Chapter 9 Introduction to Macroeconomics Macroeconomics the study

Chapter 9 Introduction to Macroeconomics

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

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

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

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

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

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

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)

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 $500 b (=96%) then potential GDP is $521 b ($500/. 96)

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

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

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

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