Macroeconomics Questionnaire

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What is Macroeconomics?
Copyright © 2020 Pearson Canada Inc.
19 – 1
Lecture 1
Important Marcoeconomic Variables
19.1 Key Macroeconomic Variables (1 of 4)
• National Product and National Income
• The production of output generates income.
• The meaning of aggregation
– This gives nominal national income, which is total
national income measured in current dollars.
• Real national income is national income
measured in constant (base-period) dollars. It
changes only when quantities change.
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19 – 3
19.1 Key Macroeconomic Variables (2 of 4)
• One of the most commonly used measures of
national income is called gross domestic product
(GDP).
• GDP can be measured in real or nominal terms.
• The major movement of real GDP is a positive
trend that increased real output by approximately
four times since 1965. This is referred to as longterm economic growth.
• Real GDP also shows short-term fluctuations
around the trend.
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19 – 4
Growth and Fluctuations in Real GDP,
1965–2017 Figure 19-1
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19 – 5
19.1 Key Macroeconomic Variables (3 of 4)
• The Business cycle
– Trough
– Recession
– Recovery
– Peak
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19 – 6
19.1 Key Macroeconomic Variables (4 of 4)
• Potential output (Y*)
• The output gap measures the difference
between potential output and actual output.
Output Gap = Y ? Y*
• When Y < Y*, the output gap is a recessionary gap. • When Y > Y*, the output gap is an inflationary
gap.
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19 – 7
Potential GDP and the Output Gap,
1985–2017 Figure 19-2
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19 – 8
Why National Income Matters
• National income is an important measure of
economic performance
• Recessions are associated with unemployment
and lost output
• Booms can bring inflation
• The long-run trend in real per capita is an
important determinant of standard of living.
• Economics grow doesn’t make everyone better off
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19 – 9
Lecture 2
Employment Metrics
Employment, Unemployment, and the
Labour Force (1 of 3)
•
•
•
•
Employment
Unemployment
Labour force
Unemployment rate
Unemployment rate
Number of people unemployed
×100
Number of people in the labour force
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19 – 11
Employment, Unemployment, and the
Labour Force (2 of 3)
• Potential GDP ? full employment.
• Even when the economy is at full employment,
some unemployment exists because of natural
turnover in the labour market (frictional
unemployment) and the mismatch between jobs
and workers (structural unemployment).
• When real GDP is less than potential GDP, there
is cyclical unemployment.
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19 – 12
Labour Force, Employment, and
Unemployment, 1960–2018 Figure 19-3
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19 – 13
Employment, Unemployment, and the
Labour Force (3 of 3)
• Employment has grown roughly in line with the
growth in the labour force.
• The data also shows that the short-term
fluctuations in the unemployment rate have been
substantial.
• The unemployment rate has been as low as 3.4
percent in 1966 and as high as 12 percent during
the deep recession of 1982.
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19 – 14
Why Unemployment Matters
• Enormous social significance
• Loss of income
• Loss of output
• Crime, mental illness, and general social unrest
tend to be associated with long-term
unemployment
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19 – 15
Productivity
• Productivity is a measure of the amount of output
that the economy produces per unit of input.
• Labour productivity is the level of real GDP
divided by the level of employment (or total hours
worked).
• There has been a significant increase in labour
productivity over the past four decades.
• Productivity growth is the single largest cause of
rising material living standards over long periods of
time.
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19 – 16
Canadian Labour Productivity, 1976–2017
Figure 19-4
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19 – 17
Lecture 3
Price Metrics and Interest Rates
Inflation and Price Level
• The price level is the average level of all prices in
the economy expressed as an index number.
• Inflation
• The Consumer Price Index (CPI)
• Rate of inflation calculation with CPI data
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19 – 19
Why Inflation Matters (1 of 2)
• We value money not for itself but for what we can
purchase with it.
• The purchasing power of money is the amount
of goods and services that can be purchased with
a unit of money.
• Inflation reduces the purchasing power of money.
It also reduces the real value of any sum fixed in
nominal (dollar) terms.
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19 – 20
Why Inflation Matters (2 of 2)
• If households and firms fully anticipate inflation over
the coming year, they will be able to adjust many
nominal prices and wages to maintain their real values.
• Unanticipated inflation generally leads to more
changes in the real value of prices and wages.
• In reality, inflation is rarely fully anticipated or fully
anticipated.
