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ECO1102 Midterm: Midterm Notes-ECO1102

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David Gray

Midterm Notes ECO1102 Target Rate- Short lending between commercial bank Prime Rate- Lending between credible businesses Introduction Facts to Know - Canadian Unemployment rate: 7.1% (2015), 6.6% (2014), 8.7% (2009) - All jobs have been recovered from recession - Lowest point = in 2008, below 6% - Weekly earnings grew by 1.9% (2014-15) - Average = $49,868/year - 33 hours/week - Inflation rate: 1.4% from Nov. 2014 to Nov. 2015 - GDP is approx. 2 trillion dollars/year - Real GDP growth: 2.3% from Q3 2014 to Q3 2015 - GDP per capita estimated to be about 80% of US level History 50s-60s: The “good old days” 70s: stagnation + inflation = stagflation 2008-09: the “Great Recession” Mea Culpa- Mid 2000s, financial economists fucked up Chapter 5 Macroeconomics is as follows; about the tradeoffs in the aggregate, such as aggregate employment; deficit reduction in exchange for lower interest rates, lower inflation in exchange for higher interest rates. Three Primary Markets of Macro - Output market (goods & services) - Money markets - Employment markets Circular Flow Model - Gives the structure of macroeconomy - A flow quantity is an amount per unit of time (like a current of water passing through) - A stock is an amount observed at a point in time, like the volume of water in a tank (snapshot, no time frame) - Value of stock at time, t=value of stock at time t - 1 + value of inflow - value of outflow - Injection: Any addition to the circular flow (investment, exporting, government spending) - Leakage: Any withdrawal from the circular flow (taxes, imports, savings) Basic Concept - Flows of expenditures and incomes circulating through the markets that compromise the macroeconomy The Concept of Twos - Two by two by two is simplest version, which is what the textbook does - Two types of markets (Factor markets, good and service markets) Circular Flow Diagram - The factor market is on the bottom and households are the sellers and earn income - The goods and services market is on the top and households are the buyers and spend - Firms are the sellers and earn income National Accounting - Measures GDP - Track and measure economic activity - Two major approaches - Expenditure approach - Income approach - Income and expenditure are distinct flows within the macroeconomy, and are equal in the aggregate Expenditure Approach - Easiest approach - All spending activity is broken down as: - Consumption spending - Investment spending - Net export spending (exports - imports) - Government spending - GDP = C + I + G + X - Imports - Add interjects with + signs - Government spending - Investment spending - Export spending - Subtract leakages with - signs - Imports Real GDP = Nominal GDP / Deflator x 100 Savings and Taxes - Savings (S) is consumption spending (C) postponed into the future - In the current accounting period, think of S as a transformation of consumption spending into investment spending - Think of Taxes (T) as a transformation of private consumption spending into public spending (G) and investment spending (I) Three Types of Investment - Residential investment - Plant and equipment - Inventory accumulation Factor Incomes Approach - Focus on income earning (not spending) - “How was this dollar earned?” - “Y” (aggregate income) broken down into - Factor payments - Indirect taxes - Depreciation - NDP (net domestic production) = Factor incomes + indirect taxes - GDP (same as Y) = NDP + depreciation (capital consumption allowance) Apogee - GDP, as calculated by the expenditure approach
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