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Department
Economics
Course Code
ECO202Y1
Professor
N/ A

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Introduction
HISTORY OF MACROECONOMICS
In 1930, there is no macroeconomics only classical economics (microeconomics).
When the great depression came, it was not expected nor could be explained started macroeconomics.
M. Keynes is the father of macroeconomics used mathematical models.
MACROECONOMIC VARIABLES
Output how to measure it?
Unemployment rate.
Inflation rate affects purchasing power.
OBJECTIVES OF MACROECONOMICS
Low unemployment.
Low inflation.
Stable but fast growing economy.
ANATOMY OF ECONOMIES
There are four major players: households, government, foreigners, firms.
They meet in three markets: factor, goods, financial.
OUTPUT
Have only one good that represents all goods GDP (gross domestic product).
Definition of GDP
trend (long run)
business cycles (short run)
recession
boom/expansion
year
output
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Market value of all final goods and services produced within a country in a given period of time.
Market value: what the price should be.
of all: legal, commercially sold.
final: capital and consumption goods, but no intermediate goods.
Goods and services: both tangible and intangible products.
produced: reselling doesnt count.
within a country: geographical.
in a given period of time: time constraint (ex: quarterly, yearly).
Approaches
Output approach.
Final good approach:
=ii QPGDP.
Value added approach:
=i
VAGDP. The value added is the value of output minus the value of used
intermediate goods.
Demand approach.
GDP = Private Consumption (C) + Gross Investment (I) + Government Spending (G) + Net Export
(NX)
Private Consumption (60-70%): durable goods, nondurable goods, services.
Gross Investment (15-17%): fixed investment (machinery, building (residential, non-
residential)), inventories.
Government Spending (15-20%): federal, provincial, local.
Net Export NX = X Q (±5%): >0 (trade balance surplus), <0 (trade balance deficit), >0
(balanced trade).
Income approach.
Idea: When output is sold, somebody in the economic earns it.
GDP Labor Compensation + Capital Return + Rent
Doesnt quite add up to GDP because of indirect taxes and depreciation.
INFLATION AND PRICES
GDP
Nominal GDPt =
tt QP has both price and quantity in it.
Real GDPt =
tbQP based on a base year, and yields the change of aggregate quantity.
GDP deflator = 100
GDP real
GDP nomial×, or
Y
Y
P$
= so PYY =$. This is the price of the aggregate good.
From here, we can calculate the inflation of P GDP deflator inflation.
Chained Method
Real GDP Growth Ratet = 1001
111
1×
tttt
tttt
QPQP
QPQP
.
Cost of Living
Cost of Living =
btQP Qb (the bundle) is based in a base year.
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Note: The bundle contains only household goods and is different from GDP.
Consumer Price Index: 100
Year Base
Living ofCost
CPI×= .
UNEMPLOYMENT RATE
Civilian Population = Labor Force + Not in Labor Force.
In symbols,
P
NL
P
L
NLLP+=+= 1.
P
L is the participation rate.
Labor Force = Employed + Unemployed.
In symbols,
L
U
L
E
UEL+=+= 1.
L
E is the unemployment rate.
Economies in the Short Run
Assumptions
The price level (P) is fixed.
Capital stock (K) and labor force (L) are fixed.
The output capacity
(
)
LKFY,= is fixed.
Y can go above or below output capacity
Y
by over-utilization or under-utilization of capital stock and labor
force.
GOODS MARKET
The demand for goods IGCZ
+
+
=
(we assume closed economy, so 0
=
NX).
Behavioral function for C is
(
)
dd YccYCC 10 +== . Since TYYd= ,
(
)
TYccC+= 10 .
c0: Autonomous consumption.
c1: Marginal propensity to consume (MPC).
We assume the tax function
T
T
=
is a lump sum tax.
Behavioral function for G is GG =, an exogenous variable.
Behavioral function for I is
I
I
=
, an exogenous variable.
So finally, IGTYccZ+++= )(
10 .
The supply equation is the sum of all value added Y.
So, by setting
Z
=
, we can solve for equilibrium GDP.
Stability
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