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Canada (161,660)
Economics (924)
ECN 301 (20)
David Lee (4)
Chapter 2

Week 2 Chapter 2

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Department
Economics
Course
ECN 301
Professor
David Lee
Semester
Winter

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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