1. 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

2. ©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

3. ©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

4. ©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

5. ©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 122.3 –In 2004, CPI at 124.6

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 – 17.423 million –In October 2005, total employment of 16.267 million

7. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.27 Canadian Economic Performance United StatesCanadaTable 4.1 5.27.22000-2005 5.89.51990s 7.39.41980s Unemployment rate 2.22.52000-2005 3.02.21990s 5.66.51980s Inflation rate 2.62.52000-2005 3.02.51990s 3.0 1980s Real GDP Growth Rate

8. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.28 Real GDP and Growth of Real GDP in Canada Recessions

9. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.29 Annual Inflation Rate in Canada

10. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.210 Annual Unemployment Rates in Canada

11. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.311 The Circular Flow and National Account Goods & Services Services $ Consumption $ Revenue ProductMarket Household Business FactorInputsFactorInputs $ Costs $ Income FactorMarket

12. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.312 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

13. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.313 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

14. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.314 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

15. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.315 Canadian National Account, 2005 1321.3GNI1321.3GNP -26.3Net foreign property income -26.3Net foreign property income 1347.6 GDP at Market Prices 1347.6 155.4Net indirect taxes 1192.2GDP at basic prices 178.0Capital consumption2.0Statistical discrepancy 1014.2Net domestic income43.6 NX (net exports)‏ 58.0 Investment Income250.0 I by industry 284.3 Profit & business Income295.5 G by government 671.9 Employment Income756.5 C by households Income source:At Market Price: Income Measures Expenditure Measures

16. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.316 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

17. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.317 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

18. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.418 Nominal and Real GDP and the GDP Deflator 56.94550029000 Real GDP 80004000Hamburgers 3750025000Blue jeansValue in 1990 $ 2008700029000 Nominal GDP 120004000Hamburgers 7500025000Blue jeansValue in current $ 32Hamburgers 5025Blue jeansPrice in $ 40002000Hamburgers 15001000Blue jeansQuantity Change20051990Table 4.4 Nominal and Real GDP

19. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.419 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

20. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.420 The GDP Deflator 1152998833664Real GDP (billion 1997 $)‏ 117.0107.897.273.2GDP deflator (1997=100)‏ 13481076810486Nominal GDP (billion $)‏ 2005200019951985Table 4.5

21. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.521 Per Capita GDP Per Capita real GDP is an indicator of standard of living.

22. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.522 Per Capita Real GDP in Canada, 1981-2005

23. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.523 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

24. ©2007 McGraw-Hill Ryerson Ltd.Chapter 4.524 Top Ten Countries Based on the 2002 Human Development Index -70.9360.980.960.86Ireland 60.9380.930.94 Japan -40.9390.980.970.87United States 10.9410.950.960.91Iceland 70.9420.940.990.90Belgium 60.9420.950.990.89Netherlands 50.9430.950.980.90Canada 90.9460.940.990.90Australia 190.9460.930.990.92Sweden 10.9560.99 0.90Norway HDI Rank Minus GDP HDIGDPEducationLife Expectancy Country

25. ©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

26. ©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