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EC140 Midterm: EC-140 Mid-Term 1 Review

Course Code
Ken Jackson
Study Guide

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EC-4 Mid-Term Notes
What is Macroeconomics?
Macroeconomics Analysis: Trends and Fluctuations
Measuring Output and Income
Production of goods and services generates income
Nominal national income: calculated in current dollars
Real national income: calculated at prices from a base year
Potential GDP
The GDP when the economy is producing at capacity
Actual GDP is the normal production of the economy
Output Gap measures the difference between these two amounts
Terminology of Business Cycles
Actual GDP vs. Potential GDP
o Actual GDP: Regular GDP
o Potential GDP: GDP when economy is at capacity
Recession and Recovery
o Recession: GDP falling
o Recovery: GDP Rising
Peak and Trough
o Peak: farthest above Potential GDP
o Trough: farthest below Potential GDP
Measuring Unemployment
Unemployment: Not employed and actively searching for a job
Labour Force: Number employed or unemployed
Unemployment Rate: Number of people unemployed divided by the number of people in the
labour force
People not looking for work are not in either number
Trends and Fluctuation-Unemployment
Labour force and employment have been on an upward trend since 1960
Unemployment Rate has varied per the economy
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Canadian Labour Productivity
Labour productivity: Real GDP divided by employment or hours worked
Does income rise because of hours worked, or because of productivity growth
Price Level and Inflation
Price Level: Average level of all prices in the economy
Inflation: Rate of change of the price level
Anticipated vs. Unanticipated Inflation
Real and Nominal Interest Rates
Nominal interest rate is the rate paid to borrow money
Real interest rate equals nominal interest rate minus the inflation rate
Exchange Rates
Exchange rate: Amount of domestic currency needed to purchase a unit of foreign currency
Depreciation of Canadian dollar: Costs more to buy $US: Canada-US exchange rate increases
Appreciation of Canadian Dollar: Costs less to buy $US: Canada-US exchange rate decreases
Imports and Exports
Openness to the international economy
Exchange rates are connected to net exports
Canada is very open to international trade
Economics is a Mathematical Discipline
Economics often requires mathematical or statistical analysis
Math can demonstrate where intuition breaks down
Allows for assessment of feedback effects
Math (graphs) can allow us to visualize complicated problems
Measuring GDP in a Complex Economy
GDP is total production in a country
If all production was sold and consumed, GDP would be easy to measure
Most production processes occur in stages
Outputs of one company are inputs to another
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Measuring GDP is about measuring final production
o Can we eliminate measuring the production of intermediate goods?
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Measuring Value Added
To avoid double counting, we measure value added by all firms
Value added is sales revenue, Cost of intermediate goods
Value added is equal to wages paid to workers plus profits paid to owners
Total value added is a measure of total output
GDP- A Measure of Total Output
GDP is the total value of final goods and services produced
Equals the value of expenditure on output
Also equals the income generated by producing that output
Production, expenditure, and income are all equal by definition
Circular Flow of Expenditure and Income
Measuring Expenditures
Consumption Expenditure
o Goods and services sold to final users
Investment Expenditure
o Goods not for current consumption
o Inventory, plant/equipment, housing
Government purchases
o Current expenditure
o Government investment
Net Exports
o Total exports minus total imports
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