Introduction To Macroeconomics


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Introduction To Macroeconomics

  1. 1. Introduction to Macroeconomics
  2. 2. Defining Macroeconomics <ul><li>The study of the economy as a whole </li></ul><ul><li>To understand the performance of the economy, it is necessary to to look at key measures: </li></ul><ul><ul><li>GDP </li></ul></ul><ul><ul><li>Unemployment Rate </li></ul></ul><ul><ul><li>CPI </li></ul></ul>
  3. 3. Gross Domestic Product <ul><li>Total market value of all final goods and services produced within a country in one year </li></ul><ul><li>Two methods of calculation: </li></ul><ul><ul><li>Expenditure approach – add up total spent on all final goods and services in one year </li></ul></ul><ul><ul><li>Income approach – add up all the income earned by different factors of production </li></ul></ul><ul><ul><li>Final amount should be the same </li></ul></ul><ul><li>Measures only final value to avoid multiple-counting </li></ul>
  4. 4. The Expenditure Approach <ul><li>C = consumption – what households spend on goods and services </li></ul><ul><li>G = government purchases – expenditures by all levels of government on all goods and services </li></ul><ul><li>I = investment – purchase of new capital goods for use in production process, construction of new buildings and changes in business inventories </li></ul><ul><li>(X – M) = value of net exports in Canada (exports minus imports). Imports are subtracted as they are not Canadian production </li></ul>GDP = C + G + I + (X – M)
  5. 5. GNP – Gross National Product <ul><li>Total value of all final goods and services produced by Canadian-owned factors of production in Canada and anywhere in the world. </li></ul><ul><li>GDP gives better indication of Canadian output </li></ul>
  6. 6. Economic Growth <ul><li>It is presumed that the higher the per capital real GDP is, the more well-off citizens are leading to a higher standard of living </li></ul><ul><li>Canada’s real GDP growth rate for 2005 = 2.9% </li></ul>Real GDP Growth Rate = (real GDP year 2 – real GDP year 1) real GDP year 1 x 100
  7. 7. Current Canadian Statistics
  8. 8. Drawbacks to GDP <ul><li>Population size – to correct for changes in population size, divide GDP by population to find GDP per capita </li></ul><ul><li>Non-market production not measured </li></ul><ul><li>Underground economy </li></ul><ul><li>Types of good produced </li></ul><ul><li>Leisure </li></ul><ul><li>Environmental degradation </li></ul><ul><li>Distribution of Income </li></ul>
  9. 9. The Unemployment Rate <ul><li>Percentage of the labour force not working at any given time </li></ul><ul><li>Stats Canada calculates once a month </li></ul><ul><li>Population broken into categories </li></ul><ul><ul><li>Those under 15 and those institutionalized (not eligible to work) </li></ul></ul><ul><ul><li>Those eligible to work but choose not to participate </li></ul></ul><ul><ul><li>Those who are either employed or actively seeking employment </li></ul></ul>
  10. 10. Calculating the Unemployment Rate <ul><li>Criticisms </li></ul><ul><ul><li>Includes those who are partially employed (working part-time when they wish to work full-time) </li></ul></ul><ul><ul><li>Doesn’t include those who have ‘given up’ looking for work </li></ul></ul><ul><ul><li>Lead to an understating of the unemployment rate </li></ul></ul><ul><ul><li>Includes those who are underemployed (working at a job where their skills are not fully utilized) </li></ul></ul>Unemployment Rate = Number unemployed Labour force x 100
  11. 11. Full Employment <ul><li>In an active and free economy, structural and frictional unemployment will always exist </li></ul><ul><li>Frictional unemployment: results from people moving between jobs </li></ul><ul><li>Structural unemployment: occurs when skills or location of workers no longer matches demand in the economy </li></ul><ul><li>Full employment in Canada is 6% to 7% (natural rate of unemployment) </li></ul>
  12. 12. Other Types of Unemployment <ul><li>Cyclical unemployment: results from an overall reduction in consumer spending. Demand for goods drop, fewer workers needed </li></ul><ul><li>Seasonal unemployment: caused by variation in climate over the course of the year (e.g. fishing, farming, camps, ski resorts, etc.) </li></ul>
  13. 13. Variations in the Unemployment Rate <ul><li>Percentage unemployment varies significantly by education (highest – those without a high school diploma, lowest – those with graduate degrees) </li></ul><ul><li>Varies by provinces as well </li></ul>
  14. 14. Consumer Price Index <ul><li>Inflation: persistent rise in the general level of prices </li></ul><ul><li>CPI tracks inflation </li></ul><ul><li>Uses a representative basket of goods and services </li></ul><ul><li>Monitors consumption of 600 good and services in cities across Canada </li></ul><ul><li>Uses households: urban, 4 people </li></ul><ul><li>Items put into one of eight categories then weighted according to importance </li></ul>
  15. 15. Calculating and Using the CPI <ul><li>Indexing: An adjustment made to wages and pension payments to offset year-to-year price increases. (full or partial indexing) </li></ul><ul><li>Current inflation target in Canada is 2% </li></ul>Inflation rate = CPI year 2 – CPI year 1 CPI year 1 x 100
  16. 16. Limitations of CPI <ul><li>Not every household's spending reflected in the index weights of CPI </li></ul><ul><li>Individual items in base basket may not reflect current spending patterns or consumer wants </li></ul><ul><li>Does not reflect cultural diversity </li></ul>
  17. 17. Real GDP <ul><li>Without adjustment, increases in GDP reflect both economic growth and inflation </li></ul><ul><li>Nominal GDP is the total value of the output of an economy before the effect of prices increases in removed </li></ul><ul><li>Real GDP is GDP adjusted for inflation </li></ul><ul><li>Canada uses the chain Fisher volume index to adjust GDP </li></ul>