Econ 2400 notes
Introduction and measurement issues
Chapter 1: Introduction
GDP: the quantity of goods and services produced within a country’s borders over a particular period of
Per capita real GDP is a measure of average level of income for Canadian resident.
Natural logarithm of per capita real GDP is approximately equal to the growth rate of per capita GDP.
The growth level is the level starting value of whatever is growing.
The growth rate is the change in the growth level from year to year.
Basic Structure of a Macroeconomic Model:
-Consumers and firms
-the set of goods that consumers consume
-The production technology
Optimize – we assume that consumers and firms optimize – that is, they do the best they can give that
constraints they face.
Competitive Equilibrium - we assume goods are bought and sold on markets in which consumers and
firms are price takers.
Macroeconomic behavior is the sum of many microeconomic decisions.
Average labour productivity is the quantity of aggregate output produced per worker.
Inflation is the rate of change in the average level of prices.
Consumer price index (CPI) is essentially the price of a set of goods bought by the average consumer
Money growth is measured as the percentage rate of growth in the monetary base, a narrow monetary
Monetary base is defined as the portion of the commercial banks’ reserves that are maintained in
accounts with their central bank plus the total currency circulating in the public.
Money supply consists of the total currency circulating in the public plus the non-bank deposits with
Economic decisions are based on real rather than nominal interest rates. Real interest rate is the nominal interest rate minus the expected rate of inflation.(r=i-p^e)
Current Account surplus is the net exports of goods and services
CA = NX = X-I
Current account deficit imports are greater than exports
Chapter 2: Measurement
GDP measured using:
1. The product approach
2. The expenditure approach
3. The income approach
After tax profits = Total Revenue – Wages – Interest – Cost of Intermediate inputs – taxes
Product approach is sometime called the value-added approach. The main principle is the product
approach is that the GDP is calculated as the sum of value added as the sum of value added to goods
and services in production across all productive units in the economy.
Expenditure approach we calculate GDP as total spending on all final goods and services in the
economy. GDP = C + I + G + NX
The Income Approach calculates GDP by adding up all income received by economic agents contributing
to production. Y = C + I + G + NX
-Largest expenditure component of Canadian GDP.
-It Includes expenditure on consumer goods and services during the current period.
-The Components of Consumption
-Investment is the expenditure on goods that are produced but not consumed during the current period
-Fixed investment – Production of Capital such as a factory, equipment, and housing.
-Non-residential investment adds to the factory, equipment, that makes up the capital stock for
producing goods and services
-Residential Investment – housing
-Inventory Investment – Consists of goods essentially put in storage
-Net exports is the difference between exports and imports. NX=X-I -Canada has run a trade deficit with the rest of the world which has negatively contributed to Canadian
GDP. ( -1.9% in 2010)
-However, exports as a whole, has contributed significantly to Canadian production. ( 29.4% in 2010)
-Consists of expenditures by federal, provincial and territorial, and municipal government on final goods
and services.( 25.9% in 2010)
-National Income and Expenditure Accounts (NIEA) makes a distinction between government
consumption and government investment. NIEA only includes expenditures on final goods and services.
-Government Transfers are not included in GDP calculations as they are money transfers from one group
of people to another. Income redistribution rather than income creation.
Price index: weighted average of a set of observed prices that gives a measure of the price level.
Price Indices allow us to measure the inflation rate- the rate of change in the price level.
- A measure of the inflation rate allows us to determine how much an increase in GDP I nominal and
how much is real. Chain-Weighting:
Measure or price level :
1.Implicit GDP price deflator
2.Consumer Price index (CPI) Flow is a rate per unit of time
-GDP, consumption, investment, government spending, and net exports are flows in NIEA
Stock is the quantity in existence of some object at a point in time.
-Cell phones or quantity of housing in existence in Canada at the end of a given year in a stock.
Private disposable income: Y^d = Y + NFP + TR + INT – T
-Y^d is GDP
-NFP is net factor paymenrs from abroad to candian residents
-TR is transfers from the government to private sector
-INT is interest on government debt
-T is taxes
GNP is Y + NFP
Private sector savings: S^p = Y^d – C = Y + NFP + TR + INT – T – C
Government Savings: S^g = T-TR-INT-G
National Savings: S = S^p + S^g = Y+NFP – C –G
Chapter 3: Business Cycle Measurement
Business cycles are fluctuations about trend in real GDP.
IF the deviations from trend in a macroeconomic variable are positively (negatively) correlated with the
deviations from trend in real GDP, then that variable is procyclical (countercyclical)
If a macroeconomic variable is neither procyclical nor countercyclical, it is acycliclal. Correlation coefficient – degree of correlation