Economic Activity & Performance chapter 16

2020, Curtis & Irvine Chapter 4 1
4
ECONOMICACTIVITY&
PERFORMANCE
Principles of MacroEconomics
Douglas Curtis & Ian Irvine
Ch 16

This chapter examines:
4.1 Indicators of macroeconomic activity &
performance
4.2 Recent Canadian economic performance
4.3 National Accounts & Economic Structure
4.4 Measuring GDP
4.5 Nominal GDP, Real GDP and the GDP
deflator
4.6 Per capita real GDP, Productivity &
Standards of Living

Macroeconomic theories and models
• Try to capture the complex linkages and
feedback effects that determine:
• The economy’s total output of goods & services
• Expenditures on current output
• Employment & incomes
• Money & financial markets
• Prices and inflation
• Macroeconomic performance
• Monetary and fiscal policies

Macroeconomic Performance
A starting point:
Three key indicators of performance:
a) The rate of growth of real national income
b) The rate of inflation
c) The rate of unemployment

Definitions:
• Real national income (GDP) ≡ GDP measured in constant base
year prices ≡ quantity of final goods and services produced
in a given time period
• Inflation ≡ a persistent increase in the general price level
• Unemployment ≡ number of persons 15+yrs not working
but actively seeking work

100
GDP
Real
GDP
Real
GDP
Real
1
year
1
year
2
year



Rate of growth of real GDP
In 2017, real GDP was $2,022 billion
In 2018, real GDP was $2,065 billion
Rate of growth in 2018 =
Measuring Macroeconomic Performance
$2,065 −$2,022
$2,022
X 100 = 2.1%

Economic Performance
• The Price Level
• Weighted average price of a basket of goods & services
• Consumer Price Index (CPI)
• The Inflation Rate:
• Annual % change in the Price Level
year 2 year 1
year 1
CPI CPI
100
CPI

 

Inflation in Canada (Stats Canada uses 2002 as the current base year for CPI )
In 2018, CPI at 133.5
In 2019, CPI at 136.4
Economic Performance
𝐈𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 𝐫𝐚𝐭𝐞 𝐟𝐨𝐫 𝟐𝟎𝟏𝟗 =
CPI2019−CPI2018
CPI2018
×100
Inflation rate for 2019 =
136.4−133.5
133.5
×100 =
2.2%
Consumer price index portal (statcan.gc.ca)

Employment - Definitions
• Labour Force: Those employed + those unemployed but
actively looking for work
• Employment: Those employed full-time, part-time & self
employed
• Unemployment: Those not working but actively looking for
work

Unemployment Components
• Cyclical Unemployment: would be eliminated by higher
level of economic activity without increased pressure on
wages and inflation E.g: Discuss
• Frictional Unemployment: Changing labor force
participation as well as employment opportunities (It takes
time to match up candidates with jobs) E.g: Discuss
• Structural Unemployment: Differences in labor force
needs and opportunities as structure of economy
changes. E.g: Typewriters
• The natural unemployment rate is 6% in Canada –
represents frictional+structural unemployment

Macroeconomic Performance - Employment
Table 4.1Change in the Canadian LabourMarket, 2013Q1and 2019Q2
(thousands of persons and percent)
2013Q1 2019Q2 %∆
1) Non-insitutional population 15+yrs 28,504 30,626 7.4
2) Labourforce 18,978 20,188 6.4
3) Employment 17,623 19,029 8.0
4) Unemployment 1,355 1,159 -14.5
5) Participation rate [(2)/(1)] x 100 66.7 65.9
6) Employment rate [(3)/(1)] x 100 61.8 62.1
7) Unemployment rate [(4)/(2)] x 100 7.2 5.7
Source: Statistics Canada, Table 14-10-0287-01 and authors' calculations.

Canadian Economic Performance

Growth trend in
Figure 4.1
disguises important
business cycle
fluctuations in
annual growth rates
including the
negative growth in
recessions and large
impact of COVID-19.

Since 1991 the
Bank of Canada
has conducted
monetary policy
based on an
Inflation Rate
Target of 2.0 %
,+/- 1%.

Unemployment rates vary inversely to GDP growth rates.
Recessions cause higher unemployment.

