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MACROECONOMICS-WINTER TERM NEW OFFICE HOURS: Monday 12:30-1:30 Thursday 1-2:20 Tutorial groups begin: week of January 24---more next classcheck web page. EXAM December exam grades on WebCT View exams if you want: Office hours starting NEXT week. Long Answers-Read questions Q2 Hair Salons: Question said: “each salon is different” “a salon that raises its price will lose some customers but not all” “Free entry and exit” Development of Macro Adam Smith: Wealth of Nations-1776 Great Depression: 1929-1937 John Maynard Keynes (CANES) General Theory of Employment Interest and Money- 1936 Key macro variables are aggregate output--Gross Domestic Product (GDP), unemployment and inflation. Circular flow see text Macro Issues and Variables Unemployment Fluctuations (Cycles) in GDP (Output) Inflation G Budget Deficits Balance of Payments –International u=U/LF Pdot= %∆P inflation rate GDP = ∑Pi*Qi----$ value of all G&S Link to PPF GDP = Pcomp*#comp + Pcars*#cars MACROECONOMICS Macroeconomics: The study of the economy in the aggregate.---ADDED UP We begin our study of macroeconomics with the country’s total income and expenditure. GROSS DOMESTIC PRODUCT Tutorial groups See web page-schedule and agenda Groups begin week of January 24 Each group will meet FOUR (4) times in the Winter term. The 8 week time period does NOT include reading week Most room numbers have changed Count best 2/3 Groups B01 B02 B03 B04 B05 B06 B07 B08 B09 B10 B11 TUES TUES TUES THURS THURS THURS THURS THURS THURS THURS MON 1:35 1:35 1:35 12:35 12:35 12:35 4:35 4:35 1:35 1:35 9:35 JAN 25 FEB 1 JAN 25 FEB 3 JAN 27 FEB 3 JAN 27 FEB 3 JAN 27 FEB 3 JAN 24 Southam 309 313 Southam 311 Southam 313 Southam 311 Southam TB431 309 Southam 313 Southam TB210 TB447 ME3190 Reading week J24 ODD1 J31 EVEN 1 F7 ODD2 F14 EVEN 2 F21 RW_________ F28 ODD3 M7 EVEN 3 ETC FOR 4 Measuring a Nation’s Income What is Gross Domestic Product (GDP)? How is GDP related to a nation’s total income and spending? What How are the components of GDP? is GDP corrected for inflation? Does GDP measure society’s well-being? Income and Expenditure Gross Domestic Product (GDP) measures two things at once: – total income of everyone in the economy. – total expenditure on the economy’s output of goods & services. For the economy as a whole, income equals expenditure, because every dollar of expenditure by a buyer is a dollar of income for the seller. Gross Domestic Product (GDP) Is… …the market value of all final goods & services produced within a country in a given period of time. Goods are valued at their market prices, so: GDP measures all goods using the same units (e.g., dollars in Canada, Euros--), rather than “adding apples to oranges.” Things that don’t have a market value are excluded, e.g., housework you do for yourself. (Some bias for poor countries) Gross Domestic Product (GDP) Is… the market value of all final goods & services produced within a country in a given period of time. Final goods are intended for the end user. Intermediate goods are used as components or ingredients in the production of other goods. GDP only includes final goods, as they already embody the value of ALL the intermediate goods used in their production. COUNT FINAL OUTPUTS Wheat Flour BREAD POINT: steel plastic CARS To avoid double-counting Two Methods of Computing An Economy’s Income Expenditure – Sum the total expenditures by households (from the top portion of the circular flow). Resource – Approach: Cost or Income Approach: Sum the total wages and profit paid by firms for resources (from the bottom portion of the circular flow). The Economy’s Income and Expenditure A measure of the income and expenditures of an economy is Gross Domestic Product (GDP). Gross Domestic Product measures: – an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. Important Features of GDP Output is valued at market-determined prices. Output is measured in dollar terms. GDP records only the output of final goods and services. We want to “count” production only once. $ GDP represents the amount of money one would need to purchase a year’s worth of the economy’s production of all final goods and services. Principles of Macroeconomics: Ch 10 First Canadian Edition The Components of GDP GDP (Y) is the sum of: Consumption (C) – Investment (I) – Government Purchases (G) – Net Exports (NX) – Y = C + I + G + NX NX = X-M Principles of Macroeconomics: The Four Components of GDP Consumption (C): – Is the spending by households on goods and services e.g. buying clothing, food, movie tickets Investment – (I): Is the purchases of capital equipment and structures e.g. machinery, factory, houses, etc. NOT financial assets like stocks, bonds Principles of Macroeconomics: The Four Components of GDP Government Purchases (G): Includes spending on goods and services by local, provincial and federal governments (e.g. roads, police, etc.). – Does not include transfer payments, because they are not made in exchange for currently produced goods or services. – Net – Exports (NX): NX = X-M Exports minus imports. Principles of Macroeconomics: Real versus Nominal GDP GDP is the market value of the economy’s current production, referred to as Nominal GDP. Real GDP measures any given year’s total output in “constant” prices. An accurate view of the economy requires adjusting nominal to real GDP, using the GDP Price Deflator. Principles of Macroeconomics: First Canadian Edition GDP and Economic Well-Being GDP Per Person tells us the income and expenditure of the average person in the economy. It is a good measure of the material wellbeing of the economy as a whole. – More Real GDP means we have a higher material standard of living by being able to consume more goods and services. – It is NOT intended to be a measure of happiness or quality of life. – The GDP Deflator The GDP deflator is a measure of the overall level of prices. Definition: Index base 100 [YEAR 1] GDP deflator = 100 x (nominal GDP/real GDP) One way to measure the economy’s inflation rate is to compute the percentage increase in the GDP deflator from one year to the next. Simple GDP deflator Year 1 2 GDP cars 100 110 P $10 $15 Y $1000 $1650 y $1000 $1100 deflator price index in year 2 is: Y2/y2*100 =1650/1100 =150 prices increased by 50% GDP and Economic Well-Being Some factors and issues not in GDP that lead to the “well-being” of the economy: Factors that contribute to a good life such as leisure. – Factors that lead to a quality environment. – The value of almost all activity that takes place outside of the markets, e.g. volunteer work and child-rearing. – Principles of Macroeconomics: Canadian Edition Then Why Do We Care About GDP? Having a large GDP enables a country to afford better schools, a cleaner environment, health care, etc. Many indicators of the quality of life are positively correlated with GDP. For example…life expectancy…………literacy. CHAPTER SUMMARY-5 Gross Domestic Product (GDP) measures a country’s total income and expenditure. The four spending components of GDP include: C, I, G, and NX. Nominal GDP is measured using current prices. Real GDP is measured using the prices of a constant base year, and is corrected for inflation. GDP [ per capita] is the main indicator of a country’s economic well-being, even though it is not perfect.
