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Macroeconomics GDP Chapter 9 By the end of this chapter you should be able to… Understand what is meant by macroeconomics Examine the components and weaknesses of the GDP as a measure of economic output Understand why unemployment occurs, how unemployment rate is calculated and the impact of unemployment on the economy and citizens of a country Exployr the components of CPI and how the CPI is used to adjust for the effects of inflation. In this lesson you will… Be introduced to macroeconomics Learn how to measure and calculate GDP and the pros and cons of this performance indicator Micro vs Marcro Microeconomics The study of individual parts of an economy (pieces of the puzzle) Macroeconomics The study of the economy as a whole (the puzzle as a whole) Microeconomimcs vs Macroeconomics The 3 main indicators of economic performance 1) Output – Gross Domestic Product (GDP) Goal: High and Sustained Growth 2) Employment – Unemployment Rate (U) Goal: Low unemployment 3) Price Stability – Consumer Price Index (CPI) Goal: Stable Prices GDP News Clip GDP? Who cares? Why measure economics performance (GDP)? If the GDP growth rate is positive that means employment, businesses and incomes are generally growing. If the GDP growth rate is negative that means that employment, businesses and incomes in general are falling More Specifically A measure for an economy’s economic output… Assists in government decision making for tax and spending policies Used as measure to see if policies implemented by the government have yielded economic growth Allows the opportunity to compare output performance with other economies Why measure economic performance continued allows us to look at the role and impact of specific industries on the economy as a whole Measures can be used for contract negotiations (ex. unions) Measures can be used to assist in investment decision making. GDP ya you know me! What is GDP? Gross Domestic Product What does GDP measure? The total economic activity/growth across a country by estimating annual output Measures market value of total annual output of final goods and services produced in the nation GDP ya you know me… BREAK IT DOWN! GDP is broken down into 4 subdivisions Consumption ( c ): consumer goods and services purchased by households (cars, appliances etc.) Equals 60%-70% of country’s total GDP Investment (I): additions to society’s stock, business’s spending on equipment, inventory and buildings to increase production Government (G): consumption of goods (wages and office supplies) and capital Investment (schools, hospitals, roads) Net Exports (X-M) Exports (x): products produced in Canada and sold to foreign buyers Imports (M): goods purchased in Canada, that were not made in Canada GDP Calculations (2 ways) 1) Expenditure Approach The sum of all final goods and services GDP = C + I + G + (X-M) Incomes Approach The GDP can be calculated by adding all the incomes in a year (wages, rent, interest, profit) in producing the final goods and services Should both approaches give the same measure? Why or why not? Expenditure for one person is another person’s income Handout Sit back and enjoy the show GDP Expenditure Approach Scenario What do you think would happen with regards to inflation if our economy were to expand/grow? We would see inflation unemployment levels drop and more people can fined work. More workers employed = increased demand for consumer goods. As economic activity increases, both supply and demand increase. If production cannot keep pace with the demand inflation will increase because there will be a shortage resulting in excess demand leading to higher prices Scenario Would an economy experience inflation during a recession? Most likely not, because unemployment levels rise. Less jobs means consumer spending decreases Therefore less demand for goods and services Prices therefore stabilize Inflation What is inflation? a rise in the general level of prices Why does inflation occur? increased cost of production Increased consumer demand Nominal GDP vs Real GDP Nominal GDP Does not take inflation into account Real GDP GDP calculated with inflation (i.e. at current dollar value) A more accurate and truer representation of a country’s output Real GDP Real GDP Growth Rate (real GDP year 2 – Real GDP year 1) Real GDP = Growth rate X 100 real GDP year 1 Handout Use your handout of Canada’s GDP to answer the following questions 1) What is the percentage of Canada’s Real GDP growth from 2010 to 2011 ? 