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EC250 (77)
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Chapter 2

Chapter 2 - Data of Macroeconomics.docx

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Department
Economics
Course
EC250
Professor
Karen Huff
Semester
Fall

Description
Chapter 2: The Data of Macroeconomics  Scientists, economists, and detectives all try to figure out what’s going on in the world by relying on a combination of theory & observation  build theories to make sense of what they see happening  Data (plural of anecdote) is a way to combine many individual experiences into a coherent whole  Economic data offers a systematic and objective source of information - Allows economists to study the economy & policymakers to formulate appropriate policies  Stock: quantity measures at a given point in time (wealth, number of unemployed)  Flow: quantity measured per unit of time (GDP, income, expenditure, number of people losing jobs) 2.1: Measuring the Value of Economic Activity: GDP  GDP: total $ value of economic activity or of all final goods/services produced during the period broad measure of job creating activity 1. Total output of final goods and services 2. Total income generated by production of output 3. Total expenditure of final goods and services  best measure of how well the economy is performing; computed every 3 months from: - Administrative data: by-products of government functions; tax, education programs, regulations - Statistical data: come from government surveys of retail establishments, farm activity, etc.  GDP is the total income earned domestically. GDP would accurately measure Canadian income if 1. no Canadian worker has job in another country 2. no foreigner had a job in Canada 3. all machines and factories used here and elsewhere are owned by domestic residents  When the government tried to eliminate its budget deficit, the policies resulted in a decrease in government debt, and also in the indebtedness of Canadians with the world  when we subtract the foreign income part (<1%) of GDP, the timing and size of the cyclical swings in GDP are almost identical, so it’s ok to just use GDP even if it’s inaccurate.  National accounting: accounting system used to measure GDP and many related statistics Income, Expenditure, Circular Flow  Circular flow: flows between firms and households in an economy that produces 1 good from 1 input (bread and labour). The inner loop represents the flows of labour & bread as the households sell labour to firms, who sell bread to households. The outer loop represents the corresponding flows of $ as the households pay firms for bread with the money firms paid them as wages.  GDP can be measured as flow of $ from firms to households (income), or vice versa (expenditure)  Every transaction that affects expenditure affects income, and vice versa. Rules for Computing GDP  GDP: market value of all final goods and services produced within an economy in a given period  Apples & Oranges: goods have different values, so use market prices, which reflect how much people are willing to pay for the good/service  Sale of Used goods: excluded from GDP(resale, buying financial asset)  not current productivity  Treatment of inventories: putting things in inventory is seen as a purchase by the firm’s owners, so GDP rises. It’s counted when it’s put in inventory, so don’t count when items are sold from inventory. - spoiled bread means the firm paid more in wages but has not received revenue, so firm’s profit is reduced by the amount that wages rose  total expenditure in economy has not changed since nobody bought the bread  affects neither expenditure/income, so does not alter GDP  Intermediate goods and value added: many goods are produced in stages, but only the selling of the final product is counted. Value added of a firm is the value of the firm’s output minus the value of the intermediate goods that the firm purchases.  avoid double counting - If a cattle rancher sells ¼ pound of meat to McDonald’s for $0.5, then McDonald’s sells you a burger for $1.5, then value added of rancher = $0.5, and value added of McDonald’s is $1 (1.5 – 0.5 =1)  total value added = $1.5 (the price of the BURGDER. Not 0.5 + 1.5 which = 2)  Housing services and other imputations: most goods/services are valued at their market prices when computing GDP, but some are not sold in the marketplace and don’t have market prices. Thus, imputed value is important for estimating the value of police services, and housing. GDP includes rent (landowner gains income) & uses imputed value to for value of homes that are owned. - Inaccuracy: No imputations made for value of goods/services sold in underground economy, nor for cars, jewellery, and other durable goods owned by households  issue when comparing countries; but as long as the magnitude of the imperfections remain fairly constant, GDP is useful Real GDP vs. Nominal GDP  Nominal GDP: value of goods/services measured at current prices  affected by P or Q.  Real GDP: shows economic growth; value of goods/services measured using constant set of prices; shows what would’ve happened to expenditure on output if quantities changed but prices didn’t GDP deflator OR implicit price deflator for GDP  GDP deflator = nominal GDP real GDP  % in deflator = % in nominal - % in real  Reflects what’s happening to the overall level of prices in the economy  Allows us to separate nominal GDP into 2 parts (nominal GDP = real GDP x GDP deflator) 1. Measure quantities (real GDP) 2. Measure prices (GDP deflator)  Measures the current price of output relative to its price in the base year  Inflation = (deflator now - previous deflator) / previous deflator Chain-Weighted Measures of Real GDP  It is misleading to use prices from 10-20 years ago because prices change over the years  Solution: Statistics Canada updated the base year (new year picked) every 5 years  Base year changes continuously over time; so the average prices in 2008 and 2009 are used to measure real growth from 2008 to 2009, etc. These various growth rates are put together to form a chain, used to compare the output of goods/services between any 2 dates. Components of Expenditure  National accounts identity: equation that must hold because of the way the variables are defined.  Y = C + I + G + X – M = C + I + G + NX  Consumption (C): goods/services bought by households; durable, nondurable, and services  Investment (I): goods bought for future; not just reallocation of resources; must create new capital) 1. business fixed investment: purchase of new equipment by firms 2. residential construction: purchase of new housing by households/landlords 3. inventory investment: increase in firms’ inventories; if inventories are falling, this is negative  Government purchases (G): goods/services bought by all levels of government - Exclude transfer payments because they’re not exchanged for currently produced goods  Net Exports (NX = X – M): exports – imports  net expenditure from abroad which provide income % changes  The % change of a product of 2 variables is approximately the sum of the % changes in each of the variables (so % change in AxB = % change in A + % change in B)  Same with division, but subtract instead of add Several Measures of Income  GNP = GDP – net income of foreigners (so also add domestic income earned abroad)  Net nat
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