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ECO105Y1 (83)
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Chapter 2

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Paul Cohen

Macro Chapter 2: Up Around the Circular Flow (GDP, Economic growth, and Business Cycles) GDP- The total value of all final products and services produced annually in a country Nominal GDP- the value of current prices of all final products/services produced annually in a country. Value = the worth, in Canadian dollars -Changes in nominal GDP are due to the combination of many changes including prices and quantitates The importance of only counting final products is so that we don’t run into the issue of double counting I.E, counting both flour (input) and a loaf of bread (final product) in our calculation of GDP. Nominal GDP for any year counts only the products/services produced in that year. Resale does not count, I.E. selling a used car would not be added again to the GDP of the year resold. This is because Nominal GDP is measured as a flow—an amount per unit of time. However this calculation is often made in the form of estimates through the year, (quarters) then the quarterly estimates are added together to produce the yearly Nominal GDP figure. GDP includes products/services produced within a countries boarders, no matter what the nationality of the business doing the producing, I.E, Honda in Canada gets counted as Canadian, Tim Horton’s in US gets counted as American. Real GDP is the value at constant prices of all final products/services produced annually in a country. By holding prices constant, any differences in real GDP between years must be do to difference in quantities of products/services The goal is to eliminate the effects of Inflation or deflation. Real GDP per person is equal to real GDP divided by the population of a country. Real GDP per person is the best measure of a country’s material standard of living 2.2 Potential GDP: Real GDP when all inputs—labour, capital, land, resources, and entrepreneurial ability—are fully employed. Potential GDP per person: Potential GDP divided by population. In a graphical comparison between Real GDP and potential GDP per person, the points where Real GDP is either greater or lesser than potential GDP are known as Business cycles. Economic Growth: Expansion of economy’s capacity to produce products/services; increase in potential GDP person, (Its labour, capital, land/resources) Labour force participation rate: The percentage of the population that is working. An example of a huge jump in the labour force participation rate can be found in the post WWII period where women were entering the workforce at immensely increasing rates. The quantity of labour inputs can increase through training and education. Economics call such quality increase improvements in Human Capital-increased earning potential from work experience, on-the-job training, and education. Human Capital: Increase Earning from Work experience, on-the-job training, and education. Capital: is the factories and equipment businesses use to produce products/services. The greater the capital the greater the quantity produced… Economists call improvements in the quantity of capital technological change. When referring to land in is important it doesn’t simply mean to expand your boarders, it refers to the increase in the quantity of land that can contribute to production. What is important for increasing potential GDP is bringing new inputs into the circular flow of markers. The invention of new extraction technologies is helping to make Alberta’s oil tar sands a profitable “new” resource. Improvements in the “quality” of land and resource are due to these applications of capital or technological change. When entrepreneurs come up with improvements in management techniques, corporate organization, or worker/management relation that improve productivity, these also increase potential GDP. A stock is an amount at a moment in time. Unlike flows, measurements of stock quantities do not include a time dimension—think of a stock as a snapshot. The stock of inputs consists of; Labour (including human capital), Capital (including the current stake of technology), Land/Resources, and entrepreneurship. Economic growth is caused by increases in the quantity or quality of countries inputs—its labour, capital, land, and entrepreneurship. Economic Growth Rate—the annual percentage change in real GDP per person Real GDP per _ Real GDP per person this year person last year Real GDP per person growth = rate (percent) X 100 Real GDP per person last year According to the Rule of 70, the number of years it takes for an initial amount to double is roughly 70 divided by the annual percentage growth rate of
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