1. Macroeconomics
Intro to GDP

2. Macro The study of the economy as a whole.
All the markets, consumers, workers, and firms together create the ‘big picture.’

3. What we focus on:
Focus on: Output, Employment, and Price Stability.

4. Why We Study: To learn about: government’s tax policies
how effective their economic policies are
to compare our economy with other economies
to see the impact of some industries on the economy as a whole
to know what investment decisions to make
so unions can negotiate fairly.

5. What We Study - GDP
Gross Domestic Product - the total market value of all final goods and services produced within a country in 1 year.

6. Per Capita GDP
GDP can be stated as GDP per capita (per person) - total GDP is divided by the resident population on a given date.

7. 2 Approaches to GDP
Expenditure Approach: Add up the total that is spend on all final goods and services in 1 year.
Income Approach: Add up all the income that is earned by the different factors of production (wages, rent, interest, profit).
Both approaches should equal the same. Money spent = income earned.

8. How We Calculate:
GDP = C + G + I + (X-M) Or GDP = consumption + government purchases + investment + (exports - imports)

9. Consumption What households spend on goods and services.
Durable goods: stuff that lasts a long time (cars, houses est.)
Semi-durable goods: stuff that lasts a reasonable amount of time (clothing)
Non-durable goods: stuff that is consumed right away (food)
Services: haircuts, car maintance, eating out, est.

10. REAL GDP
Results from removing the effect of price increases from the nominal (current-dollar) GDP
This means: if prices increase fast the growth of GDP may not actually reflect what has been bought or sold by that given economy! Increased output does not exist

11. Change in GDP (real GDP year 2 - Real GDP = real GDP year 1)
Growth Rate x 100
real GDP year 1

12. Therefore:
If Canada’s GDP for year 1 was 900 billion and year 2 was 999 billion the calculation would be:
x 100 = 11% growth
900

13. Supply and Demand
When we combine all the markets for individual goods and services in society, we are looking at aggregate or total of the entire economy.

14. Aggregate Demand
AD - The total demand for all goods and services produced for society.
As price levels rise, the total real output falls.
For real economic growth to occur the GDP must grow

15. Understanding Economic Growth
AGGREGATE SUPPLY
Assume to add up all the producer supply for goods and services at various price levels for an economy to get a Total or Aggregate Supply for those goods and service produced in a society. AS
Price Level
Real GDP Supplied

16. AGGREGATE SUPPLY
When unemployment is high there is too little competition among labour.
Therefore wages and costs of production stay mostly unaffected. AS
Price Level
Full-employment Output
Real GDP Supplied

17. AGGREGATE SUPPLY AS
As output increases limited factors of production such as Land, Labour and Capital become more scarce.
This pushes the costs of production up and therefore the prices of goods and services produced.
Price Level
Full-employment Output
Real GDP Supplied

18. AGGREGATE SUPPLY
Eventually the economy will run out of resources altogether.
Producers in an attempt to gain access to more resources would “bid up” the value of inputs
This would make the Aggregate Supply perfectly Inelastic
This would be equal to producing on the Production Possibility Curve where it is not possible to produce more without improvements to technology or discovery of new resources of Land, Labour or Capital AS
Price Level
Maximum Capacity Output
Full-employment Output
Real GDP Supplied

19. Inelasticity
This is achieved as prices and resources are being maxed out the curve goes perfectly vertical.
An economy producing at that level is producing at a point that it cannot physically produce more without improvements in technology or new physical outputs.

20. Equilibrium Output and Price Level
The point at which AD and AS meet is the equilibrium level of price and output. This is also known as full employment.

21. EQUALIBRIUM OUTPUT AD3 AD1 AS AD2 FE Recessionary Gap Inflationary Gap
AD3
AD1 AS
AD2
Price Level
Full employment equilibrium occurs when the aggregate demand (AD1) Intersects aggregate supply (AS) at full employment output (FE). If aggregate demand (AD2) intersects below full employment output a recessionary gap exists with low employment levels low output levels and low inflation. If aggregate demand (AD3) intersects above full employment output an inflationary gap exists with high employment levels, higher output levels and higher inflation.
Recessionary Gap
Inflationary Gap FE
Real GDP Supplied

22. Absolute Capacity
At some point, the economy will produce at its max and will become vertical.
Full employment is where levels begin to rise more rapid.
Recessionary Gap - Below full employment when the AD and AS intersect
Inflationary Gap - When the AD and AS intersect to the right of full employment
Recessionary gap - high unemployment, low inflation, low GDP Growth
Inflationary gap - high inflation, high employment levels, high levels of GDP growth

23. AD Changes INCREASE IN AD DECREASE IN AD
Increase in Consumption Decrees in taxes
Decrease in savings decrease in import spending
Increase in investment
Increase in government spending
Increase in exports
DECREASE IN AD
Decrease in consumption
Increase in taxes
Increase in savings
Increase in import spending
Decrease in investment
Decrease in government spending
Decrease in exports

24. AS Changes AS INCREASE AS DECREASE
Price decrease of land, labour or capital
Improvement in technology
AS DECREASE
Price increase for land, labour or capital
New resources, more capital goods are made available or the workforce grows