• As a result, some adjustments in wages and prices are
made but not all the adjustments that would be
required to leave the economy’s allocation of resources
unaffected.
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19 – 21
The Price Level and the Inflation Rate,
1960–2018 Figure 19-5
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19 – 22
Interest Rates
• The interest rate is the price paid per dollar
borrowed per period of time, expressed either
as a proportion (e.g., 0.06) or as a percentage
(e.g., 6 percent)
• Compare the prime interest rate to the bank rate
• Nominal interest rate vs. real interest rate
• Why do interest rates matter?
– Compare effects on savers to that on borrowers
– Impact on investment plans
• Interest rates and credit flows
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19 – 23
Real and Nominal Interest Rates, 1965–2018
Figure 19-6
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19 – 24
Lecture 4
Macroeconomics and Trade
Exchange Rates and Trade Flows (1 of 3)
• In June 2018 you could buy 0.66 euros for each
dollar that you gave up. Or you could buy 1 euro for
1.52 dollars.
• The exchange rate
• Foreign currency
• The foreign-exchange market
• Appreciation vs. depreciation
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19 – 26
Canadian–U.S. Dollar Exchange Rate,
1970–2018 Figure 19-7
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19 – 27
Exchange Rates and Trade Flows (2 of 3)
• In Canada, the path of the trade-weighted
exchange rate is virtually identical to the
Canadian–U.S. exchange rate shown in
Figure 19-7, reflecting the very large proportion
of total Canadian trade with the United States.
• Two notable periods:
– Depreciation of CDN$ in late 1990s
– Appreciation of CDN$ during 2002?2012
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19 – 28
Exchange Rates and Trade Flows (3 of 3)
• Canada has long been a trading nation
• Compare the history of the relative size of exports to
imports
• Net exports are the difference between exports and
imports and are often called the trade balance.
• Canada’s exports and imports have increased fairly
closely in step with each other over the past 45 years.
• The trade balance has fluctuated mildly over the years,
but it has stayed relatively small, as a proportion of
total GDP.
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19 – 29
Canadian Imports, Exports, and Net
Exports, 1970–2017 Figure 19-8
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19 – 30
19.2 Growth Versus Fluctuations
• Long-Term Economic Growth
– Long-term trends of rising total output and output per person
have meant rising average living standards.
– Long-term growth receives less attention in the media but has
more importance for a society’s living standards from
generation to generation.
– There is considerable debate regarding the ability of
government policy to influence the economy’s long-run
rate of growth.
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19 – 31
Short-Term Fluctuations
• Short-term fluctuations lead economists to study
business cycles.
• Economists debate the effectiveness of monetary
and fiscal policy in influencing these fluctuations.
• Some economists argue that despite the power of
policy to affect the economy, governments should
not attempt to “fine-tune” the economy by making
frequent changes in spending and taxing.
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19 – 32
The Measurement of
National Income
Lecture 1
Countries and their Income Levels
Measuring the Wealth of Nations
Which countries are the 13 Richest
countries/special regions in the
World (in 2018)?
1. Qatar
Source: qatarchamber.com
2. Macau (SAR)
3. Luxembourg
Source: http://www.camping-neumuhle.lu/talen/engels/luxemburgstad.html
4. Singapore
Source: http://www.changiairport.com/en/airport-experience/attractions-and-services/free-singapore-tour.html
5. Ireland
Source: https://www.viator.com/Ireland-recommendations/d56
6. Brunei
http://www.geocities.ws/juerg74/Brunei.html
7. Norway
http://www.huffingtonpost.com/
8. United Arab Emirates
http://traveler.marriott.com/uae/
9. Kuwait
Source: http://news.kuwaittimes.net/
10. Hong Kong
11. Switzerland
12. United States
13. San Marino
Source: http://cantatecroatia.com/wp/cantate-adriatica-san-marino/
Rich – by what Measure?
There are two ways of defining rich.
122,489 • One takes into account the absolute
size of an economy.
110,870 • The other is to calculate the size of the
economy on a per capita basis – that is,
98,014
the total income generated by the
79,924
economy divided by the number of
79,726
people in the country.
74,065
• Best measure for standard of living:
68,662
Real (constant) GDP per capita.
1
Qatar
2
Macau
3
Luxemburg
4
5
6
7
Singapore
Ireland
Brunei
Norway
8
UAE
9
Kuwait
66,673
10
Hong Kong
64,533
11
Switzerland
63,379
12
United States
62,152
13
San Marino
61,169
Source: IMF, 2018
128,702 •
• ???????? ?????? ?????? ???????????? =
???????? ??????
