Macro_Chapter04

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Chapter 4 Measuring National Economic Activity and Performance:

Macro economics by Curtis, Irvine, and Begg Second Canadian Edition McGraw-Hill Ryerson, © 2010 Chapter 4 Measuring National Economic Activity and Performance

Learning Outcomes:

Learning Outcomes ©2010 McGraw-Hill Ryerson Ltd. Chapter 4 2 This chapter explains: Three main indicators of macroeconomic activity and performance Canadian economic performance National accounting measures of the economy Nominal and real GDP and the GDP deflator Per capita real GDP

Macroeconomics:

Macroeconomics ©2010 McGraw-Hill Ryerson Ltd. Chapter 4 3 Macroeconomics studies: The national economy as a system in terms of: The economy’s output of goods & services Employment & incomes Expenditures on current output Prices and inflation Money & financial markets Macroeconomic performance & policies.

Indicators of Macroeconomic Activity:

Indicators of Macroeconomic Activity Output, Incomes Real gross domestic product (real GDP) measures Quantity of final goods & services produced in the economy in a specific time period The real incomes generated in producing those goods & services ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.1 4

Slide 5:

Rate of growth of real GDP In 2005, real GDP was $1248 billion In 2006, real GDP was $1282 billion 5 Indicators of Macroeconomic Activity

Indicators of Macroeconomic Activity:

Indicators of Macroeconomic Activity The Price Level Weighted average price of a basket of goods & services Consumer Price Index (CPI) The Inflation Rate: Annual % Change in the Price Level ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.1 6

Indicators of Macroeconomic Activity:

Recent Inflation in Canada In 2006, CPI at 109.1 In 2007, CPI at 111.5 Indicators of Macroeconomic Activity 7

Indicators of Macroeconomic Activity:

Indicators of Macroeconomic Activity Labour Force, Employment & Unemployment Canada, Sept 2008 (000 persons): Non-Institutional pop 15+ yrs 27,013 2. Labour force 18,326 Employment 17,206 Unemployment [(2 – 3)] 1,120 Participation rate [(2)/(1)]x100 67.8% Employment rate [(3)/(1)]x100 63.7% Unemployment rate [(4)/(2)]x100 6.1% ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.1 8

Canadian Economic Performance Real GDP 1980-2008:

Canadian Economic Performance Real GDP 1980-2008 ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.2 9 Note: The strong growth trend over the period of 1980-2008. The recessions in the early 1980s & 1990s, late 2008 Recession Recession Real GDP

Canadian Economic Performance Annual Rates of growth in Real GDP 1980-2008:

Canadian Economic Performance Annual Rates of growth in Real GDP 1980-2008 ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.2 10 Recession Recession Growth rates fluctuate from year to year Negative growth rates mark recessions

Canadian Economic Performance Annual Inflation Rate in Canada:

Canadian Economic Performance Annual Inflation Rate in Canada ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.2 11 Strong rise in the inflation rate in the in 1970s Drop in inflation in recession of early 1980’s Further drop in inflation in recession of early 1990’s

Canadian Economic Performance Annual Unemployment Rates in Canada :

Canadian Economic Performance Annual Unemployment Rates in Canada ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.2 12 Changes in GDP growth rates  changes in unemployment rates High unemployment rates reflect 1983 and 1993 recessions

National Accounts Measures of Economic Activity:

National Accounts Measures of Economic Activity ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.3 13 National Accounts provide: A set of definitions and concepts for use in measuring GDP A framework for an aggregate demand (AD) and supply (AS) model of the economy

National Accounts Measures of Economic Activity:

National Accounts Measures of Economic Activity The Circular Flow Diagram Expenditure on goods & services Households Businesses Output of goods & services Factor inputs to business Factor incomes paid households Production costs $$ Money incomes $$ Money payments $$ Money receipts$$ 14

The Expenditure-Based GDP:

The Expenditure-Based GDP Expenditure based GDP = Consumption expenditure ( C ) by households, plus Investment expenditure ( I ) by business on buildings, machinery, & inventories, plus Government expenditure ( G ) on currently produced final goods & services, plus ( Transfer payments are not included in GDP ) Exports ( X ) - Imports ( Z ) = Net Exports (NX) ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.3 15

The Income-Based GDP:

