Intro to Macroeconomics


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Intro to Macroeconomics

  1. 1. Chapter 9 Introduction to Macroeconomics
  2. 2. Macroeconomics <ul><li>The study of the economy as a whole in contrast to microeconomics, which studies its parts. </li></ul><ul><li>It studies the structure and performance of national economies and policies governments use to affect economic performance . </li></ul>
  3. 3. Why Measure Performance??? <ul><li>Measuring national economic performance helps governments decide on tax policies and spending priorities. </li></ul><ul><li>Governments use the information to measure the effect of their economic policies. </li></ul><ul><li>Allows us to compare our economy to others. </li></ul><ul><li>Unions and wage earners use economic measures in negotiations. </li></ul><ul><li>Individuals and businesses use these measures to help make investment decisions </li></ul>
  4. 4. Gross Domestic Product (GDP) <ul><li>GDP is the most commonly used measure of a country’s output. </li></ul><ul><li>It is the total market value of all final goods and services produced within a country in one year. </li></ul><ul><li>It includes the value of all Canadian output. Including foreign companies operating in Canada. </li></ul><ul><li>It can be calculated in two ways. The expenditure approach and the income approach. </li></ul><ul><li>The expenditure approach: The total that is spent on all final goods and services in one year. </li></ul><ul><li>GDP = C + G +I + (X – M) </li></ul>
  5. 5. Gross Domestic Product (GDP) <ul><li>GDP = C + G +I + (X – M) </li></ul><ul><li>Consumption = What households spend on goods and services. </li></ul><ul><ul><ul><ul><ul><li>Durable goods: Goods that last a long time. (cars, appliances, furniture) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Semi-durable goods: Goods that last a reasonable amount of time. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>(clothing) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Non-durable goods: Goods that are used up very quickly. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>(food, gas) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Services: Actions rather than physical items. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>(haircuts, car tune-ups) </li></ul></ul></ul></ul></ul>
  6. 6. Gross Domestic Product (GDP) <ul><li>The letter G represents Government purchases. </li></ul><ul><li>This comprises the value of expenditures on goods and services by all levels of government and includes spending on: </li></ul><ul><ul><ul><li>Wages </li></ul></ul></ul><ul><ul><ul><li>Office supplies </li></ul></ul></ul><ul><ul><ul><li>Public capital goods such as schools, highways, and hospitals. </li></ul></ul></ul>
  7. 7. Gross Domestic Product (GDP) <ul><li>The letter I represents Investment. </li></ul><ul><li>This refers to: </li></ul><ul><ul><ul><li>the purchase of new capital goods for use in the production process </li></ul></ul></ul><ul><ul><ul><li>construction of new buildings </li></ul></ul></ul><ul><ul><ul><li>changes in business inventories. </li></ul></ul></ul>
  8. 8. Gross Domestic Product (GDP) <ul><li>Finally, (X-M) represents the value of net exports in Canada. </li></ul><ul><li>Imports (items produced outside of Canada) are subtracted from GDP because they do not represent Canadian production. </li></ul><ul><li>Exports (items produced in Canada, but purchased by other countries) are added to GDP. </li></ul>
  9. 9. Gross Domestic Product (GDP) <ul><li>The GNP or Gross National Product was once used in Canada. It is the value of everything produced by Canadian owned businesses and workers wherever they are in the world. </li></ul><ul><li>GDP gives a better indication of Canadian output. </li></ul><ul><li>Because changes in prices from year to year may impact GDP, economists remove the effects of price increases. This is known as Real GDP. </li></ul>
  10. 10. Gross Domestic Product (GDP) <ul><li>GDP is most commonly used as a tool for measuring the economic growth of a country. To determine how much a country has expanded we must compare GDP figures for two successive years. </li></ul><ul><li>Real GDP Growth Rate = GDP Year 2 – GDP Year 1 x 100 </li></ul><ul><li>Real GDP year 1 </li></ul>
  11. 11. Gross Domestic Product (GDP) <ul><li>GDP is used to compare the standards of living of different countries. </li></ul><ul><li>Standard of Living = the quantity and quality of goods and services that people are able to obtain to accommodate their needs and wants. </li></ul><ul><li>If real GDP is divided by the country’s population it represents the GDP on a per capita basis and provides an average income for each person. </li></ul>
  12. 12. Measuring Employment The Unemployment Rate <ul><li>A high unemployment rate is a clear sign that the economy is not using all its resources efficiently. </li></ul><ul><li>The unemployment rate is the percentage of the labour force not working at any given time. </li></ul><ul><li>Stats Canada conducts a Labour Force Survey and groups the population into 3 categories. </li></ul><ul><ul><ul><ul><li>Those not legally eligible for the workforce. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>(Under the age of 15 and those who are institutionalized) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Those eligible but chose not to participate. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>(Students 15 and older, homemakers, and retirees) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The labour force are people who are employed or those willing and able to work and actively seeking employment. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>(People who are without employment yet seeking employment are therefore deemed unemployed) </li></ul></ul></ul></ul>
