1 ECON 2000- Chapter 2 Textbook Notes Harit Lalia

Chapter 2 The Data of Macroeconomics

3 Variables used by economists and policymakers GDP: Nations total income and total expenditure on its output of goods and services. CPI: Measures the level of prices Unemployment Rate: Fraction of the workers who are unemployed

Measuring the Value of Economic activity: GDP GDP considered the best measure to see how well economy is performing Computed every 3 months The purpose of GDP is to summarize data (administrative and statistical) in a single number that represents the total dollar value of economic activity in a given period of time GDP= total value of final goods and services produced within Canada during a given period of time GDP is total income earned domestically Incudes income earned domestically by foreigners, but it does not include income earned by domestic residents on foreign ground. The total income earned by Canadians includes the income that we earn abroad, but does not include income earned within our country by foreigners. To measure standard of living, income earned by foreigners is disregarded Income and expenditure can both be used to determine GDP

COMPUTING GDP Used Goods: Sale of a used good cannot be included in the calculation of GDP. The reason being that you would be double counting. When a shop sells a deck of sporting cards for $50 and the item goes up to $500, the resale will not be included because it has already been sold. The expenditure of making the card and selling them has been matched to the $55. The resale would be a sale of assets and not goods. The Treatment of Inventories: Workers are hired by a bakery to make bread. Some of the bread is left. How does this affect GDP? Bread Spoils: Firm paid more wages but has not received additional revenue. Total expenditure, however, has not changed because no one has bought the bread (no additional income for the bakery, no additional bread for households) Bread put up for sale: The owners have purchased the bread to sell. The expenditure has gone up and higher profit for firm has gone up, GDP increases What happens when firm sells bread? Nothing, because the bread had already been bought by the firm. Cannot be double counted (much like used goods)

2 ECON 2000- Chapter 2 Textbook Notes Harit Lalia Intermediate Goods and Value Added: Intermediate goods not counted (raw materials) in the calculation of GDP. Ex: Macdonalds buys $0.50 of meat from farmer and sells hamburger for $1.50. Only the $1.50 will be recorded as the $0.50 have been accounted for in the price of the final product. One way to compute value of all final goods and services is to compute it at each stage, called VALUE ADDED (Firms output-value of intermediate goods). So for Macdonalds: Value added of Macdonald is 1.50-0.50= $1.00!! Housing Services and Other Imputations: Some goods and services are not sold at market prices, thus should be estimated (imputed value) to add to the GDP. Example: Police, fire fighters all provide services. However, they are at no cost to us. However, their value is computed using other factors such as wages of public servants etc. Underground economy and household productions are all part of GDP but cannot be computed because they cannot be estimated.

REAL GDP VS. NOMINAL GDP NOMINAL Value of goods and services measure at current prices is called Nominal GDP Nominal GDP can either increase or decrease because prices rise or because quantities rise. This method, however, is not a good measure to accurately reflect how well the economy can satisfy the demands of households, firms and governments. REAL Value of goods and services measure using a constant set of prices. Used base year for calculation/easier comparability Since a societys ability to provide economic satisfaction for its members ultimately depends on the quantities of goods and services produced, real GDP provides a better measure of economic well-being than nominal GDP. THE GDP DEFLATOR GDP DEFLATOR= NOMINAL GDP/REAL GDP Reflects whats happening to the overall level of prices in the economy. NOMINAL GDP= Real GDP x GDP deflator GDP deflator is used to deflate (or take inflation out) of nominal GDP to yield real GDP.

THE COMPONENTS OF EXPENDITURE The national accounts divide GDP into four broad categories of spending: Consumption ( c): Consists of goods and services bought by households. Divided into 2 subcategories (Durable-car, TVs , non-durable food, clothing , and services-haircuts)

3 ECON 2000- Chapter 2 Textbook Notes Harit Lalia Investment (I): Consists of goods bought for future use. Divided into 3 subcategories (Business fixed investment-new plant, equipment, Residential construction- new housing, Inventory investment- inventories) Government Purchases (G): Goods and services bought by federal, provincial, and municipal governments. Includes military equipment, highways, services government workers provide but does not include transfer payments such as Canada pension plan, EI, welfare. Net Exports (NX): Accounts for trade with other countries. Value of goods and services sold to other countries-the goods and services bought from other countries Y= Output Thus, Y=C+I+G+NX MEASURES OF INCOME Gross National Income= GDP-Net income of foreigners Net National Income= Gross National Income- Depreciation In national accounts, depreciation is referred to as capital consumption allowances National income is how much everyone earns in the economy after the taxes National Income divided into: Compensation of employees (wages and fringe benefits), Corporate Profit (income of firms after payment to workers and creditors), Non-incorporated business income (income of small firms, law partnerships and income landlords receive, and imputed rent) and Net interest (The interest domestic businesses pay minus the interest they receive plus the interest earned from foreigners) PERSONAL INCOME= National Income- Corporate profits- Social Insurance Contributions Net interest +Dividends+ Government Transfers to individuals + Personal interest income PERSONAL DISPOSIBLE INCOME= Personal Income- Personal Tax payments MEASURING THE COST OF LIVING: CPI The increase in the overall level of prices is called Inflation CPI = Q of product A x P of product A+ Q of product B x P of product B Q of product Ax P of base year for product A+ Q of product B x P of base year for product B

CPI VS. GDP DEFLATOR CPI and GDP deflator take into account the inflation; however, have 3 main differences GDP deflator measures the prices of all goods and services produced whereas CPI measures the prices of only the goods and services bought by the consumers. Thus, an increase in the price of the goods and services bought by firms and the government would be accounted for in the GDP deflator but not in the CPI GDP deflator accounts for only the goods and services produced domestically, imported goods not being part of the GDP. Thus, price that Canadians pay for foreign goods sold in Canada affects the CPI and not GDP deflator

4 ECON 2000- Chapter 2 Textbook Notes Harit Lalia CPI assigns fixed weights to prices and GDP assigns changing weights. Fixed basket of goods is called Laspeyres index and a changing basket is called Paache index. MEASURING JOBLESSNESS: THE UNEMPLOYMENT RATE The unemployment rate measures the percentage of those people wanting to work who do not have jobs. Structural Unemployment: Friction in labor markets Cyclical Unemployment: Depends on the overall economic state A person is employed if he/she has spent most of the previous week working at a paid job. A persona is unemployed If he/she has been unemployed and is waiting for the start date of a new job, temporarily laid off or has been looking for a job. Discouraged worker not unemployed Labor Force: Sum of the employed and the unemployed Unemployment Rate: Percentage of the labor force that is unemployed LABOR FORCE= # OF EMPLOYED+ # OF UNEMPLOYED UNEMPLOYMENT RATE= # OF UNEMPLOYED/LABOR FORCE X100 Labor force participation Rate: Percentage of the adult population that is in the labor force: LFPR= LABOR FORCE/ADULT POPULATION X100