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Midterm Notes (must download, got 90%+)

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Angela Trimarchi

Measuring GDP and Economic Growth GDP: market value of all final goods and services produced in a country for a given time  Main measure of economic prosperity or standard of living  Measures total value of production (total expenditure or total income) Measuring GDP with the: - Expenditure approach sums up: o consumption (C)  Buying a house is a part of investment rather than consumption o gross investment (I)  purchasing machinery, equipment, tools – used to produce other things  all construction – residential properties  when some are unsold, all are counted and the firm buys theirs back (changes in inventories)  add increases in inventories and subtract decreases in inventories  Adding changes in inventories to gross investment is what makes GDP = total expenditure  do not subtract depreciation o government purchases (G)  spending on final goods and services  military spending  Canada’s economic action plan  Not transfer payments  Taxes, subsidies, welfare payments, EI payments not counted  Transactions are purely financial not counted o exports (X) minus imports (M)  Exports:  Produced domestically, so you count them  Adds to our production and income (add exports)  Imports:  Not produced in our borders  Income goes to other countries (minus imports) Aggregate Expenditure (AE) AE = C + I + G + X – M GDP = AE = Y - Income approach o Money spent on goods goes to someone as income o Money flows to individuals as:  Wages, salaries, and supplementary labour income  Other factor incomes o Income components sum to net domestic income at factor cost  Factor cost: cost of factors of production o Market prices = factor cost + taxes – subsidies  Indirect taxes: PST, GST, HST o Add indirect taxes and subtract subsidies o Income so far is a net measure  Add back in depreciation o Adding depreciation, we have Gross Domestic Income at Market Prices (Y) = GDP o AE = Y Nominal vs Real GDP - Nominal GDP: value of goods during a given year valued at the prices of that year (current prices) - Real GDP: value of final goods produced in a given year valued at the prices of a base year (base year prices) Actual vs. Potential GDP - Actual RGDP: computed as we saw previously at any point in time - Potential RGDP: when all economy’s resources are fully employed o Typically hypothetical Business Cycle: periodic, irregular up-and-down movement of total production - Two phases: o Expansion  A period during which real GDP increases o Recession  A period during which real GDP decreases for at least two successive quarters - Two turning points: o Peak o Trough Purchasing Power Parity - PPP price: the hypothetical price of a good in another country that would need to exist to equate purchasing power using the market exchange rate Not quantified or measured: - Household production - Underground economic activity - Health and life expectancy - Leisure time - Environmental quality - Political freedom and social justice Jobs and Inflation Unemployment: - Measure of economic health o Can be used to tell if we are in recession or expansion - People make a living through employment o Losing work imposes costs on people - Depends heavily on active job search - Not a measure of duration o Point-in-time measure Population: everyone in Canada Working-age population: everyone 15+, excludes institutionalized Employed: have a full or part time job Unemployed: available for work and has searched for work in the previous 4 weeks, is waiting for a call back after being laid off or waiting to start a new job within 30 days Labour Force: employed plus unemployed, full-time students, retirees, homemakers, are not in the labour force Full Time: people who work more than 30 hours per week Part Time: people who usually work less than 30 hours per week Involuntary Part Time: people who usually work less than 30 hours per week but would like full time work Unemployment Rate is the % of the labour force that is unemployed It measures the underutilization of labour resources and is imperfect for many reasons: - It excludes some types of underutilized labour o People that could take a job but are not currently looking - Some unemployment is unavoidable, and possibly desirable (“natural”) - Says nothing about duration Marginally attached workers: a person neither working nor looking for work but wants work, is available for a job, has look for work sometime in the recent past Discourage workers: a marginally attached worker who has stopped looking for a job because of repeated failure to find one Involuntary part-time rate: % of the labour force that work part time but want full-time jobs Labour Force Participation Rate: % working-age population in the labour force Employment-to-Population Ratio: % of working-age population who have jobs Long-term unemployment is most costly (+14 weeks) - If the UR is the same as 2 other times, people may be unemployed the entire time or could be different groups of people (the first however is worse) Types of Unemployment Frictional: unemployment arising from normal labour market turnover - Jobs are created and destroyed - Number of people entering and re-entering the labour force change naturally o Students exit school, then enter the workforce o Population variation over time - Unemployment benefits (EI) change occasionally o All of these are normal in the dynamics of a healthy labour market Structural: unemployment created by changes in technology and foreign competition that change the skills needed to perform jobs or the locations of jobs - Lasts longer than frictional – need to be retrained in a new field Cyclical: fluctuating unemployment over the business cycle - People laid off in a recession (because of market conditions) - Fewer of all jobs, and jobs will pick back up and they will get those jobs back Natural Unemployment Rate: unemployment rate when there is no cyclical unemployment - Only frictional and structural unemployment - Occurs at full employment Full Employment: employment levels when there is no cyclical unemployment Natural Rate is influenced by: - Population age distribution o Young workers are more prone to frictional unemployment - Scale
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