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ECON 105 Midterm: Term Test 1 - Fall 2017

26 Pages
Fall 2017

Course Code
ECON 105
David Cox
Study Guide

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Simon Fraser University
ECON 105
Principles of Macroeconomics
Fall 2017
Term Test 1
Prof: David Cox
Exam Guide
Topic Included:
1. Introduction and measurement of GDP
2. Unemployment and Inflation
3. Long run Economic Growth
4. Savings, Investment Spending and the Financial system
5. Income and Expenditure
6. Banking System
7. Monetary Policy
1. Introduction to Macroeconomics
Macroeconomics is about the big picture, i.e., it is the study of the behavior of the economy as a
whole. While microeconomics is about a specific market, macroeconomics is about the economy
as a whole (i.e. the aggregates).
In macroeconomics, we look at the things like: national income, level of unemployment, inflation
rate, the exchange rate, etc.
2. Meaning of Gross Domestic Product
Gross domestic product (GDP) is the total value of all final goods and services produced in the
economy during a given year.
1) It only includes goods and services sold to final/end users, i.e., intermediate goods and
services are not counted.
2) It looks at the value of products produced within the economy.
3. Measurement of GDP
There are 3 ways to measure GDP, and they are:
1) The value-added approach.
2) The expenditure approach.
3) The income approach.
1) The Value-Added Approach
This approach focuses on the value added of each producer in the economy.
Introduction & Measurement of GDP
Value added = Value of the sales Value of the purchases of intermediate goods and
2) The Expenditure Approach
It adds up expenditure on domestically produced final goods and services by households,
firms, governments, and foreign buyers.
Total expenditure is the sum of 4 major categories:
i) Consumption (C) spending by households on goods and services.
ii) Investment (I) spending on goods that are not for present consumption (building up
of [physical] capital, such as machinery and/or money)
There are 3 types of investment:
a) Business fixed investment the purchases of capital equipment, machinery and
production plants.
b) Residential investment the building of new houses.
c) Inventory investment the change in the quantity of goods that firms hold in
storage, including materials and supplies, work in process, and finished goods.
iii) Government spending (G) spending on goods and services by different levels of
government, exclusive of government transfer payment.
iv) Net exports (NX), NX = Exports (X) Imports (IM)
𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 +(𝑋 𝐼𝑀) = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
3) The Income Approach
It means income earned from production of goods and services.
There are two sources of income:
1) Factor incomes income earned by factors of production or inputs such as wages,
salaries, interest, rent, business profits.
2) Non-factor payments the difference between the prices paid for the final goods and
services and the amount received by production factors before income taxes are
removed. Non-factor payments include net indirect taxes, capital depreciation
4. Meaning of Consumer Price Index (CPI)
It is the most commonly used price index to compute inflation rate. It measures how the cost of
a basket of goods and services bought by a typical Canadian household has changed over time.
To construct the CPI, Statistics Canada will:
Choose a base year.

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Simon Fraser University ECON 105 Principles of Macroeconomics Fall 2017 Term Test 1 Prof: David Cox Exam Guide
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