1. Introduction to Macroeconomics
Chapter 9
Introduction to Macroeconomics

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

3. 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

4. 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 Real GDP year 1
Real GDP per capita more informative (divide by pop.)

5. 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

6. 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

7. 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

8. 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)

9. 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)

10. 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

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

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

13. 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