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ECO202Y1a.doc Introduction H ISTORY OF M ACROECONOMICS 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. M ACROECONOMIC V ARIABLES Output how to measure it? Unemployment rate. Inflation rate affects purchasing power. O BJECTIVES OF M ACROECONOMICS Low unemployment. Low inflation. Stable but fast growing economy. boomexpansion output trend (long run) business cycles (short run) recession year A NATOMY OF ECONOMIES There are four major players: households, government, foreigners, firms. They meet in three markets: factor, goods, financial. O UTPUT Have only one good that represents all goods GDP (gross domestic product). Definition of GDP Page 1 of 30 ECO202Y1a.doc 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:GDP = P i i Value added approach: GDP = VAi. 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 P RICES GDP Nominal GDP =t PtQt has both price and quantity in it. Real GDP t PbQ t based on a base year, and yields the change of aggregate quantity. nomial GDP $Y GDP deflator = realGDP 100, or P = Y so $Y = PY . This is the price of the aggregate good. From here, we can calculate the inflation of P GDP deflator inflation. Chained Method Pt Pt1 t Real GDP Growth Rate t 1100 . Pt1 t1 PtQt1 Cost of Living Cost of Living = PQ Qb(the bundle) is based in a base year. t b Page 2 of 30
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