‒ ___________Capital Per Worker, K ‒ ___________ Capital per Worker, H ‒ _________________ per Worker, N ‒ _________________ Knowledge, A K/L © 2014 T. Joseph / Nelson Education Ltd. Do not distribute without permission. 2 Govt policy to raise productivity: 1. encourage _____________  increases _________________ - Since resources are scarce, producing more ________________ requires producing fewer __________________ goods. - Reducing _______________ = increasing _______________. This extra Saving funds the production of Investment goods. - Hence, a tradeoff between ________ and ________ Consumption. 2. promote R&D 3. encourage Foreign Investment 4. encourage Education and Training 5. establish Property Rights and Political Stability 6. promote Free Trade SAVING AND INVESTMENT IN THE NATIONAL INCOME ACCOUNTS  Assume a closed economy, i.e., no NX=0:  Subtract C and G from both sides of the equation:  Left side of equation: the economy’s National Saving, or just Saving (S) • total income in the economy after paying for Consumption and Government purchases  Substituting S = Y – C – G, the equation can be written as: Market for Loanable Funds Market for Loanable Funds  Financial markets coordinate the economy’s Saving and Investment Interest – _____________ – from people who have extra income Rate they want to save and lend, rather than use for their own present Consumption – An increase in the Interest Rate makes Saving more attractive, which increases the quantity of Loanable Funds supplied. – ________________ – those who wish to borrow to make Investments: – Firms - to pay for new equipment, factories, etc. – Households – to purchase new houses, cars, Loanable Funds etc. ‒ A fall in the ____________________ reduces the cost of borrowing, which increases the quantity of Loanable Funds demanded.  Real Interest Rate (the price of a loan) establishes equilibrium. © 2014 T. Joseph / Nelson Education Ltd. Do not distribute without permission. 3 Measuring Unemployment Labour Force Survey • each adult classified into 3 categories: - ______________ – most of previous week spent at a paid job - _________________ – person on temporary layoff, looking for a job, or waiting for the start date of a new job - _________________________ – person fits neither of these categories, e.g., not looking for work (e.g., discouraged workers), full-time student, homemaker, retiree, volunteer  difficult to distinguish between a person who is ______________ and _________ _________________________ – Discouraged Workers • would like to work, but have ______________ looking for jobs after an ________________________ • classified as “Not in the Labour Force” rather than “Unemployed”  not counted in Unemployment statistics Observed and Natural Unemployment Rates, 1966–2010 Why has the Natural Rate of Unemployment been _____creasing? ____________________Insurance  intended to ________________________ for those who find themselves Unemployed by temporarily providing an income • but also _________________ incentive to work - ____creased the Natural Rate of Unemployment Rise of _______________ • Workers in Unions (____siders) reap the benefits of collective bargaining, while workers not in the Union (______siders) bear some of the costs. – Union wages above equilibrium reduce Quantity of Labour Demanded and cause ________________________________. © 2014 T. Joseph / Nelson Education Ltd. Do not distribute without permission. 4 Theory of Liquidity Preference  Which assets should be considered part of the Money Supply? Obvious candidates: • _________________: paper bills and coins in the hands of the (non-bank) public • __________________: balances in bank accounts that depositors can access on demand by using a debit card or writing a cheque Less _________________: • Savings Accounts: take 1 days to withdraw + • Term Deposits: up to 5 years before cashable Bank of Canada’s Tools of (Domestic) Monetary Control 1. ___________________________ • BoC sells/buys govt bonds to/from public: - buying bonds ____creases Money Supply - selling bonds ____creases Money Supply • Foreign Exchange Market Operations BoC buys or sells foreign currencies - buying foreign currency (with Canadian currency) _____creases Money Supply - selling foreign currency ____creases Money Supply 2. Changing the ___________________ - decreasing bank rate ___creases quantity of reserves in the banking system, and therefore increases Money Supply - ____creasing bank rate reduces Money Supply 3. Adjusting ________________________ • Fractional Reserve Banking System - banks keep a fraction of Deposits as ________________ and use the rest to make ___________ - Reserve Ratio, R = fraction of Deposits banks hold as Reserves – _____creasing Reserve Ratio increases the Money Supply – _____creasing Reserve Ratio reduces Money Supply © 2014 T. Joseph / Nelson Education Ltd. Do not distribute without permission. 5 Quantity Theory of Money • Quantity Equation: ______________________ M = ___________________ V = ________________ P = ________________ Y = ________________  Empirically, V is usually ________________.  Y grows in the Long Run based on the rate of productivity increases.  Central Bank ‘chooses’ the Inflation Rate (growth of P) by setting growth of the Money Supply in excess of growth of Real GDP. – e.g., if Y grows by 3%, and the Central Bank is striving for 4% Inflation  ____________________________________. Closed Economy