Textbook Notes (270,000)
CA (160,000)
UTSC (20,000)
Iris Au (30)
Chapter 6

MGEA06H3 Chapter Notes - Chapter 6: Gdp Deflator, Disposable And Discretionary Income, Fiscal Policy


Department
Economics for Management Studies
Course Code
MGEA06H3
Professor
Iris Au
Chapter
6

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Chapter 6 Macroeconomics: The Big Picture
The paradox of thrift – when families and businesses are worried about the possibility of economic hard times, they
prepare by cutting their spending. The reduction in spending depresses the economy as consumers spend less and
businesses react by laying-off workers. As a result, families and businesses may end up worse off than if they hadn’t
tried to act responsibly by cutting their spending
Self-regulating economy – problems such as unemployment are resolved without government intervention, through the
working of the invisible hand
Keynesian economics – economic slumps are caused by inadequate spending, and they can be mitigated by government
intervention
Monetary policy – used the quantity and/or the growth rate of money to affect economic activity
Influences the inflation rate, interest rates, exchange rates, and other important short-run economic variables
The Bank of Canada is responsible for the design and implementation of Canadian monetary policy
Fiscal policy – uses changes in taxes and government spending to affect overall economic activity
The federal, provincial, and municipal governments also design and implement fiscal policy
The Business Cycle – the short-run alternative between recessions and expansions
Recession (Contraction) – output & employment fall in many industries
Expansion (Recovery) – when most economic numbers are following their normal upward trend
Business-cycle peak – when the economy shifts from expansion to recession
Business-cycle trough – when the economy shifts from recession to expansion
Long-run economic growth – the sustained upward trend in the economys output over time
Long-run growth per capita – a sustained upward trend in output per person is the key to higher wages and a rising
standard of living
Inflation – a rise in the overall level of prices
Deflation – a fall in the overall level of prices
Supply & Demand can only explain why a particular good or service becomes more expensive relative to other
goods and services
In the short run, movements in inflation are closely related to the business cycle
When economy is depressed and jobs are hard to find, inflation tends to fall
When the economy is booming, inflation tends to rise
In the long run, the overall level of prices is mainly determined by changes in the money supply, the total
quantity of assets that can be readily used to make purchases
Inflation causes the amount of goods and services you can buy with a given amount of cash to fall
oCash loses value over time if the overall price level is rising
Deflation causes the amount of goods and services you can buy with a given amount of cash to increase
oCash gains value over time as it buys more and more goods and services than previously
Hyperinflation – prices rise by thousands or hundreds of thousands of percent, invariably occurs when governments print
money to pay large part of their bills
Price stability – the overall level of prices is changes slowly or not at all
Open economy – an economy that trades goods and services with other countries
Trade surplus – the goods and services it sold to other countries were worth more than the goods and services it bought
from them
Trade deficit – when the value of goods and services bought from other countries is more than the value of goods and
services it sells to them

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Chapter 7: GDP and the CPI: Tracking the Macroeconomy
National income and product accounts (national accounts) – keep track of the spending of consumers, sales of producers,
business investment spending, government purchases, and a variety of other flows of money between different sectors of
the economy
Consumer spending (consumption) – buying goods and services from domestic firms and from firms in the rest of the
world
Factors of production – labour, land, physical capital, human capital, and financial capital
Stock – a share in the ownership of a company held by a shareholder
Bond – is borrowing in the form of an IOU that pays interest
Dividends – profits distributed to shareholders
Government transfers- payments by the government to individuals for which no goods or services is provided in return
(Ex. Canadian public pension benefits and employment insurance payments)
Disposable income – the total income households have left after paying taxes and receiving government transfers
Private savings – equal to disposable income minus consumer spending, is disposable income that is not spent on
consumption
Financial markets – the banking stock and bond markets which channel private savings and foreign lending into
investments spending, government borrowing, and foreign borrowing
Government borrowing – the total amount of funds borrowed by federal, provincial, and municipal governments in the
financial markets
Government purchases of goods and services – total expenditures on goods and services by federal, provincial, and
municipal governments
The world participates in the Canadian economy in three ways:
Some of the goods and services produced in Canada are sold to residents of other countries (Canada is an
exporter of durum, a type of wheat, canola and softwood lumber)
Some of the goods and services purchased by residents of Canada are produced abroad (many consumer goods
are made in China)
Foreign can participate in Canadian financial markets by making transactions (Foreign lending)
Inventories – stocks of goods and raw materials held to facilitate business operations
Investment spending (investment) – spending on productive physical capital (new machinery and equipment and on
construction on buildings – and on changes to inventories)
Final goods and services – goods and services sold to the final or end, user
Intermediate goods and services – goods and services bought from one firm by another firm that are inputs for
production of final goods and services
Gross domestic product (GDP – the total value of all final goods and services produced in the economy during a given
year
Survey firms and add up the total value of their production of final goods and services
Add up aggregate expenditure on domestically produced final goods and services in the economy
Add up all the factor income earned by households from firms in the economy

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Aggregate expenditure – the sum of consumer spending, investment spending, government purchases of goods and
services, and exports minus imports, is the total spending or domestically produced final goods and services in the
economy
Calculating GDP:
1. The Value-Added Approach: Add the total value of all final goods and services produced domestically
2. The Expenditure Approach: Add the spending on all domestically produced goods and services
3. The Income Approach: Add the income earned by labour and capital from the domestic production of goods and
services
Value added – the value of its sales minus the value of its purchases of intermediate goods and services
Factor incomes – incomes earned by factors of production, which include wages, interest, rent, dividends, and profits
Non-factor payments – the difference between the prices paid for final goods and services and the amount received by
factors of production, which include net indirect taxes and capital depreciation
Net Exports – the difference between the value of exports and the value of imports
Aggregate output – the economys total quantity of output of final goods and services
Real GDP – the total value of all final goods and services produced in the economy during a given year, calculated using
the prices of a selected base year
Nominal GDP – the value of all final goods and services produced in the economy during a given year, calculated using
the prices (current) in the year in which the output is produced
Chained dollars – the method of calculating changes in real GDP using the average between the growth rate calculated
using an early base year and the growth rate calculated using a late base year
GDP per capita – the GDP divided by the size of the population; it is equivalent to the average GDP per person
Larger population = higher GDP (more people working)
Aggregate price level – a measure of the overall level of prices in the economy
Market basket – a hypothetical set of goods and services (purchased or made). The quantities in the basket are weights to
be used in a price index
Price index – measures the cost of purchasing a given market basket in a given year, where that cost is normalized so
that it is equal to 100 in the selected base year
Consumer Price Index (CPS) – uses the cost of the market basket purchased by a typical Canadian family to gauge what
the high average price level is and how quickly it is changing
Industrial producer price index (IPPI) – measures changes in the prices of goods purchased by producers
GDP deflator – for a given year, is 100 times the ratio of nominal GDP to real GDP in that year
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