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ECO100Y1c.doc
Page 1 of 12
Lecture #16 Monday, February 2, 2004
MACROECONOMICS
Output : GDP.
Employment:
employment/unemployment.
Prices: inflation.
NATURAL INCOME ACCOUNTING
Profits = Total Sales Revenue Cost of Goods Sold.
Cost of Goods Sold: wages/salaries, rent, indirect taxes, purchases from other firms, interest,
depreciation.
Profits + Cost of Goods Sold = Total Sales Revenue (Income Earned = Expenditure).
Cost of Good Sold + Profits Total Sales Revenue
Purchase of goods and services * 100 To households 500
Wages, salaries, benefits 600 To businesses: capital 200
Rents 100 To businesses: non-capital * 100
Interest paid 100 To government 300
Indirect Taxes - Subsidies 50
Depreciation 50
Profits
Corporate profits: retained
Corporate profits: dividends
Corporate profits: taxes
Total 1100 Total 1100
Purchase of goods and services and Capital sales to businesses must be netted out.
Cost of Good Sold + Profits Total Sales Revenue
Wages, salaries, benefits 600 Personal Consumption Expenditure (C) 500
Rents 100 Government spending on goods and services 300
Interest 100 Gross Business Investment 200
Corporate profits 100
Domestic Income (at
factor cost)
900 Export - Imports (X - M)
Indirect Taxes -
Subsidies
50
Net Domestic Product
(NDP)
950
Depreciation 50
Households
Firms
Input
Markets
Output
Markets
Total income
earned
Total
expen
diture/production
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ECO100Y1c.doc
Page 2 of 12
Gross Domestic
Product (GDP)
1000 Gross Domestic Expenditure (GDE) (at
market prices)
1000
Lecture #17 Monday, February 9, 2004
INTERMEDIATE SALES AND VALUED ADDED
Example
Sales Purchase From Other Firms Value Added
Wheat 10 10
Flour 25 10 15
Bread 50 25 25
85 35 50
Proper contribution = 50.
Bread is the final product (brought by consumers).
REAL VS. NOMINAL
Real: Figures adjusted for average price increases and inflation.
Nominal: Figures not adjusted for average price increases and inflation.
PRICE INDEX
Helps determine whether increases in GDP is prices or production.
Examples
GDP deflator, CPI (consumer price index).
Challenges
Changing prices.
Weighting what is more important?
What is included? What is not included?
New/changing products.
GDP VS. GNP
Gross Domestic Product
Measures economic activities.
Ignores who owns the factors of production.
Gross National Product
Concentrates on who owns the assets tracing where profits goes.
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OUTPUT/GDP GAP
Potential GDP vs. Actual GDP.
Employment vs. Unemployment.
LABOUR FORCE
UELF
+
=
.
LF
U
U=
rate.
Issues
Full employment = no unemployment? No. There is always frictional unemployment (between jobs).
Definition of unemployment differ country to country:
US: not active = not in labour force
Canada: no jot = unemployment
KEYNESIAN MODEL
MXGICGDP
+
+
+
=
.
Assumptions
Only C and I G, X, M = 0.
No inflation nominal = real.
More output until YF (full employment GDP).
HOUSEHOLDS AND CONSUMPTION
C = C(income, assets/wealth, interest rate). Well use C = C(Y).
0>
Y
C because higher income, more stuff. This rate is called the marginal propensity to consume (MPC).
Also, 1<=
MPC
Y
C.
CYS
=
savings is what is not spent.
1
=
+
MPSMPC.
AS
Y
P
YF
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Document Summary

Purchase of goods and services and capital sales to businesses must be netted out. 50: proper contribution = 50, bread is the final product (brought by consumers). Real vs. nominal: real: figures adjusted for average price increases and inflation, nominal: figures not adjusted for average price increases and inflation. Price index: helps determine whether increases in gdp is prices or production. Gross national product: concentrates on who owns the assets tracing where profits goes. Output/gdp gap: potential gdp vs. actual gdp, employment vs. unemployment. There is always frictional unemployment (between jobs): definition of unemployment differ country to country, us: not active = not in labour force, canada: no jot = unemployment. Assumptions: only c and i g, x, m = 0, no inflation nominal = real, more output until yf (full employment gdp). Households and consumption: c = c(income, assets/wealth, interest rate). This rate is called the marginal propensity to consume (mpc).

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