MACROECONOMICS-WINTER TERM u NEW OFFICE HOURS: u Monday 12:30-1:30 u Thursday 1-2:20 u Tutorial groups begin: u week of January 24---more next class- check web page.

EXAM u December exam grades on WebCT u View exams if you want: Office hours starting NEXT week. u Long Answers-Read questions u Q2 Hair Salons: Question said: u “each salon is different” “a salon that raises its price will lose some customers but not all” “Free entry and exit”

Development of Macro u Adam Smith: Wealth of Nations-1776 u Great Depression: u John Maynard Keynes (CANES) u General Theory of Employment Interest and Money u Key macro variables are aggregate output--Gross Domestic Product (GDP), unemployment and inflation.

Circular flow see text

Macro Issues and Variables u Unemployment u Fluctuations (Cycles) in GDP (Output) u Inflation u G Budget Deficits u Balance of Payments –International u u=U/LF u Pdot= %∆P inflation rate u GDP = ∑Pi*Qi----$ value of all G&S

Link to PPF GDP = Pcomp*#comp + Pcars*#cars

MACROECONOMICS u Macroeconomics: The study of the economy in the aggregate.---ADDED UP u We begin our study of macroeconomics with the country’s total income and expenditure. u GROSS DOMESTIC PRODUCT

Tutorial groups u See web page-schedule and agenda u Groups begin week of January 24 u Each group will meet FOUR (4) times in the Winter term. The 8 week time period does NOT include reading week u Most room numbers have changed u Count best 2/3

Groups u B01TUES1:35JAN 25Southam 309 u B02TUES1:35FEB Southam u B03TUES 1:35JAN Southam u B04THURS 12:35FEB Southam u B05THURS 12:35JAN Southam u B06THURS 12:35FEB 3 TB431 u B07THURS 4:35JAN Southam u B08THURS 4:35FEB Southam u B09THURS 1:35JAN 27TB210 u B10THURS 1:35FEB 3TB447 u B11MON 9:35JAN 24ME3190

Reading week u J24 ODD1 u J31 EVEN 1 u F7 ODD2 u F14 EVEN 2 u F21 RW_________ u F28 ODD3 u M7 EVEN 3 u ETC FOR 4

Measuring a Nation’s Income u What is Gross Domestic Product (GDP)? u How is GDP related to a nation’s total income and spending? u What are the components of GDP? u How is GDP corrected for inflation? u Does GDP measure society’s well-being?

Income and Expenditure u Gross Domestic Product (GDP) measures two things at once: –total income of everyone in the economy. –total expenditure on the economy’s output of goods & services. income equals expenditure For the economy as a whole, income equals expenditure, because every dollar of expenditure by a buyer is a dollar of income for the seller.

Gross Domestic Product (GDP) Is… … the market value of all final goods & services produced within a country in a given period of time. Goods are valued at their market prices, so: u GDP measures all goods using the same units (e.g., dollars in Canada, Euros--), rather than “adding apples to oranges.” u Things that don’t have a market value are excluded, e.g., housework you do for yourself. (Some bias for poor countries)

Gross Domestic Product (GDP) Is… the market value of all final goods & services produced within a country in a given period of time. Final goods are intended for the end user. u Intermediate goods are used as components or ingredients in the production of other goods. u GDP only includes final goods, as they already embody the value of ALL the intermediate goods used in their production.

COUNT FINAL OUTPUTS u Wheatsteel u Flourplastic u BREADCARS u POINT: To avoid double-counting

Two Methods of Computing An Economy’s Income u Expenditure Approach: – Sum the total expenditures by households (from the top portion of the circular flow). u Resource Cost or Income Approach: – Sum the total wages and profit paid by firms for resources (from the bottom portion of the circular flow).

u A measure of the income and expenditures of an economy is Gross Domestic Product (GDP). u Gross Domestic Product measures: – an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. The Economy’s Income and Expenditure

Principles of Macroeconomics: Ch 10 First Canadian Edition Important Features of GDP ¬ Output is valued at market-determined prices. ­ Output is measured in dollar terms. ® GDP records only the output of final goods and services. We want to “count” production only once. ¯ $ GDP represents the amount of money one would need to purchase a year’s worth of the economy’s production of all final goods and services.

Principles of Macroeconomics: The Components of GDP u GDP (Y) is the sum of: – Consumption (C) – Investment (I) – Government Purchases (G) – Net Exports (NX) Y = C + I + G + NX NX = X-M

Principles of Macroeconomics: The Four Components of GDP u Consumption (C): – Is the spending by households on goods and services v e.g. buying clothing, food, movie tickets u Investment (I): – Is the purchases of capital equipment and structures v e.g. machinery, factory, houses, etc. v NOT financial assets like stocks, bonds

Principles of Macroeconomics: The Four Components of GDP u Government Purchases (G): – Includes spending on goods and services by local, provincial and federal governments (e.g. roads, police, etc.). – Does not include transfer payments, because they are not made in exchange for currently produced goods or services. u Net Exports (NX): NX = X-M – Exports minus imports.

Principles of Macroeconomics: First Canadian Edition Real versus Nominal GDP u GDP is the market value of the economy’s current production, referred to as Nominal GDP. u Real GDP measures any given year’s total output in “constant” prices. u An accurate view of the economy requires adjusting nominal to real GDP, using the GDP Price Deflator.

GDP and Economic Well-Being u GDP Per Person tells us the income and expenditure of the average person in the economy. – It is a good measure of the material well- being of the economy as a whole. – More Real GDP means we have a higher material standard of living by being able to consume more goods and services. – It is NOT intended to be a measure of happiness or quality of life.

The GDP Deflator u The GDP deflator is a measure of the overall level of prices. u Definition: Index base 100 [YEAR 1] GDP deflator = 100 x (nominal GDP/real GDP) u One way to measure the economy’s inflation rate is to compute the percentage increase in the GDP deflator from one year to the next.

Simple GDP deflator u YearcarsP Y y u 1100$10$1000 $1000 u 2110$15$1650 $1100 u GDP deflator price index in year 2 is: u Y2/y2*100 u =1650/1100 u =150 prices increased by 50%

Principles of Macroeconomics: Canadian Edition GDP and Economic Well-Being u Some factors and issues not in GDP that lead to the “well-being” of the economy: – Factors that contribute to a good life such as leisure. – Factors that lead to a quality environment. – The value of almost all activity that takes place outside of the markets, e.g. volunteer work and child-rearing.

Then Why Do We Care About GDP? u Having a large GDP enables a country to afford better schools, a cleaner environment, health care, etc. u Many indicators of the quality of life are positively correlated with GDP. For example…life expectancy…………literacy.

CHAPTER SUMMARY-5 u Gross Domestic Product (GDP) measures a country’s total income and expenditure. u The four spending components of GDP include: C, I, G, and NX. u Nominal GDP is measured using current prices. Real GDP is measured using the prices of a constant base year, and is corrected for inflation. u GDP [ per capita] is the main indicator of a country’s economic well-being, even though it is not perfect.