??????????????????????
• The values next to each country in the
table are GDP/capita in international
dollars, a currency unit used by
economists and international
organizations to compare the values of
different currencies.
Lecture 2
How GDP is Measured
Measuring National Income
• Aggregating production of goods and services from 4
sectors of the economy:
• 1. Households/consumers and non-profit
– we label this sector, C, for consumption
• 2. Business sector (for-profit)
– We label this sector, I, for investment
• 3. Government sector (municipal, provincial, federal)
– We label this sector, G, for government
• 4. Foreign: all entities located outside Canada.
– We label this sector, X, for exports, and IM, for imports,
and NX, for net exports, where NX = X-IM
How do we count it?
• Gross domestic product (GDP): a measure of the total value, in
prices, of final goods and services produced in a country during a
given year.
• 3 accounting methods for calculated GDP:
• 1. Output-based GDP is the sum of value added (output less the
cost of goods and services purchased from other businesses) by all
industries in Canada;
• 2. Income-based GDP records the earnings generated by the
production of goods and services; and
• 3. Expenditure-based GDP is equal to expenditure on final goods
and services produced.
• We will use the expenditure approach for modeling purposes:
GDP = C + G + I + X – IM or
Y = C + G + I + NX
GDP from the Expenditure Side
Measured from the expenditure side, GDP is equal to the total
expenditure on domestically produced output.
DP = Ca + Ia + Ga + NXa
Partitioning the Definition of GDP
• Gross domestic product (GDP) is…
1.
2.
3.
4.
a measure of the total value, in prices (i.e. market prices) (NOT a measure
of quantities)
of final goods and services for which payment is rendered (a good or
service purchased by a final user, for example, a car, but not the individual
tires)
produced in a country (not imports)
during a given period, usually a year (a flow variable).
Note:
• Intermediate good or service: A good or service that is an input into
another good or service such as a tire on a truck.
•
GDP data are collected by Statistics Canada.
•
Reports on GDP and related statistics released monthly.
The Circular Flow of Expenditure and
Income Figure 20-1
How the Government Calculates GDP
1. GDP is measured using market values, not quantities.
–
GDP is the total value in dollars of all goods and services produced.
2. GDP includes only the market values of final goods.
–
Only counting final goods and services avoids double counting.
3. GDP measures production within a country regardless of who
does the production.
4. GDP includes some imputed values.
–
For example, police services and services provided by an owner-occupied home are
estimated to provide value at cost.
5. Statistics Canada does not count some types of production.
–
Underground, volunteer work and home production are excluded from GDP.
6. GDP includes only current production.
–
GDP measures an amount of production during a time period.
A Note on the use of the term ‘Investment’
• Economists use the term “investment” to mean additions to stocks of nonfinancial assets, as opposed to the common on-the-street use of the term
“investment” to refer to financial investment, such as the purchase of stocks
and bonds!
Example 1: Software, Equipment and Structures
Economists generally use the term “investment” to refer to investment in
productive capacity. The BEA further limits this to only investments in equipment,
software, and structures. So buying a share is not “investment”.
Example 2: Education (spending on)
Spending on education is considered a consumption expenditure. It should be
considered an investment in human capital, but is not since human capital is not
recognized as a form of capital in the national accounts. Buying a share in a
company is financial investment—it transfers ownership rights to the company, but
does not in itself create new productive capacity.
A Look at The Expenditure Approach, 2018, Canada
Sector
GDP per
Sector
2.22
Percent Share
of Total GDP
Personal consumption expenditures, C
1.29
58%
Gross private domestic investment, I
0.4
18%
Net exports of goods and services, NX
0
0%
0.53
24%
Gross domestic product, Total
Government consumption expenditures
and gross investment, G
GDP from the Expenditure Side, 2017
Table 20-1 (1 of 2)
Category
Billions of Dollars
Consumption (C)
Blank
Durable goods
Percent of GDP
Blank
161.6 Blank
Semi-durable goods
85.0 Blank
Non-durable goods
284.2 Blank
Services
707.9 Blank
Blank
1238.7
Investment (I)
Blank Blank
Plant and equipment
208.2 Blank
Residential structures
164.8 Blank
Inventories
15.1 Blank
Other
36.6 Blank
Blank
57.8
424.7
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19.8
20 – 31
GDP from the Expenditure Side, 2017
Table 20-1 (2 of 2)
Category
Billions of Dollars
Government Purchases (G)
Current expenditure
Blank
Percent of GDP
Blank
446.6 Blank
Investment
83.5 Blank
Blank
530.1
Net Exports (X?IM)
Blank Blank
Exports of goods and services
Imports of goods and services
Blank
Statistical Discrepancy
Total GDP
662.3
24.7
Blank
– 711.3 Blank
?49.0
– 2.3
– 0.1
0.0
2144.4
100.0
• GDP measured from the expenditure side of the national accounts
gives the size of the major components of aggregate expenditure.
