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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%