National Accounts (Accounting system that describes the
economynot an economicmodel that explainsthe economiesbehavior)
National Accounts provide:
• Definitions and concepts for measuring GDP
• A framework for aggregate demand (AD) and
supply (AS) models of the economy
https://www150.statcan.gc.ca/n1/pub/36-28-0001/2022003/article/00004-eng.htm

The Circular Flow Diagram
Households Businesses
Output of goods
& services
Factor inputs
to business
(labour & Raw Mat - RP)
Factor incomes
paid households
(wages & profits - RP)
Production
costs $$
Money incomes
$$
Money
payments
$$
Money receipts
$$
Expenditure on
goods & services
This is not an easy diagram to
like. For the same concept
please look at next page
(Simple economy – no
government or int’t trade)
1
3
2
0

Circular Flow of Economic Life
This is not new material.
This is just a “user-friendlier”
diagram that serves the SAME
PURPOSE as the diagram on
Previous page
1
2
3
Simple model. No Gov. No
Banks. No International trade

Measuring GDP
Three measures of nominal GDP
1. Output-based GDP ≡ sum of value added by all industries
2. Income-based GDP ≡ sum of payments to factors of production
3. Expenditure-based GDP ≡ sum of expenditures on final goods
and services

Output based GDP = the sum of all net outputs by industries
as measured by value added
- Value added ≡ market value of output minus cost of inputs
purchased from other businesses (e.g cheese
and pepperoni for pizza makers, computer chips for hard drives etc – avoids double counting)
- Inputs purchased from other businesses are intermediate inputs
(e.g accounting services, engineering services etc)
- Net outputs by industry describe the industrial structure of
the economy
Output – Based GDP
1

Output – Based GDP
Let’s pound this “Value added” concept with an example from another source
1

Industrial Structure of Canada: 2019
Table 4.2 Outputs of Selected Industries in GDP
Canada, July 2019
% shares
All industries 100.0
Goods producing industries 29.5
Service producing industries 70.5
Agriculture, forestry, fishing etc. 1.5
Mining, oil and gas extraction 8.3
Construction 7.1
Manufacturing 10.5
Wholesale and retail trade 11.4
Transportation 4.6
Finance, insurance and real estate 19.9
Professional,scientific and management 8.0
Health and social assistance 6.7
Educational services 5.2
Public administration 6.2
Entertainment, recreation, accommodation etc 3.0
All other 7.6
Gross domestic product (GDP) at basic 2012 prices
Statistics Canada. Table 36-10-0434-01
and author's calculations

Income-Based GDP(Addsupfactorcostsofproductionofallgoods/services
plusnetindirecttaxesincludedinmarketprice)
Income based GDP = Factor costs + CCA + TIN
Factor costs = W + GCS + GMI
•W = employment compensation: the sum of all wages, salaries
& benefits paid to labour
•GCS = corporate surplus including CCA
•GMI = mixed income including CCA
Depreciation and net indirect taxes:
• CCA = Capital consumption allowance to cover the
depreciation of capital stock
• TIN = Net indirect Tax = sales + excise taxes – subsidies
GDP at market price = W + GCS + GMI + Tin
2

Expenditure-Based GDP(Addsmarketvalueofallfinalgoods/servicesbought
inagiventimeperiod)
Expenditure based GDP = C + I + G + X – IM
• C = consumption expenditure by households
• I = investment expenditure by business on buildings,
machinery, & inventories,
• G = government expenditure on currently produced
final goods & services,
• X = exports of goods and services
• IM = imports of goods and services
GDP at market price = C + I + G + X – IM
3

Table 4.3 Canadian National Accounts 2018Q4
($ billions at current prices seasonally adj at annual rates & %GDP)
Expenditure Measures Income Measures
Atmarketprice $ % By income source $ %
C by households 1,196.7 53.8 (W) Employee compensation 1,135.0 51.1
I by business 597.6 26.9 (GCS) Gross operating surplus 568.6 25.6
Gby government 417.8 18.8 (GMI) Gross mixed income 267.9 12.1
X exports 664.4 29.9 (TIN) Net indirect taxes 253.2 11.4
IMimports -654.8 -29.5
Statistical discrepancy 1.4 0.1 Statistical discrepancy -1.5 -0.1
GDP atmarketprice 2,223.1 100.0 GDP atmarketprice 2,223.2 100.0
Source: Statistics Canada, Tables 36-10-0103-01 and 36-10-0104-01 and author's calculations

Nominal GDP, Real GDP& the GDPDeflator
• Nominal GDP ≡ output & incomes of a given year measured with
current market prices of goods & services.
• Real GDP, or GDP in constant dollars ≡ output & incomes of given
year measured with base year prices* of goods & services.
• Changes in nominal GDP = Changes in prices & quantities
• Real GDP = nominal GDP is adjusted by GDP deflator.
• Changes in real GDP = Changes in price & quantities of goods & services
*base year, for example 2002

Nominal & Real GDP& the GDPDeflator
• GDP deflator for year t :
PGDPt =
𝐍𝐨𝐦𝐢𝐧𝐚𝐥 𝐆𝐃𝐏𝐭
𝐑𝐞𝐚𝐥 𝐆𝐃𝐏𝐭
x 100
• GDP deflator: covers all goods & services included in
GDP.
• GDP deflator: Comprehensive and deflates the dollar value
of current output to what it would have been in base
year’s prices.
• The CPI is based on “representative baskets” of
goods & services consumers buy
I don’t know why they use.
P to stand for “deflator”

