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

Course Code
ECON 302
Derek Pyne
Study Guide

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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 – Pt–1)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
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

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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 doesn’t 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
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)

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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
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 between GNP and capital consumption
Market Prices includes all taxes and subsidies
Indirect Taxes are sales or excise taxes paid by businesses to federal, provincial/territorial,
and local governments (incl. federal goods and services tax / GST, and PST)
Basic Prices include the costs of production facts (capital and labour) and indirect taxes (net
of subsidies) on factors of production
Personal Income is income households receive directly
Disposable Personal Income is personal income after taxes
Owner-Occupied Housing enters into GDP as (an estimate of what this housing would fetch
on the market if the owner rented the property to another person) – imputed rental income on
owner-occupied housing
Seasonal Adjustment is needed when there are systematic variations due to seasonal
factors; affects economic time series such as employment, labour, earnings, etc. and has
minor affect on CPI and no affect on interest rates
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