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Chapter 2

Week 2 Chapter 2

8 Pages
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Department
Economics
Course Code
ECN 301
Professor
David Lee

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Intermediate Macroeconomics 1: theory
Week 2
Chapter 2
Statistics and Economic Activity
Economic activity is the pattern of transactions in which things of real, useful value are created,
transformed, and exchanged.
• National Income and Expenditure Accounts (NIEA)
– reported by Statistics Canada
The Importance of Data
• Economists use quantitative data to examine and understand behavior
• Data can be used in two ways
– make quantitative forecasts
– test economic theories
Six Key Economic Variables
• Real Gross Domestic Product (GDP)
• The unemployment rate
• The inflation rate
• The interest rate
• The level of the stock market
• The exchange rate
Real Gross Domestic Product (GDP)
– is corrected for changes in the price level (real)
– includes the replacement of worn-out and obsolete equipment and structures as well as new
investment (gross)
– counts economic activity that happens in Canada (domestic)
– represents the production of final goods and services (product)
– often divided by the number of workers in the economy
– measures how well the economy produces goods and services that people find useful
– does not indicate the relative distribution of the nation’s economic product
– is an imperfect measure of economic well-being
www.notesolution.com
The Unemployment Rate
– to be unemployed, a person must
• be in the labour force
• want to work and be actively looking for a job (but have not yet found one)
– the labour force consists of those who
• are at least fifteen years old, are not retired,
• and are either employed or unemployed
-the unemployment rate is equal to the number of unemployed people divided by the labour force
The Unemployment Rate
frictional unemployment occurs because workers and firms spend time searching for the best
match
cyclical unemployment occurs during recessions and depressions
– the unemployment rate is the best indicator of how well the economy is doing relative to its
productive potential
The Inflation Rate
- is a measure of how fast the overall price level is rising
- hyperinflation occurs when the price level is rising by more than 20% per month
The Interest Rate
is important because it governs the redistribution of purchasing power across time.
the many different interest rates in the economy vary by duration and degree of risk often
move up and down together
The Interest Rate
- nominal interest rate is the interest rate in terms of money
i. does not take into account the effects of inflation
- real interest rate is the interest rate in terms of goods and services
ii. does take into account the effects of inflation
The Stock Market
is heard about most often (every day)
is an index of expectations for the future
www.notesolution.com
- a high value means that investors expect economic growth to be rapid, profits to be high, and
unemployment to be low
The Exchange Rate
The nominal exchange rate is the relative price of two different currencies
oThe rate at which monies can be exchanged for each other
Example
- 1.00 equals $1.40
- $1.00 equals €0.71
The Exchange Rate
- governs the terms on which international trade and investment take place
- nominal exchange rate is the rate at which monies of different countries can be exchanged for
one another
- real exchange rate is the rate at which the goods and services produced in different countries
can be exchanged for one another
The Exchange Rate
- if domestic currency appreciates
iii. its value in terms of other currencies increases
iv. foreign-produced goods are relatively cheap for domestic buyers
1. imports are likely to be high
v. domestic-made goods are relatively expensive for foreigners
1. exports are likely to be low
- if domestic currency depreciates
vi. its value in terms of other currencies declines
vii. domestic-produced goods are relatively cheap for foreign buyers
1. exports are likely to be high
viii. foreign-made goods are relatively expensive for domestic buyers
1. imports are likely to be low
Stocks vs. Flows
Stocks – variables measured at a point of time
- Capital, wealth, government debt
Flows – variables measured per unit of time
- Income, output, saving, investment
A flow variable is the difference between the values of a stock variable at two consecutive
points in time
www.notesolution.com

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Description
Intermediate Macroeconomics 1: theory Week 2 Chapter 2 Statistics and Economic Activity • Economic activity is the pattern of transactions in which things of real, useful value are created, transformed, and exchanged. • National Income and Expenditure Accounts (NIEA) – reported by Statistics Canada The Importance of Data • Economists use quantitative data to examine and understand behavior • Data can be used in two ways – make quantitative forecasts – test economic theories Six Key Economic Variables • Real Gross Domestic Product (GDP) • The unemployment rate • The inflation rate • The interest rate • The level of the stock market • The exchange rate Real Gross Domestic Product (GDP) – is corrected for changes in the price level (real) – includes the replacement of worn-out and obsolete equipment and structures as well as new investment (gross) – counts economic activity that happens in Canada (domestic) – represents the production of final goods and services (product) – often divided by the number of workers in the economy – measures how well the economy produces goods and services that people find useful – does not indicate the relative distribution of the nation’s economic product – is an imperfect measure of economic well-being www.notesolution.com The Unemployment Rate – to be unemployed, a person must • be in the labour force • want to work and be actively looking for a job (but have not yet found one) – the labour force consists of those who • are at least fifteen years old, are not retired, • and are either employed or unemployed -the unemployment rate is equal to the number of unemployed people divided by the labour force The Unemployment Rate – frictional unemployment occurs because workers and firms spend time searching for the best match – cyclical unemployment occurs during recessions and depressions – the unemployment rate is the best indicator of how well the economy is doing relative to its productive potential The Inflation Rate - is a measure of how fast the overall price level is rising - hyperinflation occurs when the price level is rising by more than 20% per month The Interest Rate • is important because it governs the redistribution of purchasing power across time. • the many different interest rates in the economy vary by duration and degree of risk often move up and down together • The Interest Rate - nominal interest rate is the interest rate in terms of money i. does not take into account the effects of inflation - real interest rate is the interest rate in terms of goods and services ii. does take into account the effects of inflation The Stock Market • is heard about most often (every day) • is an index of expectations for the future www.notesolution.com - a high value means that investors expect economic growth to be rapid, profits to be high, and unemployment to be low The Exchange Rate • The nominal exchange rate is the relative price of two different currencies o The rate at which monies can be exchanged for each other • Example - €1.00 equals $1.40 - $1.00 equals €0.71 • The Exchange Rate - governs the terms on which international trade and investment take place - nominal exchange rate is the rate at which monies of different countries can be exchanged for one another - real exchange rate is the rate at which the goods and services produced in different countries can be exchanged for one another • The Exchange Rate - if domestic currency appreciates iii. its value in terms of other currencies increases iv. foreign-produced goods are relatively cheap for domestic buyers 1. imports are likely to be high v. domestic-made goods are relatively expensive for foreigners 1. exports are likely to be low - if domestic currency depreciates vi. its value in terms of other currencies declines vii. domestic-produced goods are relatively cheap for foreign buyers 1. exports are likely to be high viii. foreign-made goods are relatively expensive for domestic buyers 1. imports are likely to be low Stocks vs. Flows • Stocks – variables measured at a point of time - Capital, wealth, government debt… • Flows – variables measured per unit of time - Income, output, saving, investment • A flow variable is the difference between the values of a stock variable at two consecutive points in time www.notesolution.com The Exchange Rate • The nominal exchange rate is the relative price of two different currencies - determined in the foreign exchange market Example - €1.00 equals $1.40 - $1.00 equals €0.71 • Domestic exporters earn foreign currency when they export products - need to trade the foreign currency for dollars • Foreign producers earn dollars when Canadian residents import their products - need to trade the dollars for foreign currency • The real exchange rate is the nominal exchange rate adjusted for changes in the value of the currency - depends on the nominal exchange rate and the price level • Example 1 - nominal exchange rate changes from $1.40 = €1.00 to $2.80 = €1.00 - price level doubles - real exchange rate is unchanged • Example 2 - nominal exchange rate remains at the same level ($1.40 = €1.00) - price level doubles - real
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