Chapter 4: Economics Bitches

Microeconomics: market behaviour of individual consumers and firms how prices are
determined and how prices determine the production and distribution and use of
goods
Macroeconomocs: performance of the economy as a whole, challenges facing
society, limited natural resources etc.
Three decision makers: consumer, companies and government
Market: arrangement that allows buyers and sellers to conduct business with one
another
Gross Domestic product: market value of all final goods and services produced
within a country in a given time period, year or quarter.
Final good: finished product, dell computer not the chip inside
Approaches:
Expenditure approach: looks at total spending on final goods and services produced
within the economy
C+I+G+(X-M)
Income approach: total income earned by those producing those goods and services
Measured by totalling incomes that pay for: wages for labour, rent for land,
interest for capital goods, profits for entrepreneurs
All production results in income and eveuntually all production is consumed or
stored in inventory
In theory both same
Real and Nominal
Nominal: dollar value in given year prices for that year
Real gdp: constant dollar gdp, using a base year price.
Influences of Economic Growth
Population, capital stock= more training and education, technology
A higher savings rate is not responsible for a higher sustained growth rate over long
periods of time
Phases in a business cycle:

 Expansion: normal growth, economy steadily growing, inflation stable,

inventories adjust to make higher demand
Peak: demand is high, not enough labour, interest rise, bond price fall
Contraction: enters a downturn, activity starts to lower, falling employment,
consumer save
Trough: firms raise prices workers need more money, interest fall, inflation fall
Recovery: starts to pick up, not ready yet to make new investment
Economic indicatiors:
1. Housing starts, 2. Manufactuers new orders expecting more consumer
purchse 3. Commodity prices 4. Average hours worked per week 5. Stock
prices changing profits 6. Money supply
Macdonald Laurier institute tracks performance of 9 factors
Coincident indicators: those which change at approximately the same time and
in the same direction
1. Personal income 2. GDP 3. Industrial Production 4. Retail sales
Laggining indicators: those which change after the economy as a whole changes,
confirms business cycle
1. Unemployment, private sector spending, business loans an borrowing, labour
costs , inflation rate
Labour force: sum of working age people who are employed or actively seeking
employment
Participation rate: share of working age people in the work force 66%. Shows
willingness to wrk
Unemployment rate: unemployed and actively looking for work, 1.5 mill,
around 7.7
Discouraged workers: able and willing but have not made specific efforts to
find a job within the previous month and not included in the labour force
Types of unemployment
Cyclical: rises when economy weak and lowers when strengthen
Frictional: normal labour turnover, entering and leaving creation and
destruction
Structural: unable to find work or fill available jobs because of necessary
skills, do not lvie where jobs are available. Closely tied to technology,
government policy lasts long than frictional
Frictional workers have skills, structural do not
Minimal level of unemployment is called natural unemployment rate,
economy is thought to be operating at close to full potential or capcity

 Natural unemployment is often viewed as the level that is consistent with

stable inflation, thats why it is important for monetary and fiscal policy
Interest rates: deffering consumption from today to tomorrow, represents one
component of capital
Determinants: demand and supply of capital, default risk: high risk high
payment, foreign interest rate and exchange rate: influence rates, credit bank
credibility: raising and lowering short term interest rates to stabilize inflation,
inflation: high inflation high rates. 5
Nature of money and inflation
Medium of exchange, unit of account: how to price good, store of value: does
not expire 3
Money aggregates: Canada looks primarily at changes in the growth rate of
the various monetary aggregates it tracts
Consumer price index: basket of goods and services that represent household.
*inflation rate = CPI current period-previous/previous * 100
Inflation
Output gap: real GDP and potential
A negative gap means there is spare capcity to produce a, inflation will fall
A positive means output will is above, inflation rises
Means economy moves through an expansion towards a peak, this means
companies can raise prices to respond to strong demand, demand pull
inflation
Inflation can rise due to shocks from supply of economy: cost push inflation

Disflation
A decline in the rate at which prices rise, when unemployment is low inflation
tends to be high, vice versa
Sacrifice ratio: shows what GDP must be reduced by with increased
employment
International
Exports account for 30 of GDP compared to 20 back in the sixties
Balance of payments: rest pf the wpr;d mpr,a;;y pver a quarter pr a year
Current account: goods and services between Canadians and foreginers the
earnings from investment income
Capital and financial account: financial flows between Canadians and
foreigners relating to investments
*demand or supply of Canadian currency

> Current account: mercahdise trade, if high demand for canandian parts
> exchange rate also lowers price of exports or raises price of imports
1. exchange rate as I said
Determinants of Exchange rates
1. Commodity prices, 2. Inflation 3. Current account 4. Economic performance 5.
Public devts anddeficits
Fixed exchange rate: country central bank maintains the currency fixed level
to another or a composite
Floating: markets to value the currency