• (Source: Based on Statistics Canada, CANSIM database,
Table 380-0064. Available at www.statcan.gc.ca.)
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20 – 32
GDP from the Income Side (3 of 3)
• When we calculate GDP from the income side, we
include a “fudge factor”, called statistical
discrepancy.
• Statistical discrepancy makes sure that the
independent measures of income and expenditure
come to the same total.
• Although national income and national
expenditure are conceptually identical, in practice
both are measured with slight error.
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20 – 33
GDP from the Income Side (1 of 3)
• Involves adding up factor incomes and other claims on
the value of output until all of that value is accounted for.
1.
Factor Incomes
? Three main components of factor incomes: wages and
salaries, interest, and business profits.
2.
Non-factor Payments
? Indirect taxes are taxes on the production and sale of goods
and services.
? Subsidies act like negative taxes. They are payments from
the government to firms.
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20 – 34
GDP from the Income Side (2 of 3)
• Some portion of current output replaces worn out
physical capital—depreciation.
• So from the income side, GDP is the sum of factor
incomes plus indirect taxes (net of subsidies) plus
depreciation.
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20 – 35
GDP from the Income Side, 2017 Table 20-2
Category
Billions of
Dollars
Factor Incomes
Blank
Wages, salaries, and supplementary income
Percent of
GDP
Blank
1084.2
50.6
Interest and other investment income
187.9
8.8
Business profits (including rent)
273.7
12.8
1545.86
72.1
Net Domestic Income at Factor Cost
Non-factor Payments
Blank
Depreciation
356.3
16.6.0
Indirect taxes less subsidies
242.2
11.3
0,1
0.0
2144.4
100.0
Statistical Discrepancy
Total
• GDP measured from the income side of the national accounts gives
the sizes of the major components of the income generated by
producing the nation’s output.
• (Source: Based on Statistics Canada, CANSIM database,
Table 380-0063. Available at www.statcan.gc.ca.)
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20 – 36
Related GDP Video
• What is GDP?
http://www.slate.com/articles/video/slate_v/20
11/10/gdp_standard_measure_of_our_econom
y_but_what_exactly_is_it_.html
What’s included in Canada’s GDP?
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Someone has a tooth extracted by a dentist
Yes
Sam rents an apartment in Montreal.
Yes
You buy a new house in Ottawa.
Yes
You buy an old home in Toronto.
No
John smuggles $100,000 worth of drugs into the Canada from Mexico.
No
Bombardier increases production of airplanes which are exported to India.
Yes
Canadians consume Italian wines.
No
Ford opens a new factory in Southern Ontario producing new cars.
Yes
Kate buys 100 shares from AT&T telecom.
No
What’s Included in Canada’s GDP?
•
•
•
•
•
•
•
•
•
•
•
•
Professor who teaches a boring economics class
Yes (maybe no, depending on residency)
You sell your car to your friend.
No
Your neighbour mows your lawn for you.
No
John receives cash payment of $1000 (dividends) from Bell
Canada.
Yes
Steve, a real estate agent, receives $5000 commission for
the sale of a condo.
Yes
Joe works for Burger King.
Yes
Lecture 3
GDP and its Shortcomings
Shortcomings in GDP as a Measure of Well-Being
1. GDP is Not a Measure of Well-Being
2. Value of Leisure: increasing one’s well-being (e.g.
working less hours) can lead to a decline in GDP
3. GDP is not Adjusted to Negative Externalities: Nondesirable outputs include generated wastes such as
pollution, waste heat and waste material are not
subtracted from GDP.
Shortcomings in GDP as a Measure of Well-Being
4. GDP is not Adjusted for Changes in Crime Rates/Social Problems:
Increases in crime lead to lower well-being, but may increase GDP if more is
spent on policing. GDP does not account for changes in well-being from
increasing divorce rates, drug addiction, etc.