∆ nominal GDP
2008 – 2018
= 63% (190/300)
∆ real GDP
2007 – 2018
= 75%
∆ Prices 2008-2018
= - 6.7%
2008 2018 %change
Qunatity blue jeans 4000 5000 25
solar panels 2000 4000 100
Price in curent $ blue jeans 25 50 100
solar panels 100 60 -40
Current value blue jeans 100,000 250,000 150
solar panels 200,000 240,000 20
Nominal GDP 300,000 490,000 63
Value in 2007 $ blue jeans 100,000 125,000 25
solar panels 200,000 400,000 100
Real GDP 300,000 525,000 75
GDP deflator 100 93.3 -6.7
2008 $

Using the GDPDeflator
Nominal GDP
Real GDP 100
GDP deflator
 
Canadian nominal GDP in 2018Q2: $2,225 billion
GDP deflator (2007 = 100): 120.2
Real GDP in 2018Q4 =
$2,225
120.2
× 100 = $1,851 billion
From 2006 to 2014 Nominal
GDP grew by about 33%
Over the same period the price
level increased by 14.5%
Real GDP grew by 16.1%
Table 4.5 Canadian nominal and real GDP 2006Q4-2018Q2
2006Q4 2010Q4 2014Q4 2018Q4
(Seasonally adjusted at annual rates)
Nominal GDP (billions $) 1,510 1,698 2,009 2,225
GDP deflator (2007 = 100) 98.4 102.4 112.9 120.2
Real GDP (billions 2007 $) 1,532 1,658 1,779 1,851
Source: Statistics Canada Tables 36-10-0104-01, 36-10-105-10 and 36-10-0106-10

Per Capita GDP
• Per Capita real GDP : an indicator of
standard of living.
Real GDP
Per capita real GDP
Population


Quarterly Growth rates in Canadian PerCapita Real GDP
The reductions in
per capita real GDP
during recessions
motivate stabilization
policy

Limitations of GDP (whyGDP,asameasureofstandardofliving,haslimitations)
• Pollution & other externalities caused by production
and consumption (associated costs are not included)
• Unreported income & output (drug trade for example )
• Non-marketed goods & services (housework for example )
• Composition of output affects standard of living
(military production vs health care) (does every $ of GDP improve
standard of living for Canadians equally for these 2 sectors? )
• Income distribution (does every $ of GDP improve standard of living for every
Canadians equally? )

Top Ten Countries by UN HDI 2018
Table 4.6 Top twelve countries based on the United Nations human development index
HDI Life Expected Mean yrs GNP/pop
1
GNP/pop HDI rank
Rank Country HDI Expectancy yrs schooling - HDI rank
2
(years) schooling
2017 2017 2017 2017 2017 2017 2016
1 Norway 0.953 82.3 17.9 12.0 68,012 5 1
2 Switzerlamd 0.944 83.5 16.2 13.4 57,625 19 3
3 Australia 0.939 83.1 22.9 12.9 43,560 7 2
4 Ireland 0.938 81.6 19.6 12.5 53,754 13 4
5 Germany 0.936 81.2 17.0 14.1 46,136 13 6
6 Iceland 0.935 82.9 19.3 12.4 45,810 -3 4
7 Sweden 0.933 82.6 17.6 12.4 47,766 8 6
8 Singapore 0.932 83.2 16.2 11.5 82,503 11 8
9 Netherlands 0.931 82.0 18.0 12.2 47,900 20 9
10 Denmark 0.929 80.9 19.1 12.6 47,918 12 9
11 Canada 0.926 82.5 16.4 13.3 43,433 10 12
12 United States 0.924 79.5 16.5 13.4 54,941 -2 12
United Nations Human Development Reports: 2018 update HDR Report.
http://hdr.undp.org/en/composite/HDI
Note 1:
GNP in PPP international dollars.
Note 2: Difference between rank by GNP per capita and by HDI value.
A negative value means the country is better ranked by GDP than by HDI

Chapter Summary
• Macroeconomics studies the whole national
economy as a system
• Real GDP growth rates, inflation rates &
unemployment rates are indicators of
macroeconomic performance
• Business cycles cause fluctuations in real GDP
growth, in inflation, and in unemployment
• Circular flow shows macroeconomic linkages
• The National Accounts provide a framework for the
measurements of national output & income

Chapter Summary
• Nominal GDP measures the output of final goods &
services at market prices in the economy
• Real GDP measures the country’s output of final goods &
services
• The GDP deflator is a measure of the price level relative
to a base year
• Real GDP and per capita real GDP are crude measures of
national and individual welfare

Economic Activity & Performance chapter 16

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