2) What is the percentage of Canada’s Real GDP growth from 2007 to 2011? Canada's Real GDP (GDP year 2 – GDP year 1) Real GDP = Growth rate X 100 GDP year 1 1) 2010’s GDP = $1,624,608 (in millions) 2011’s GDP = $1,718,685 (in millions) GDP = 1,718,685 – 1,624,608 Growth rate 1,624,608 GDP growth from 2010 – 2011 = 5.7% Real GDP is 3% growth X 100 ( GDP year 2 – GDP year 1) GDP = Growth rate X 100 GDP year 1 2007’s GDP = $1,529,589 (in millions) 2011’s GDP = $1,718,685 (in millions) GDP = $1,718,685 - $1,529,589 Growth Rate $1,529,589 X 100 The GDP growth rate from 2007 to 2011 is approximately 12.4% Real GDP growth rate is 12% How much GDP growth is ideal The ideal GDP growth rate is one that can be sustained year after year. Think of GDP growth rate like our bodies. Our bodily temperature is 98.6 degrees F. And we want to keep it there. That is the ideal temperature for us to maintain healthy growth. However, if your temperature is lower than the ideal, you know you’re sick. If it’s too low, you’re near death. But a higher temperature can also mean you’re sick. If it’s over 100, you have a fever. If it’s above 104 degrees for any period of time you’re deathly ill. If the economy grows too slowly it’s not healthy. But, if it grows too fast, that’s not ideal, either. Why is this the case? The economy overheats (so to speak) Too much money chasing too few real growth opportunities. Eventually, good money is invested in poor business growth opportunities. Investments start losing money and as a result confidence is lost. Panic then occurs and results in selling of many more investments due to fear. Panic doesn’t stop until prices are low enough to attract investors 2008-2009 Recession Why do you think the 2008-2009 recession occurred? 2008-2009 Recession This is what happened during the 20082009 recession. GDP was above 4% for many quarters. Housing alone peaked at over 7% growth. Once the housing bubble burst then everything else went with it. GDP fell sharply (contraction phase) GDP the good, the bad and the ugly We’ve talked about the positives of measuring economic output? Can you think of any negatives? GDP Drawbacks A number of economists have criticized the GDP as a measure of economic output 1) Population Size A GDP growth of 3% can be misleading if the population of a country grows by 5%. In this case we need to divide the GDP by the number of people (per capita GDP) 2) Non-market production is not measured GDP does not measure everything Examples: people who renovate homes, homemakers, voluntary services 3) GDP does not measure output of underground economies (hidden economies) When a paper trail is not present GDP cannot be measured – under-the-table transactions that occur so people can avoid paying taxes. Economists believe this could add anywhere from 3%-20% of the total GDP 4) Types of goods produced Many believe that goods and services that take away from a country’s well being (decrease in GDP) should not be included Examples; policing riots and guns 5) Leisure GDP does not take into account leisure time. Leisure time = greater well being = positive GDP growth A country could have people work 18 hour days 7 days a week and they most likely would generate a higher GDP growth rate. However, there would be less leisure time and thus lower well being Environmental Degradation GDP does not take into effect the negative effect industry has on our environment Environmental degradation is actually rewarded Example: Oil spill of the cost of Florida, has to be cleaned up. That contributes to our GDP Distribution of income GDP does not take how evenly income is distributed among it’s citizens. Even though you have positive GDP growth you can have only a small portion of the population the benefits from that growth. The wealthy becoming wealthier and the poorer becoming poorer. Agenda Review what we learned (GDP) Introduction to Unemployment Four Walls Activity Discussion/Lecture Group Work What have we already learned about GDP What are 3 economic indicators of economic performance? What is GDP and what does it measure? Is GDP an accurate measure? Unemployment Today’s Lesson Labour Force What is it? Who Qualifies? What role does it play? Labour Force Surveys (LFS) Unemployment What is it? Who qualifies? Is it an accurate measure of true unemployment The 4 types of unemployment Let’s Brainstorm Unemployment 4 Walls There is a sign in each corner of the classroom. I will read the statement on the board and you are to think about the statement and walk to the wall that agrees with your point of view. Let’s walk through the first one together Joe works a 20 hour/wk minimum wage job, but would like to work full time. Despite not being able to find a full-time job and having difficulty making ends meet, he is still considered employed. A homemaker (stay at home parent), should be considered as an employed individual. Canada’s national unemployment rate is 7.2%. This number greatly underestimates the percentage of people unemployed in the country. Lack of education is the greatest contributor to high unemployment levels. Seasonal unemployment – where people choose to only work during specific seasons of the year (ie. resorts, camps, construction etc.), should not be allowed to collect unemployment benefits during the off-season. Labour Force Before we can truly understand unemployment, we must define labour force Labour Force - all people who either have a job (employed) or are actively seeking employment (unemployed). Unemployment Unemployment? Anyone in the labour force that is not working and is actively seeking work Do you believe these definitions provide an accurate representation of our economy’s true labour force? Part time workers looking for full time work Any amount of work that you get paid for is considered employed Weren’t really looking for a job but said they were People can eventually give up trying to find a job Unemployment Video Clip Population The population is grouped into 3 categories 1) Those not eligible