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Final Exam Study Guide All textbook notes, includes diagrams + shifts in the model

85 Pages

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ECON 302
Derek Pyne

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Daphne Liu ECON 302 Notes Chapter 1: Thinking About Macroeconomics Economics is the science of scarcity; the study of how scarce resources are used to satisfy unlimited needs and wants Microeconomics is the foundation of the neoclassical (includes Classical and Keynesian) economics approach to human behaviour; it assumes individual economic agents are rational (they behave in a way consistent with their preferences) Macroeconomics determines economy-wide aggregates (ex. real GDP) Microeconomic foundations is the microeconomic analysis of individual choices that underlies the macroeconomic model of the economy Real Gross Domestic Product (GDP) is a measure of aggregate output, or the real value of nominal GDP Economic Fluctuations, or the business cycle, can be represented by variations in real GDP Recessions and booms can also be gauged using unemployment rate The unemployment rate is the fraction of people who are seeking work who have no job; this measure is less complete than GDP During recessions, the unemployment rate typically rises above the median Unemployment is a countercyclical variable; when GDP is down, unemployment is up Countercyclical variables move in the opposite direction as GDP; price and inflation rate are also examples Inflation is calculated: (Pt P t1 P t1 x 100 Price levels fluctuated before WWII but has consistently increased since then Canada was on a gold standard from 1879 to WW1, a system in which the dollar price of gold was nearly constant The American experience is important because it has major effects on the Canadian economy, U.S. dominates economic research so much of the evidence used to test macroeconomic models involves the American experience, and is sometimes better than Canadian data Scientific Method: 1. Observation and Measurement- collect economic data 2. Modeling- make simplified descriptions of some aspects of the real world that include only details we think are important 3. Testing (Falsification)- test the predictions of the model against the data collected Ceteris paribus means everything else being equal which acts as either an implicit or explicit assumption in all economic models Endogenous variables are determined within the model; the variables being explained Exogenous variables are determined outside the model and their values are taken as given The central idea of a model is that it tells us how to go from exogenous variables to endogenous ones: Exogenous Variables Economic Model Endogenous Variables Keynes argued that the labour market typically did not clear and was usually in disequilibrium Disequilibrium is a discrepancy between the quantities of labour demanded and supplied The New Keynesian Model argues that some prices are sticky and move only slowly to equate the quantities of goods demanded and supplied; some goods markets tend to be in disequilibrium A Equilibrium Business-Cycle (or New Classical) Model is a basic market-clearing model of economic fluctuations; wages and prices are flexible in the short-run A price taker is an individual that takes prices as given (does not determine own prices) Perfect competition is a market in which there are so many buyers and sellers that no individual can noticeably affect the price Chapter 2: National-Income Accounting GDP and Price Level 1 Nominal GDP (GDP in current dollars) measures the dollar (currency) value of all the final goods and services that an economy produces during a specific period; uses prices from the same year of production Nominal GDP is a flow variable, meaning it measures the dollar amount of goods produced in a unit of time Aggregate Real GDP (GDP in constant dollars) uses prices from base year that do not vary over time Problems with using constant dollars is that relative prices change and this method weights the outputs of the various goods to a base year which becomes less relevant over time Chain-Weighted Real GDP is a newer way of calculating GDP: 1. Take the average price of two adjacent years (ex. 2008-2009) 2. Multiply these averages by the corresponding quantities of the two years 3. Add these values for each year 4. Divide the total values by the base year 5. Multiply this ratio (the base year is always 1) by nominal GDP for each year By moving every two years, this method is called chain-linking Implicit Price Level = Nominal GDP Real GDP Implicit GDP deflator is the implicit price level times 100; converts nominal to real Real GDP as a welfare measure has some shortcomings: GDP doesnt consider changes in the distribution of income It does not count household production and excludes non-market goods like the underground economy (ex. does not count childcare for housemakers, but counts babysitters) May not reflect factors such as health and life expectancy Does not count leisure time Does not take into account environmental (air, water) quality Does not take into account political freedom and social justice Problems are associated with international comparisons Measuring GDP: 1. Expenditure-Approach 2. Income-Approach 3. Production-Approach GDP by Expenditure- 1. Personal Consumption Expenditure The purchases of goods and services by households for consumption purposes Usually accounts for more than half of GDP Divided into two categories: (I) Consumer nondurables and services (II) Consumer durables 2. Gross Private Domestic Investment Total private expenditure on capital goods, including business spending on plant and equipment, the net change in capital (durable) goods, business inventories, and residential construction; does not include government investment Contains no adjustment for depreciation (also called net private domestic investment) differs in the net change in the value of the stock of physical capital goods If net investment was used instead of gross investment, depreciation would also be deducted from GDP, producing net domestic product, or NDP, instead 3. Government Purchases of Goods and Services Includes consumption outlays (ex. salaries of military personnel and public-school teachers) as well as public investment (ex. purchases of new buildings) Excludes transfer payments (ex. welfare payments treated as negative taxes) Government services are valued at cost Some government outputs are inputs for private firms (ex. highways for truckers) 2 4. Exports and Imports Exports are goods produced domestically but sold internationally Imports have to be subtracted from domestic purchases Macroeconomists assume closed economy (no exports or imports) since it simplifies the analysis GDP by Income- National income is income earned by factors of production GDP is the sum of the value-added for all sectors Nominal GDP is a value of the final product (ex. bread, flour GDP consists of labour to make bread, labour to make flour, and profit made by bread and flour; flour is not recounted in GDP in cost of bread) Divergences in GDP and National Income reflect: 1. Income receipts and payments involving the rest of the world (i.e. net investment income from non-residents 2. Deprecation of capital stocks Labour income is the largest part of Canadian national income income of employees, excluding self-employed GDP by Production is essentially GDP by industry Gross National Product (GNP) is the total market value of the goods and services produced by the residents of a country over a specified period of time; GNP = GDP + Net Factor Income From Abroad GNP vs. GDP: GDP can be viewed as total gross output/income of all factors of production within Canada, whether owned by Canadians or not GNP can be viewed as total output/income of all factors production owned by Canadians, whether in Canada or not Corporate Profits is the difference between corporate revenue and wages, interest, rents, and other costs; used to pay (corporate) taxes and dividends to shareholders, rest is retained earrings Interest and Investment Income is the net interest earned by individuals from businesses and foreign sources Unincorporated Business Income is income of the unincorporated self-employed persons; represents a mix of payments to labour and capital Domestic Income: labour + corporate profits + interest and investment income + unincorporated business income + taxes subsidies on factors of production Net Investment Income from Non-residents is the difference between Canadian income receipts from the rest of the world and Canadian income payments to the rest of the world Net National Income (NNI) is net investment income from non-residents added to the net domestic income Capital Consumption Allowances (Depreciation) is the fall in the value of capital because it wears out is scrapped during the period over which economic activity is measured Net National Product (NNP) is the difference
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