Introduction to Macroeconomics Chapter 9 Introduction to Macroeconomics

Macroeconomics the study of the economy as a whole We measure performance to track the development of the economy

Gross Domestic Product (GDP) Expenditure Approach – total spent on final goods and services: C+G+I+(X-M) where C = consumption of households G = government purchases I = investment X = amount received in sale of exports M = amount spent on imports Income Approach – add income earned by factors of production in producing the final goods and services

Gross Domestic Product (GDP) Gross National Product (GNP) popular before mid-80’s but it didn’t include foreign firms in Canada paying Canadian workers Real GDP growth rate = Real GDP year 2 – Real GDP year 1 x 100 Real GDP year 1 Real GDP per capita more informative (divide by pop.)

Drawbacks to GDP population size (do a GDP per capita instead) non-market production (volunteer, homemaking, etc.) underground economy types of goods leisure environment distribution of income

Unemployment Unemployment rate is the percentage of the labour force not working at any given time UE Rate = Number unemployed x 100 Labour force Labour Force is those employed willing and able to work actively seeking employment

Unemployment Issues part-time counted as full-time those who give up looking not part of labour force some are overqualified Full Employment (FE) does not mean all in labour force are working FE may be in the 5-7% range given the types of unemployment

Types of Unemployment Structural skills of workers not needed technological replacement replacement to other lower paying country Frictional – between jobs (also students) Cyclical – based on downturn in the economy Seasonal – employment depends on climate (farming)

Okun’s Law Okun’s Law – the GDP gap is 2% for every 1% the unemployment rate is higher than the natural rate E.g., Full employment is 5% Real unemployment rate 7% GDP gap = 4% (7-5 x 2) If GDP is $500b (=96%) then potential GDP is $521b ($500/.96)

Inflation Consumer Price Index – general increase in prices from one year to the next Formula = CPI year 2 – CPI year 1 x 100 CPI year 1 A “basket of goods” is used with weightings of different goods A base year is used to allow comparisons Price index Formula = Price of Basket in current year x 100 Price of Basket in base year Indexing – means your wage or pension is tied to the CPI

Limitation of CPI weightings don’t reflect everybody’s spending habits Statscan slow to change due to spending pattern changes Cultural differences

Useful Formula to Find Unknowns: CPI year 1 = Price, Wage, Pension in year 1 CPI year 2 Price, Wage, Pension in year 2

GDP Deflator used to measure real GDP based on all goods and services, not just consumer goods (CPI) Formula Real GDP = Nominal GDP x 100 GDP Deflator the problem with the GDP Deflator was it’s use of 1992 as a base year and the changes in technology since then Chain Fisher Volume index now used with formula to “rebase” the GDP each quarter