to work 2) Institutionalized individuals Under 15 years of age Those who are eligible to be in the workforce but choose not to participate Retirees Students 15 and over who don’t need to have a job Homemakers – stay at home parent Military 3) The labour force – all the people who either have a job or are actively seeking employment (unemployed). Handout Labour Survey Flow Chart CTV Video Clip 4 Types of Unemployment Structural Unemployment Frictional Unemployment Cyclical Unemployment Seasonal Unemployment 4 Types of Unemployment 1) Structural Unemployment Occurs when workers are unable to fill available jobs because they lack the necessary skill set and/or are unwilling to move for work (fish plant workers in New Brunswick). Is the most serious and long lasting type of unemployment Structural Unemployment is divided into two subdivisions Breakdown of Structural Unemployment Technological Unemployment Occurs as a result of more industries advancing technology in the production process, thereby reducing the need for workers. Example? Replacement Unemployment Outsourcing labour to other countries in order to save production costs has resulted in a number of lost jobs. Example? 4 Types of Unemployment 2) Frictional Unemployment Occurs when people move from one job to another Naturally occurs Example? 3) Cyclical Unemployment A significant decrease in consumer consumption/spending results in the loss of jobs Example? 4 Types of Unemployment 4) Seasonal Unemployment Employment that only occurs during certain seasons Statistics Canada adjusts for this when calculating employment Example? Group Activity Topic: Unemployment and Policy Homework Read pg. 203-206 Answer Questions on pg. 206 #1-4 When in the last 10 years do you think unemployment was it’s lowest? Why? Question Which province do you think has the lowest unemployment rate? Guess right and get a prize! OOOOOhhh Unemployment Rate Comparison Province Unemployment rate Newfoundland and Labrador 13.0 Prince Edward Island 11.3 Nova Scotia 8.3 New Brunswick 10.2 Quebec 7.9 Ontario 7.4 Manitoba 5.3 Saskatchewan 4.8 Alberta 5.3 British Columbia 7.0 Canada (national) 7.2 3 Taken From Statistics Canada Saskatchewan What is the unemployment rate and how is it calculated? Unemployment Rate Unemployment rate the percentage of the labour force that is not working What do you think the calculation for the unemployment rate looks like? Unemployment rate (U) = # unemployed X 100 labour force You do the Math Unemployment rate (U) = # unemployed X 100 labour force If Canada has an unemployment rate of 7.2% and a labour force of 18,590,000. How many people are unemployed in Canada? ANSWER: 1,338,480 people are unemployed If Canada’s current population is 34,100,000, what percentage of the Country’s population are part of the labour force? Answer: 54.5% of the country’s population is part of the labour force Unemployment Rate 58,000-59,000 Labour Force Surveys are randomly distributed throughout Canada Calculated once a month by Statistics Canada It is mandatory to fill out Northern Provinces and Aboriginal people are not included in the nations average unemployment rate. Does full employment exist? In Practice Yes…but theoretically No. Full employment = 6% - 7% unemployment In a free market there will always be structural and frictional unemployment When would frictional unemployment be at its maximum? When the economy is showing strong growth. That’s when people feel comfortable leaving one job to find another. Unemployment aint cheap? Social costs increase as (U) increases loss of taxes collected by the government decreased spending on goods and services social welfare programs increase social unrest and crime family tension Poor health Economic Costs of Unemployment Loss of money in taxation Unemployed don’t pay income tax Unemployed buy less, so they pay less on goods and services Reduces government expenditures De-valued skills Skills can become dated and de-valued for people unemployed for long periods of time Economic Costs of Unemployment Waste of scarce resources Opportunity Cost 16000 14000 Bread 12000 10000 8000 6000 4000 2000 0 0 1 2 3 Ploughs 4 5 6 Consumer Price Index (CPI) The 3rd Economic Goal Goal of CPI: Maintain Stable Prices If prices of goods and services rise and incomes stay the same. People will have less income. Consumer Price Index (CPI) Is an indicator of a change of prices for consumer goods over time. Measures inflation and deflation How Does the CPI account for measuring the change in price for all goods? Magnum CPI CPI doesn’t just measure the increase in prices CPI also weights consumer spending habits Which Categories do you think Canadians spend most of their income on ? Measuring CPI CPI Takes a General Representation of our spending habits It monitors over 600 goods from services from various cities across Canada. The CPI includes such goods as Transportation Food Shelter Clothing Health and personal care Alcoholic beverages and tobacco Recreation, education and reading Household operations and home furnishings Alc. and Tobacco 3.9% Rec. Educ. and Reading – 11.2% Food – 16% Health and Personal Care 4.9% Transportation 20.6% Shelter 27.5% Clths. and footwear – 5.3% House Hld. Oper. Furnishings and equipment – 11.6% How CPI