5. GDP is a Bad Measure of Income Equality: GDP does not indicate how a
nation’s income is divided amongst its citizens.
6. GDP Omits Human Capital Depreciations:
a) the value of the depletion of natural resources is not subtracted from
GDP;
b) changes in human health are not included in GDP calculations
Shortcomings in GDP as a Measure of Total Production
7. Household Production: goods and services produced for
oneself is not counted (e.g. homemaker services such as child
care, meal preparation, building one’s one cabinets, volunteer
work etc.)
8. The Underground economy: about 10% of GDP in the U.S. to
as high as 50% of measured GDP in countries like Zimbabwe and
Peru (drugs, prostitution, selling of goods to avoid taxes or
government regulation)
Source: www.bild.de
Does GDP = Happiness?
Do all these limitations mean that GDP is a poor
measure of well-being of an economy?
Why don’t we ask people how happy or satisfied
they are and compare these responses to GDP?
GDP per Capita and Life Satisfaction
There is a positive relationship in that an increase in GDP per capita (moving left to right)
is associated with an increase in life satisfaction (moving bottom to top). The relationship
is not perfect, and, in fact, mean life satisfaction decreases at an increasing rate as income
increases.
Source: Angus Deaton, J Econ Perspect. 2008 Apr 1; 22(2): 53–72. doi: 10.1257/jep.22.2.53
Income, Health and Wellbeing Around the World: Evidence from the Gallup World Poll
Alternative Measures to GDP
• Satellite accounts, The Key National Indicators System,
and Subjective Well-Being data are three examples of
efforts to supplement GDP.
• Time Use Surveys (combined with the replacement cost
or the opportunity cost method of valuing household
time)
• Environmentally-adjusted net domestic product (EDP) are
two examples of efforts to adjust GDP.
• The Genuine Progress Indicator (GPI), the Better Life
Index (BLI), and the Human Development Index (HDI) are
three examples efforts to replace GDP altogether.
The Human Development Index (HDI)
• The United Nations prepares an annual HDI to
provide a more comprehensive measure of a
country’s achievements based on life expectancy,
adult literacy, and real GDP per capita.
2019
Genuine Progress Indicator, United States, 2004
Component of GPI
Personal consumption
Personal consumption after inequality adjustment
Value of household work and parenting
Value of higher education
Value of volunteer work
Service value of consumer durables
Service value of highways and streets
Costs of crime
Loss of leisure time
Costs of underemployment
Cost of consumer durables
Costs of commuting and auto accidents
Costs of environmental defensive expenditures
Costs of pollution
Value of lost wetlands, farmland, and forests
Costs of nonrenewable energy depletion
Damages from carbon emissions and ozone depletion
Adjustment for capital investment and foreign borrowing
Genuine Progress Indicator
Value (billions of dollars)
7,589
6,318
+ 2,542
+ 828
+ 131
+ 744
+ 112
—
34
— 402
— 177
— 1,090
— 698
—
21
— 178
— 368
— 1,761
— 1,662
+
135
4,419
Talberth et al., The Genuine Progress Indicator 2006: A Tool for Sustainable Development. Redefining Progress, 2007, pp. 1–2. http://rprogress.org.
GDP and GPI Per Capita (2000 US $)
Comparison of GDP and GPI per Capita, United
States, 1970-2004
Gross Domestic Product
Genuine Progress Indicator
Talberth et al., The Genuine Progress Indicator 2006: A Tool for Sustainable Development. Redefining Progress, 2007, pp. 1–2. http://rprogress.org.
Lecture 4
Real and Nominal GDP
Calculating GDP using the Expenditure
Approach– Output by San Armando
(1)
(2)
(3)
(4)
Description
Price per
Pound
Quantity
(Pounds)
Contribution to Nominal GDP
[column (2) × column (3)]
Year 1
Peaches
Wine
$1.00
$2.00
100
50
$100
$100
$200
Year 2
Peaches
Wine
$1.50
$2.00
100
75
$150
$150
$300
We use prices in the year in which the
goods were produced.
Real vs Nominal GDP
An increase in GDP will record both increases in
actual production (and income) and increases in
prices of those goods and services.
If one is to consider only increases in actual
production, but not prices, one therefore needs to
distinguish between nominal GDP and real GDP.