The Income-Based GDP ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.3 16 Net Domestic Income ( NDI ) = Employment Income ( W ): the sum of all wages, salaries, & benefits paid to labour, plus Profits & business Income is the sum of corporate profit & small business income , plus Interest & investment income is income earned from financial sources Business and investment income ( BI ) is the sum of profit, interest, investment, & business income NDI = W + BI

The Income-Based GDP:

The Income-Based GDP Income based GDP = Net Domestic Income NDI = W + BI, plus Capital Consumption Allowance ( CCA ) to cover the depreciation of capital stock = GDP at basic price = NDI + CCA, plus Net indirect Tax ( T IN ) = sales + excise taxes – subsidies GDP at market price = NDI + CCA + T IN ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.3 17

Canadian National Accounts, 2008 (bil $, current prices):

Canadian National Accounts, 2008 (bil $, current prices) ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.3 18 GDP at market prices = $1602.5 billion Net foreign income = -$14.7 billion GNP = GNI = $1587.8 billion

Nominal & Real GDP & the GDP Deflator:

Nominal & Real GDP & the GDP Deflator ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.4 19 Nominal GDP ≡ output & incomes of a given year measured with current market prices of goods & services. Real GDP , or GDP in constant dollars ≡ output & incomes of given year measured with base year prices of goods & services . Changes in nominal GDP = Changes in prices & quantities Real GDP = Nominal GDP is adjusted by GDP deflator. Changes in real GDP = Changes in quantities

Nominal & Real GDP & the GDP Deflator:

Nominal & Real GDP & the GDP Deflator The GDP deflator of a given year = (Nominal GDP/Real GDP) x 100. The GDP deflator index differs from the consumer price index (CPI). The CPI is based on “representative baskets” of goods & services that consumers buy, while GDP deflator covers all the goods & services included in GDP. GDP deflator deflates the dollar value of current output to what it would have been in base year’s prices. ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.4 20

Nominal & Real GDP & the GDP Deflator:

Nominal & Real GDP & the GDP Deflator ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.4 21 Between 1990 – 2008, nominal GDP increased by 200% Between 1990-2008, real GDP increased by 56.9%. Between 1990-2008, GDP deflator increased by 91.2%.

The GDP Deflator (P):

The GDP Deflator ( P ) Nominal GDP = W + BI + CCA + T IN Real GDP = Y = C + I + G + X - Z Nominal GDP = P x Y = P x (C + I + G + X – Z) P x Y = W + BI + CCA + T IN ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.4 22 P = ∑ (Unit labour-cost, Unit gross business income,Unit net indirect tax)

Using the GDP Deflator:

Using the GDP Deflator ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.4 23 Canadian Nominal & Real GDP 1987-2008

Per Capita GDP:

Per Capita GDP Per Capita real GDP : an indicator of standard of living . ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.5 24

Per Capita Real GDP in Canada, 1980-2008:

Per Capita Real GDP in Canada, 1980-2008 ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.5 25 Per capita GDP in Canada ↑ by 50% between 1980 & 2008. ↑ has not been smooth & stable Per capita GDP ↓ in recessions

Limitations of GDP:

Limitations of GDP ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.5 26 Some production causes pollution & other externalities Unreported income & output Non-marketed goods & services Composition of output affects standard of living (military production vs health care) Income distribution

Top Twelve Countries Based on the 2005 Human Development Index:

Top Twelve Countries Based on the 2005 Human Development Index ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.5 27 High GDP may not necessarily be a good measure of economic well-being. Human Development Index (HDI) provides a broader measure of country’s wellbeing and progress

Chapter Summary:

Chapter Summary ©2010 McGraw-Hill Ryerson Ltd. Chapter 4 28 Macroeconomics studies the whole national economy as a system Real Gross Domestic Product , prices, inflation rates & unemployment rates are indicators of macroeconomic performance Circular flow shows macroeconomic linkages The national accounts provide a framework for the measurements of national output & income Nominal GDP measures the output of final goods & services at market prices in the economy

Chapter Summary:

Chapter Summary ©2010 McGraw-Hill Ryerson Ltd. Chapter 4 29 Real GDP measures the country’s output of final goods & services The GDP deflator is a measure of the price level Fluctuations in the growth rate of real GDP , in inflation rates , and in unemployment rates are important aspects of recent economic performance in Canada Real GDP and per capita real GDP are crude measures of national and individual welfare

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