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Introduction To Macroeconomics
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Introduction To Macroeconomics

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Introduction To Macroeconomics Introduction To Macroeconomics Presentation Transcript

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