Slides are prepared by Dr. Amy Peng, Ryerson University Chapter Four Measuring National Economic Activity and Performance Macroeconomics by Curtis, Irvine, and Begg Canadian Edition, McGraw-Hill Ryerson, 2007

©2007 McGraw-Hill Ryerson Ltd.Chapter 42 Learning Outcomes This chapter explains: Macroeconomics as the study of the whole national economy Three main indicators of macroeconomic activity and performance The facts about recent Canadian macroeconomic activity The circular flow of outputs and incomes The basic national income accounting framework The relationship between national and real national income Per capita real GDP and standards of living

©2007 McGraw-Hill Ryerson Ltd.Chapter 43 Macroeconomics is... The study of the economy as a whole It deals with broad aggregates It has important policy dimensions

©2007 McGraw-Hill Ryerson Ltd.Chapter 4.14 Three Main Indicators in Macroeconomic Activity - Output Output –Real gross domestic product (real GDP) measures output and income it is the quantity of final goods and service produced in the economy in a specific time period –Rate of growth of real GDP –In 2003, real GDP was 1092 billion –In 2004, real GDP was 1124 billion

©2007 McGraw-Hill Ryerson Ltd.Chapter 4.15 Three Main Indicators in Macroeconomic Activity - Inflation The Price Level –Is a measure of the weighted average of prices of a wide variety of goods and services –Consumer Price Index (CPI)‏ –The Inflation Rate –In 2003, CPI at –In 2004, CPI at 124.6

©2007 McGraw-Hill Ryerson Ltd.Chapter 4.16 Three Main Indicators in Macroeconomic Activity – Employment Employment –The number of adults (15 years of age and older) employed full-time and part-time and self-employed –The civilian labour force –Unemployment rate –In October 2005, Canadian labour force – million –In October 2005, total employment of million

©2007 McGraw-Hill Ryerson Ltd.Chapter 4.27 Canadian Economic Performance United StatesCanadaTable s s Unemployment rate s s Inflation rate s s Real GDP Growth Rate

©2007 McGraw-Hill Ryerson Ltd.Chapter 4.28 Real GDP and Growth of Real GDP in Canada Recessions

©2007 McGraw-Hill Ryerson Ltd.Chapter 4.29 Annual Inflation Rate in Canada

©2007 McGraw-Hill Ryerson Ltd.Chapter Annual Unemployment Rates in Canada

©2007 McGraw-Hill Ryerson Ltd.Chapter The Circular Flow and National Account Goods & Services Services $ Consumption $ Revenue ProductMarket Household Business FactorInputsFactorInputs $ Costs $ Income FactorMarket

©2007 McGraw-Hill Ryerson Ltd.Chapter Measuring GDP Nominal GDP –Expenditure Approach –Income Approach Value Added Approach Nominal GDP is market value of all final goods and services at current prices Quarterly GDP and annual GDP

©2007 McGraw-Hill Ryerson Ltd.Chapter The Expenditure Approach to GDP Consumption expenditure (C)‏ Investment (I)‏ –Gross investment Government expenditure (G)‏ –Transfer payments Exports and Imports –Net Exports NX = X - Z

©2007 McGraw-Hill Ryerson Ltd.Chapter The Income Approach to GDP Employment Income Profits and Business Income Interest and Investment Income Net Domestic Income NDI = W + BI Capital Consumption Allowance (CCA)‏ GDP at basic price = NDI + CCA Net indirect Tax (T IN )‏ GDP at market price = NDI + CCA + T IN

©2007 McGraw-Hill Ryerson Ltd.Chapter Canadian National Account, GNI1321.3GNP -26.3Net foreign property income -26.3Net foreign property income GDP at Market Prices Net indirect taxes GDP at basic prices 178.0Capital consumption2.0Statistical discrepancy Net domestic income43.6 NX (net exports)‏ 58.0 Investment Income250.0 I by industry Profit & business Income295.5 G by government Employment Income756.5 C by households Income source:At Market Price: Income Measures Expenditure Measures

©2007 McGraw-Hill Ryerson Ltd.Chapter The Circular Flow With Government and Trade PY = W+BI C + I + G + X I C S HouseholdsBusinessesGovernment C + I + G + NX T-G G T DN PY – T DN X T IN CCA Z

©2007 McGraw-Hill Ryerson Ltd.Chapter GDP and GNP Gross domestic product (GDP)‏ –measures the output produced by factors of production located in the domestic economy Gross national product (GNP)‏ –measures the total income earned by domestic citizens GNP or GNI = GDP + net income from abroad

©2007 McGraw-Hill Ryerson Ltd.Chapter Nominal and Real GDP and the GDP Deflator Real GDP Hamburgers Blue jeansValue in 1990 $ Nominal GDP Hamburgers Blue jeansValue in current $ 32Hamburgers 5025Blue jeansPrice in $ Hamburgers Blue jeansQuantity Change Table 4.4 Nominal and Real GDP

©2007 McGraw-Hill Ryerson Ltd.Chapter The GDP Deflator Nominal GDP = W + BI + CCA + T IN Real GDP Y = C + I + G + NX Nominal GDP = P x Y = P x (C + I + G + NX)‏ P x Y = W + BI + CCA + T IN

©2007 McGraw-Hill Ryerson Ltd.Chapter The GDP Deflator Real GDP (billion 1997 $)‏ GDP deflator (1997=100)‏ Nominal GDP (billion $)‏ Table 4.5

©2007 McGraw-Hill Ryerson Ltd.Chapter Per Capita GDP Per Capita real GDP is an indicator of standard of living.

©2007 McGraw-Hill Ryerson Ltd.Chapter Per Capita Real GDP in Canada,

©2007 McGraw-Hill Ryerson Ltd.Chapter Limitation of GDP Some output production do not contribute to economic welfare Many valuable goods and services are excluded from GDP May not necessarily be a good measure of economic well-being

©2007 McGraw-Hill Ryerson Ltd.Chapter Top Ten Countries Based on the 2002 Human Development Index Ireland Japan United States Iceland Belgium Netherlands Canada Australia Sweden Norway HDI Rank Minus GDP HDIGDPEducationLife Expectancy Country

©2007 McGraw-Hill Ryerson Ltd.Chapter 425 Chapter Summary MacroeconomicsMacroeconomics studies the whole national economy as a system Real Gross Domestic Product inflation ratesunemployment ratesReal Gross Domestic Product, prices and inflation rates, and unemployment rates are macroeconomic indicators Circular flow national accountsThe national accounts provide a framework for the measurements of output of the economy

©2007 McGraw-Hill Ryerson Ltd.Chapter 426 Chapter Summary Nominal GDPNominal GDP measures the output of final goods and services at market prices in the economy Real GDPReal GDP measures the output of final goods and services produced GDP deflatorThe GDP deflator is a measure of the price level per capita real GDPReal GDP and per capita real GDP are crude measures of national and individual welfare