MACROECONOMICS-WINTER TERM

1. MACROECONOMICS-WINTER TERM • NEW OFFICE HOURS: • Monday 12:30-1:30 • Thursday 1-2:20 • Tutorial groups begin: • week of January 24---more next class-check web page.

2. 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”

3. 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.

4. Circular flow see text

5. 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

6. Link to PPFGDP = Pcomp*#comp + Pcars*#cars

7. 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

8. 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

9. Groups • B01 TUES 1:35 JAN 25 Southam 309 • B02 TUES 1:35 FEB 1 313 Southam • B03 TUES 1:35 JAN 25 311 Southam • B04 THURS 12:35 FEB 3 313 Southam • B05 THURS 12:35 JAN 27 311 Southam • B06 THURS 12:35 FEB 3 TB431 • B07 THURS 4:35 JAN 27 309 Southam • B08 THURS 4:35 FEB 3 313 Southam • B09 THURS 1:35 JAN 27 TB210 • B10 THURS 1:35 FEB 3 TB447 • B11 MON 9:35 JAN 24 ME3190

10. Reading week • J24 ODD1 • J31 EVEN 1 • F7 ODD2 • F14 EVEN 2 • F21 RW_________ • F28 ODD3 • M7 EVEN 3 • ETC FOR 4

11. Measuring a Nation’s Income • What is Gross Domestic Product (GDP)? • How is GDP related to a nation’s total income and spending? • What are the components of GDP? • How is GDP corrected for inflation? • Does GDP measure society’s well-being?

12. 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.

13. 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)

14. Gross Domestic Product (GDP) Is… the market value of all final goods & services produced within a country in a given period of time. Final goodsare 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.

15. COUNT FINAL OUTPUTS • Wheat steel • Flour plastic • BREAD CARS • POINT: To avoid double-counting

16. Two Methods of Computing An Economy’s Income • Expenditure Approach: • Sum the total expenditures by households (from the top portion of the circular flow). • Resource Cost or Income Approach: • Sum the total wages and profit paid by firms for resources (from the bottom portion of the circular flow).

17. 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.

18. 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

19. 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:

20. 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:

21. 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:

22. 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

23. 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 well-being 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.

24. 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.

25. Simple GDP deflator • Year cars P Y y • 1 100 $10 $1000 $1000 • 2 110 $15 $1650 $1100 • GDP deflator price index in year 2 is: • Y2/y2*100 • =1650/1100 • =150 prices increased by 50%

26. 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

27. 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.

28. 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.