Introduction to Macroeconomics
Macroeconomics the study of the economy as a whole We measure performance to track the development of the economy
Why Measure Performance Helps the government develop tax policies & spending priorities. Helps the government assess the impact of their economic policies. Enables a comparison of our economy to the economies of other countries. Gives us an idea of which industry sectors are most important to our well-being. Provides unions and wage earners with a basis for negotiations. Allows individuals and businesses to make sound investment decisions.
CANADA s ECONOMIC GOALS Political Stability Reduced Public Debt Economic Growth Increased Productivity & Efficiency Equitable Distribution of Income Price Stability Full Employment Viable Balance of Payments & Stable Currency Economic Freedom Environmental Stewardship
Measuring Canada s Economic Goals Economic Growth Full Employment Price Stability GDP Employment Rate Inflation Rate
Domestic Product (GDP): Measuring Output GDP is the total market value of all final goods and services produced within a country in one year. GDP allows us to measure our economic output, and is the most commonly used measure of a country s economic growth. GDP is used to compare standards of living of different countries. GNP (Gross National Product) is the old way of measuring the economy. It includes production by domestic firms overseas but does not include the operations of foreign companies here so it is not an accurate measure of what s actually happening in our country.
Real GDP GDP measures output value using prices. If GDP increases, how much of the increase is real growth and how is due to price changes? Nominal GDP (current-dollar GDP or money GDP) is GDP including inflation Real GDP (constant-dollar GDP) is GDP adjusted for inflation using a GDP deflator (until May, 2001) and the chain Fisher volume index (since May, 2001) GDP deflator removes the impact of price increases in measuring GDP as expresses GDP in base-year dolalrs Real GDP = (Nominal GDP / GDP deflator)
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 Wages, rent, interest and profit
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 (Output Growth) = Real GDP year 2 Real GDP year 1 x 100 Real GDP year 1 Ex. Real GDP yr 1 + $4, 000; Real GDP yr 2 = $4, 086 Calculate Real GDP Growth Rate 4, 086 4, 000 x 100 = 2.15% 4, 000
Real GDP per capita more informative (divide by pop.) Formula: Real GDP per capita =Real GDP/population
Drawbacks to GDP The use of GDP as a measure of economic well-being has been criticized for the following reasons: Population Size if GDP has increased by 5%, but population increased by 8%, output per person has actually declined to remove the impact of a population change on GDP, we must calculate per Capita GDP per Capita GDP = GDP/Population
What are some problems with GDP as a measurement of economic wellbeing? Non-marketed goods and services including home child care, elder care, housework, home garden cultivation, voluntary Work is not included. The Underground Economy and illegal activity is not included. It treats crime, divorce, and natural disasters as economic gain The Type of Goods Produced may be not improve society s well-being (i.e. guns)
Leisure time available for the working population may suffer in order to achieve an increased GDP. Environmental degradation: GDP does not include the negative impacts of economic production such as pollution..but money spent to clean up oil and chemical spills increase the GDP. Quality of Life is not measured in GDP family breakdowns, and drop in leisure time from people trying to increase productivity
Distribution of Income: GDP may be high overall, but growth may be distributed unevenly. A better measure of economic well being? GDP + Non marketed goods & services + underground transactions environmental damage = BMEW BMEW = better measure of economic wellbeing Better tool for measuring economic wellbeing?...genuine Progress Indicator (GPI) is suggested, which includes the negative impacts of crime, pollution, commuting, family breakdowns, and drop in leisure time etc.
OTHER MEASURES OF ECONOMIC WELL-BEING Index of Economic Well Being (IEWB) International Human Development Index UN Human Development Index (HDI) Weighted Index of Social Progress (WISP) Happy Planet Index (HPI) Measure of Economic Welfare (MEW) Gross National Happiness (GNH) Genuine Progress Indicator (GPI)
Conclusion: GDP & Happiness More GDP does not mean more happiness More GDP does mean more goods & services; income; jobs BHUTAN as an example of GNH http://www.youtube.com/watch?v=7zqdqa4ynvi
TRY THIS! What impact would each of the following have on REAL GDP? Would economic well being increase or decrease? 1. On average, people in a country decide to increase the number of hours they work by 5%. ANS: Real GDP would increase. Assuming the people chose to increase their work effort and forgo the extra leisure time, economic well being would increase as well.
2. Spending on department of defense increases due to a terrorist attack on the nation. ANS: Real GDP would increase. The extra expenditure is in the economy was due to an increase in something bad, so economic well being would be lower.
3. The price level (inflation) and GDP increase by 10%. ANS: No change in REAL GDP. For some people, economic well being might increase and for others decrease, since inflation does not affect each person in the same way. (more on this later)
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 $500b (=96%) then potential GDP is $521b ($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