Real GDP vs Nominal GDP
• Given that GDP is measured in value terms, we have to
be careful about interpreting changes over time.
• Total GDP at current market prices is called Nominal
GDP
• Total GDP at a specific base-period prices is called Real
(or constant) GDP.
Calculation of Constant-Dollar Real GDP
(1)
(2)
Price per
Pound
(3)
Quantity
(Pounds)
(4)
Contribution to Nominal GDP [column
(2) × column (3)]
Year 1
Peaches
Wine
$1.00
$2.00
100
50
$100
$100
$200
Year 2
Peaches
Wine
$1.50
$2.00
100
75
(1)
(2)
(3)
$150
$150
$300
(4)
Description
Price per Pound
in Base Year
Quantity
(Pounds)
Contribution to Real GDP
[column (2) × column (3)]
$1.00
$2.00
100
50
$100
$100
$200
$1.00
$2.00
100
75
$100
$150
$250
Description
Year 1 (Base)
Peaches
Wine
Use
prices
Year 2
from
Peaches
base year
Wine
Real versus Nominal GDP, Canada, Current and Chained
(2012) Dollars, 1981–2018
2,500,000
Nominal GDP grows faster than real GDP
when prices are rising.
Arrow indicate recessions – at least two
consecutive quarters of negative growth in
real GDP
Canadian dollars (x $1,000,000)
2,000,000
1,500,000
1,000,000
500,000
0
1980
1985
1990
1995
Chained (Real) GDP
2000
2005
2010
2015
Current prices (Nominal) GDP
2020
GDP Growth Rate
GDP and the price level are more often quoted in
(annual) growth rates.
A growth rate is defined as a percentage change. The
percentage change is the change in some economic
variable, usually from one period to the next, expressed
as a percentage:
? GDP2013 ? GDP2012 ?
??
?? x 100
GDP2012
?
?
Percentage change = (
Value in the second period – Value in the first period
) x 100
Value in the first period
GDP Deflator
GDP deflator
The price level of the overall economy.
To compare GDP over time we convert nominal GDP to real GDP for
any year using an index call the GDP Deflator.
The GDP deflator shows how much a change in the base year’s GDP
relies upon changes in the price level. Also known as the “GDP
implicit price deflator.“
?????????????? ??????
?????? ???????????????? =
????????
???????? ??????
GDP Deflator – its Interpretation
The GDP deflator tells us the percentage increase or decrease in
prices from the base year.
• If the GDP deflator value is 100, then there were no changes in
the price level.
• If the GDP deflator value is greater than 100, then there was an
increase in the price level.
• If the GDP deflator value is less than 100, then there was a
decrease in the price level.
Exercise: Assume that an economy’s nominal GDP is $350 and its
real GDP for the same year is $320. Find and interpret the value of
the GDP deflator.
Answer: GDP deflator = 350/320 = 1.094; thus, the overall price
level increased by 9.4% from the base year.
GDP Exercises
• Assume that the economy of the Roman Empire produces 3 goods:
Wine, Olives and Wheat. The table shows the output for years 56
and 57 A.D.
Year
56
(year 1)
57
(year 2)
Wine
Olives
Wheat
Price
(Denarii)
100
Quantity
(units)
1
Price
(Denarii)
10
Quantity
(units)
8
Price
(Denarii)
5
Quantity
(units)
4
100
1
12
10
4
5
1. Calculate nominal GDP for each year. Compute the percentage of growth in
nominal GDP between years 56 and 57.
2. Using Year 56 as the base year, calculate real GDP for Year 57.
3. What is the GDP deflator for Year 57? What was the inflation rate between 56 and
57?
4. Compute the real rate of output growth from 56 to 57.
Solutions
1. Nominal GDP (for year 56) = ($100 x 1) + ($10 x 8) + ($5 x 4) = $200
Nominal GDP (for year 57) = ($110 x 1) + ($12 x 10) + ($4 x 5) = $250
• Growth rate =
$250?$200
×
$200
100 = 25%
2. Real GDP for Year 57 = ($100 x 1) + ($10 x 10) + ($5 x 5) = $225
• Note Real GDP for year 56 is equal to nominal GDP because year 56
is the base year!
?????????????? ??????
???????? ??????
250
×
225
3. GDP deflator (year 57) =
× 100 =
100 = 111;
therefore, the inflation rate between the two years is 111 – 100 = 11%.