Works CPI plays a vital role in calculating the inflation rate. Inflation rate – the annual percentage that CPI has increased Inflation rate = (CPI year 2 – CPI year 1) CPI year 1 X 100 Why is it helpful for govenement, business and everyday people to understand CPI and inflation? Allows us to make adjustments regarding wages (minimum wage) and pensions on a year to year basis as price increases or decreases. This is called indexing Magnum CPI Isn’t Perfect What do you think some limitations of CPI are? Not every household spending patterns reflect those of the CPI (ex. smokers vs non-smokers) Not every household is made up of 4 people, therefore spending will be greater than smaller households People may switch their purchasing trends (VHS to DVD) consumption patterns vary greatly in culturally diverse areas. Therefore CPI may not be an accurate measure of the impact that price changes have on households HW Start work in class Read Pages 207-212 Do question 1 on page 209 Do Questions 1 and 2 on page 211 QUIZ on TUESDAY, MAY 15th. HW Pg. 209 Price index = price of basket in current year price of basket in base year Base year index always = 100 X 100 Item Weight Price in 1999 Price in 2001 Purple Stuffed Dino 4 $20 $24 Bag of Lemon drops 6 $4 $5 Bag of Gum Drops 9 $4.50 $5.25 Total Basket Base year 1999 – Basket of goods = $144.50 Year 2001 – Basket of goods = $173.25 CPI = 173.25 X 100 144.50 CPI for 2001 = 119 What would be the inflation rate? Inflation rate = (CPI year 2 – CPI year 1) CPI year 1 Inflation rate = (119 – 100) 100 Inflation rate of 19.9% X100 X100 Page 211 Lets do this one together Remember CPI Year 1 wage or pension amount year 1 = CPI Year 2 wage or pension amount year 2 Pg. 211 1) $26, 136.36 #2 CPI 153.3 Homework Page 202 Questions #1-4 Page 212 Questions #2-4 Questions to prep for quiz pg. 214-215 # 3,4, 5, 12, 14, 16 Pg. 202 #1-4 1) GDP quantifies the amount of economic activity in the economy by measuring the value of finished goods and services. GDP can be measured by 2 approaches; income and expenditure approach. Both should give the same final value 2)If you don’t count the final value of goods you will overstate the GDP, because the inputs at each level of production would be counted multiple times. Let’s use the example of a car. There are many components to a car. If they counted in the GDP when they are sold parts of the car to the manufacturer, they would be counted twice – once when they were sold to the manufacturer and once when the car was sold to the consumer. Hence the GDP would be overstated. 3) You tell me 4) standard of living takes more into account than that needs and wants that are accounted in the GDP. The GDP however, fails to take into account nonmarket production, types of goods produced, leisure time, underground economic activity, environmental degradations, and distribution of income. Pg. 212 #2-4 #2) Shelter, transportation and food #3) Indexing allows for the CPI to be used to adjust people’s incomes and penson’s to take into account increases in the general level of prices. 4) If a family’s spending patterns do not mathc those of the typical Canadian household, then the CPI will not accurately measure the impact of price increases for that family. Furthermore the weightings for the basket do not reflect the spending of individuals. For example, the proportion of income spent on shelter for a small family is likely to be lower than that of a larger family. Cultural backgrounds will also have an impact on patterns of expenditure, which will differ form those of the country as a whole Pg.214-215 #3) a) included –consumption b) included consumption c) included – consumption d) Not included – unreported activity e) Not included - import #4) A) frictional unemployment B) structural unemployment C) seasonal unemployment D) technological unemployment E) cyclical unemployment F) replacement unemployment #5) Because the inflation rate is calculated based on a weighted basket of goods, anyone whose purchasing habits are weighted differently than the basket will feel the effects of inflation differently. Pg.214-215 12) a) The GDP goes up as government expenditures increase to meet the needs of the military. Involvement in the war does little to improve the well being of Canadians b) The GDP goes up through increased government expenditures on border security. Canadians may feel safer, but this feeling does not necessarily improve their well-being. c) The GDP may go up as long as producers are not also laying off workers. Less leisure time likely means a decrease in quality of life. 12) D) GDP increases through increased consumption as people buy materials for their projects, although it does not go up by as much as it would if people hired contractors to do the work. Presumably people are redecorating in a manner that improves how they feel about their living space, so well-being would likely improve E) GDP increases as drivers now have to spend money on emissions test. If the emissions testing program actually reduces pollution, the well being of Canadians is improved. #14 The wage rate at the end of the third year of the contract at Koskins Inc. would be $15.13/hr #16 Canada - 6.8% Bangladesh – 35.3% United Kingdom – 5.5% Vietnam – 25% Australia – 6.3%