Introduction To Macroeconomics

Introduction To Macroeconomics

• 1.
  Introduction to Macroeconomics
• 2.
  Defining Macroeconomics Thestudy 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
• 3.
  Gross Domestic ProductTotal 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
• 4.
  The Expenditure ApproachC = 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)
• 5.
  GNP – GrossNational 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
• 6.
  Economic Growth Itis 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
• 7.
  Current Canadian Statistics
• 8.
  Drawbacks to GDPPopulation 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
• 9.
  The Unemployment RatePercentage 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
• 10.
  Calculating the UnemploymentRate 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
• 11.
  Full Employment Inan 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)
• 12.
  Other Types ofUnemployment 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.)
• 13.
  Variations in theUnemployment Rate Percentage unemployment varies significantly by education (highest – those without a high school diploma, lowest – those with graduate degrees) Varies by provinces as well
• 14.
  Consumer Price IndexInflation: 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
• 15.
  Calculating and Usingthe 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
• 16.
  Limitations of CPINot 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
• 17.
  Real GDP Withoutadjustment, 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