ECON 1BB3 Study Guide - Final Guide: Net Domestic Product, Aggregate Supply, Aggregate Demand
27 Apr 2018
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Chapter 5 ā Introduction to Macroeconomics
The National Economy
Macroeconomics focuses on the overall performance of the economy
Economy ā The structure which represents the economic activity in a region
Gross Domestic Product (GDP) ā Market value of all final goods and services produced in
a nation in a period
Gross domestic product is used to compare different economies at the same time or to
track an economy over a period.
Gross World Product ā Same as GDP but for the entire world
Flow Variable ā A measure of something over an interval of time
Stock Variable ā A measure of something at an instance in time
Understanding the economy will help economists improve it and so we have many theories
that help as understand it.
Economics Fluctuations and Growth
An economy generally has two phases:
Expansions ā The growth of an economy as reflected by rising in employment, income,
output, and other aggregate measures
Contraction ā The decline of an economy. A depression is a sharp contraction (lasts a
significant amount of time) while a recession is a minor contraction (last a couple of
months).
Generally, output has shown to be the best measure on how an economy is doing.
Production can increase by:
1. Increasing the amount and quality of resources
2. Improvements in technology
3. Improvements in the rules of the game (property rights, patent laws, legal system,
market practises)
Inflation ā An increase in the economies average price level
Because of seasonal fluctuations and random disturbances, the economy does not run
smoothly through its business cycles, so it is harder for economists to see how the economy
is doing in an instant in time.
Trends are generally noticed over a period of time.
Figure 1: Shows the hypothetical business cycles of a growing economy over a period of time.
However, there can be clear indicators of how the economy could do in the future:
Leading Economic Indicators ā Variables that predict a recession or recovery. Prediction
when a turning point will occur (consumer confidence, stock market prices, business
investments)
Coincidence Economic Indicators ā Variables that reflect peaks and troughs in economic
activity (employment, persona income, industrial production)
Lagging Economic Indicators ā Variables that follow/trail changes in economic activity
(interest rates, average duration of unemployment)
Aggregate Demand and Aggregate Supply
Aggregate means āa whole formed by combining several elementsā
Aggregate Output ā A composite measure of all final goods and services produced in an
economy during a given period; real GDP
Aggregate Demand ā Economyās price level (measure of average prices of all goods and
services relative to a base year) vs aggregate output demanded
Real Gross Domestic Product (Real GDP) ā The measure of an economies output
measured in dollars that have constant purchasing power (no consideration of inflation)
1. Shows economies price level changes over time
2. Used to figure out real GDP each year
Aggregate Curves
These curves are produced assuming resource prices, state of technology, and rules of the
game are constant
Aggregate Demand Curve ā Curve which represents the relationship of economyās price
level vs the real GDP demanded per period (sum of four economic decision makers)ā
This is an inverse relationship since consumers will spend/buy more when the price level
is low.
Aggregate Supply Curve ā Curve which represents relationship of economyās price level
vs the real GDP supplied per period
Real GDP supplied increases with price level since firms find it profitable to expand output
since product prices rise higher than costs of production.
Figure 2: Graph of aggregate demand vs aggregate supply in 2012 (Canada)
The equilibrium of the two graphs indicate where the two curves intersect. The economy
always wants to move towards this point.
Chapter 6 ā Tracking the Canadian Economy
The Product of a Nation
The gross domestic product measures the market value of all final goods and services (not
including anything in between). There are two different approaches to determining a
nations final GDP.
Expenditure Approach to GDPā Calculation of GDP by adding spending on all final goods
and services produced during the year
Income Approach to GDP ā Calculation of GDP by adding all earning from resources used
to produce output during the year.
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ECON 1BB3 Full Course Notes
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