  13. 13. Measuring Employment The Unemployment Rate <ul><li>The unemployment rate is therefore: </li></ul><ul><li>Unemployment rate = number unemployed x 100 </li></ul><ul><li> labour force </li></ul>
  14. 14. Measuring Employment The Unemployment Rate <ul><li>There is some criticism of Stats Canada’s unemployment rate. </li></ul><ul><ul><ul><ul><li>It includes anyone who has any type of wage-earning job as being “employed” </li></ul></ul></ul></ul><ul><ul><ul><ul><li>It does not included people that are not actively looking for work. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>There are a range of people who accept jobs for which they are overqualified. </li></ul></ul></ul></ul><ul><li>Therefore the unemployment rate is understated and there are people who are underemployed. </li></ul>
  15. 15. Measuring Employment Types of Unemployment <ul><li>Structural Unemployment: Occurs when the skill or location of workers no longer matches the patterns of demand in the economy. </li></ul><ul><ul><ul><li>Technological Unemployment: Results from industries using more technology and thus reducing the need for workers. </li></ul></ul></ul><ul><ul><ul><li>Replacement Unemployment: Results as firms move labour-intensive production to other countries with cheaper labour. </li></ul></ul></ul>
  16. 16. Measuring Employment Types of Unemployment <ul><li>Frictional Unemployment: Results from people moving between jobs. A certain amount of frictional unemployment is natural in an economy. </li></ul><ul><li>Cyclical Unemployment: Results from a reduction in overall consumer spending. As overall demand for goods and services declines fewer workers are needed. </li></ul><ul><li>Seasonal Unemployment: Caused by variation in climate over the course of the year. </li></ul>
  17. 17. Measuring Employment Full Employment <ul><li>Full employment does not mean zero unemployment. </li></ul><ul><li>Most economist believe an active economy has at least some structural and frictional unemployment. </li></ul><ul><li>In Canada even when there has been significant economic growth unemployment has been no lower than approx 6%. </li></ul><ul><li>Why would frictional unemployment during a time of economic growth be at its maximum? </li></ul><ul><li>Full employment in Canada is considered to be in the range of 6 to 7 percent. </li></ul><ul><li>This is also know as the natural rate of unemployment . </li></ul>
  18. 18. Measuring Employment Okun’s Law <ul><li>Unemployment above the natural rate of unemployment has both financial and social costs. </li></ul><ul><li>The GDP Gap is the difference between the actual GDP produced by the economy and the potential GDP that could be produced if the unemployment rate was not higher than the natural rate. </li></ul><ul><li>Arthur Okun created a formula to estimate the size of this gap. Known as Okun’s law. For every percentage point the actual unemployment rate exceeds the natural rate, a GDP gap of 2 percent occurs. </li></ul><ul><li>GDP = Actual GDP x (unemployment rate- natural rate) x 2 </li></ul><ul><li>Gap 100 </li></ul><ul><li>. </li></ul>
  19. 19. Measuring Price Stability The Consumer Price Index <ul><li>The term inflation is used to describe the persistent rise in the general level of prices. </li></ul><ul><li>The Consumer Price Index is used to track inflation. </li></ul><ul><li>The CPI is a price index that measures the changes in the prices of consumer goods. </li></ul><ul><li>Stats Can uses a “representative basket” and monitors consumption of 600 goods and services in cities across Canada. </li></ul><ul><li>From this it determines the spending habits of households. </li></ul><ul><li>Each item is placed into one of eight categories and “weighted” to reflect how important they are in a typical household’s “shopping basket.” </li></ul>
  20. 20. Measuring Price Stability The Consumer Price Index <ul><li>Food </li></ul><ul><li>Shelter </li></ul><ul><li>Household operations and furnishing </li></ul><ul><li>Clothing and Footwear </li></ul><ul><li>Transportation </li></ul><ul><li>Health an Personal Care </li></ul><ul><li>Recreation, Education, and Reading </li></ul><ul><li>Alcoholic Beverages and Tobacco Products </li></ul>
  21. 21. Measuring Price Stability The Consumer Price Index <ul><li>The primary use of CPI is to calculate the inflation rate. </li></ul><ul><li>Any two back-to-back years can be used to calculate an inflation rate. </li></ul><ul><li>Inflation Rate = (CPI year 2 –CPI year 1) x 100 </li></ul><ul><li>CPI year 1 </li></ul>
  22. 22. Measuring Price Stability The Consumer Price Index <ul><li>CPI helps us determine how wage and pension payments should be adjusted to offset inflation. </li></ul><ul><li>This is known as indexing . </li></ul>
  23. 23. Measuring Price Stability The Consumer Price Index <ul><li>Limitations of CPI </li></ul><ul><li>Not every household’s spending habits reflect the index weights in CPI. </li></ul><ul><li>Many households do not match the norm of 4 members set by Stats Canada. </li></ul><ul><li>The individual items in a base year basket can be very different in its quality and price in later years. </li></ul><ul><li>It does not account for culturally unique differences in spending. </li></ul>