introduction to macroeconomics
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Introduction to Macroeconomics. Microeconomics. Macroeconomics. Definitions:. Microeconomics: - the branch of economics that studies the economy of consumers or households or individual firms VS. Macroeconomics: - PowerPoint PPT PresentationTRANSCRIPT
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Introduction to Macroeconomics
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Microeconomics
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Macroeconomics
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Definitions:Microeconomics: - the branch of economics that studies the
economy of consumers or households or individual firms
VS.
Macroeconomics: - The Study of the economy as a whole in contrast to microeconomics , which studies its parts.
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Gross Domestic ProductGDP: The total value of all final goods and services produced by and economy in a given year.
- The most commonly used measure of a country’s output.
- GDP can be calculated in two different ways :* Expenditure approach - Add up the total that is spent on all
goods and services in one year.
* Income approach – Add up all income that is earned by the different factors of production (wages, rent, interest, profit)
- The GDP in each case should be the same.
Multiple-counting: Inflating the size of the GDP by including the value of the components of the final goods in the total.
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Expenditure ApproachTo calculate the GDP using this approach, the final value of goods and services produced in Canada is tabulated by Statistics Canada through gathering expenditure information on a nationwide basis.
The formula below is used to arrive at the GDP:
GDP = C + G + I + (X – M)
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Expenditure Approach Cont…GDP = C + G + I + (X – M)
C = Consumption: - What households spent on goods and services. - total spent on durable goods, semi-durable goods, non-
durable goods and services
G = Government Purchases': - contains value of expenditures on all goods and services
by all levels of Government. - Includes spending on wages to employees, office supplies, and public capital goods (schools hospitals)
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Expenditure Approach Cont…I = Investment:
- A business’s purchase of capital goods, construction of new buildings, or changes to inventories, with a view to increasing production and profit.
(X – M) = the value of net exports in Canada
M = imports: - Purchases of all items , some of which are produced outside of Canada
X = Exports: - Production that originated in Canada but is purchased by Individuals, businesses and governments in other countries.
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GNP and GDPGross National Product (GNP):
- Total value of all final goods and services produced by Canadian-owned factories or productions in Canada or anywhere in the world.
• Canada Started using GDP as its main measure of output because it gives a better indication of Canadian output.
- Includes production from Japanese – owned firms but excludes production from Canadian
Owned firms.
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Comparing GDP Years• GDP is calculated based on
the market prices at the time the goods.
- Changes in the level of prices year to year can produce misleading results.
• If prices increase rapidly, the growth in GDP may not actually be a result of increased output.
• GDP is most commonly used as a tool for measuring economic growth of a Country.
Real GDP: the constant dollar GDP or chained dollar GDP.
• Economic Growth: - How much a country's economy has expanded from one year to the next.
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Calculation
Real GDP (real GDP year 2 – real GDP year 1)__Growth rate = Real GDP year 1 x 100
Example: 1999 real GDP = $966.4 billion2000 real GDP = $ 1009.2 billion - Economy growing are rate of 4.4%
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• Population size change can
be misleading if it change significantly.
- Dividing a Country’s GDP by its population reveals its per capita GDP.
• Does not count output that has no dollar value attached to it (renovating homes)
Drawbacks
• Does not include transactions without paper trails ( selling drugs)• Negative effects of
economic production. (water pollution, Solid waste)• distribution of
income
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Measuring Employment: The Unemployment Rate
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Unemployment Rate: - the percentage of the labor force not working at any given time. Statistics Canada calculates this figure once a month.
Process: - Conducting a nation wide survey - Population is then grouped into a number of categories.
1. Under age of 15 and/or institutionalized.2. eligible to be part of the workforce but chose not to participate3. Labor force
Labor Force: - The total of all Canadians holding jobs plus all those
actively seeking work.
Unemployment Rate
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# Unemployed Unemployment Rate = Labour force X 100
Calculation
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This definition gives rise to some criticism:
- Includes anyone who has any type of wage earning job as being employed. - Does not include workers who have been looking for jobs for so long that they may have just “given up”. If not actively looking they are not included as unemployed. - People who are “underemployed.”
The actual unemployment rate is really higher than the official figure suggests.
Criticism
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Full EmploymentFull Employment:
- In Canada is considered by many to be when the unemployment rate is in the range of 6 to 7 percent. Also known as the natural rate of unemployment.
• High unemployment rate also entails the financial cost of programs, such as the Financial Insurance. This helps alleviate the problem of unemployment.
• Financial cost is compounded by lost taxation revenues due to lower incomes and decreased spending on goods and services.
• People suffer from a loss of self-esteem, los of job skill and increase in family tension.
• People living in Atlantic Canada and individuals with lower education levels consistently face higher levels of unemployment than the average Canadian. (Figure 9.6 and 9.7 in textbook)
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Applying Okun’s LawUnemployment above the natural rate of unemployment has both financial and social costs:
Financial - lost output that results from labor resources that are sitting idle. Lost output is known as
GDP Gap.
GDP Gap:- Difference between the actual GDP produced by the economy and the potential GDP that could be produced if the unemployment rate was not higher than the natural rate.
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Applying Okun’s Law Cont..
Okun’s Law: - for every percentage point that the actual
unemployment rate exceeds the natural rate, a GDP gap of 2% occurs.
Formula:
(unemployment rate – natural rate) X2GDP gap = actual X ----------------------------------------
GDP 100