4. Real growth =
100 = 12.5%
???????? ?????? ???????? 57 ????????? ?????? (???????? 56)
???????? ?????? (???????? 56)
=
$225?$200
×
$200
Lesson:
The Simplest Short-Run
Macro Model
Lecture 1
What is a Model? and Aggregate
Expenditure
Modeling
• Allow one to abstract from the countless
variables that exist in the real world
• Good models are consistent with facts
• Good models provide reasonably good
predictions of the real world
The Saving Function (1 of 2)
• Households decide how much to consume and
how much to save.
• Average propensity to save (APS):
APS = S/YD
• Marginal propensity to save (MPS):
MPS = ?S/?YD
The Saving Function (2 of 2)
• Because all disposable income is either spent or
saved, it follows that the fractions of income
consumed and saved must account for all
income:
APC + APS = 1
• It also follows that the fractions of any increment
to income consumed and saved must account for
all of that increment:
MPC + MPS = 1
Lecture 2
Graphing Aggregate Expenditure
Model
Autonomous vs Induced Expenditure
• Elements of expenditure that do not change
systematically with national income are called
autonomous expenditures.
• Any component of expenditure that is systematically
related to national income is induced expenditure.
• ?? = ??? + ??????????
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21 – 10
The Consumption Function and Related
Values
Disposable
Income (YD)
Desired
Consumption (C)
Desired
Saving (S)
APC = C/YD
?YD
MPC =
?C/?YD
?C
0
30
?30
—
30
24
0.8
30
54
?24
1.80
120
96
0.8
150
150
0
1.00
150
120
0.8
300
270
30
0.90
150
120
0.8
450
390
60
0.87
75
60
0.8
525
450
75
0.86
75
60
0.8
600
510
90
0.85
Blank
Blank
Blank
Desired Consumption Expenditure (3 of 3)
• Marginal propensity to consume (MPC)
MPC = ?C / ?YD
• The MPC is the slope of the consumption function.
• The constant slope of the consumption function shows
that the MPC is the same at any level of disposable
income.
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21 – 12
The Consumption and Saving Functions
Figure 21-2
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Shifts in the Consumption Function
Figure 21-3(i)
• The consumption
function shifts
upward with an
increase in wealth,
a decrease in
interest rates, or an
increase in
optimism about the
future.
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Lecture 3
Graphing the Desired Saving Function
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The Consumption and Saving Functions
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Shifts in the Consumption Function
• The saving
function shifts
downward with
an increase in
wealth, a
decrease in
interest rates,
or an increase
in optimism
about the
future.
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Lecture 4
Desired Investment Expenditure and National
Income Equilibrium
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Desired Investment Expenditure
• The three categories of investment are inventory
accumulation, residential construction, and new plant and
equipment.
• Investment expenditure is (1) the most volatile
component of GDP, and (2) strongly associated with
aggregate economic fluctuations.
• Determinants of desired investment expenditure:
1. the real interest rate
2. changes in the level of sales
3. business confidence
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The Volatility of Investment, 1981–2017
Figure 21-4
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Desired Investment Expenditure
•
SIMPLIFYING
ASSUMPTION:
Investment as
autonomous
expenditure
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The Aggregate Expenditure Function
• The aggregate expenditure (AE) function relates the
level of desired aggregate expenditure to the level of
actual national income.
• In the absence of government and international trade,
desired aggregate expenditure is equal to desired
consumption plus desired investment:
AE = C + I
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The Aggregate Expenditure Function
(2 of 2)
• Example:
• The consumption function is: C = 30 + (0.8)Y
• The investment function is:
• The AE function is :
I = 75
AE = C + I
= 30 + (0.8)Y + 75
= 105 + (0.8)Y
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The Aggregate Expenditure Function
• The slope of the AE function is the marginal propensity to spend, which
in this simple model, is just the marginal propensity to consume.
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Equilibrium National Income
• If desired aggregate expenditure exceeds actual
income, inventories are falling and there is
pressure for actual national income to rise.
• If desired aggregate expenditure is less than actual
income, inventories are rising and there is pressure
for actual national income to fall.
• The equilibrium level of national income occurs
when desired aggregate expenditure equals actual
national income.
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Equilibrium National Income
• If actual Y >
Y0, desired AE
will be less
than national
income, and
production
will fall.
• Only when Y =
Y0 will the
economy be in
equilibrium,
(E0).
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Changes in Equilibrium National Income: Shi