Macroeconomics final exam notes lecture notes lectures 4 14 PDF

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Macroeconomics Final Exam Notes - Lecture notes, lectures 4 - 14 Introductory Macroeconomics SFW (University of Guelph)

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Macroeconomics Final Exam Notes Chapter 4 Notes Macroeconomics - The study of the economy as a whole. Includes topics such as inflation, unemployment, and economic growth. In microeconomics, typically one market is being focused on. When it comes to macroeconomics, the effects of something are typically studied on more than one market. Business Cycle - Refers to the alternating periods of expansion and recession that a given market can go through. Expansion - Period where total production and total employment is increasing. Recession - Period where total production and total employment are decreasing. Economic Growth - When an economy produces an increasing amount of goods and services. Inflation Rate - The average rate at which prices increase over a given period of time. Gross Domestic Product (GDP) - A measure of the total production of a company or sector over a given period of time. GDP only includes the final goods and services that were provided over that period of time. Final good and services - Goods and services purchased by the final user of the product. (I.E. A car, not a wheel.) Intermediate good or service - This is a good or service that is used as an input into another good or service, such as a car seat. (A car seat is an intermediate good or service, a car is a final good or service.) These are not included in GDP unless they were purchased separately from the final product. Another way to look at GDP is thinking about it as the total value of income in the market. Every time Honda sells a car, all of that money goes back into the company, and spread out through itself and employees as income. Tax on the other hand, goes to the government, and eventually becomes income to someone when the government spends the money. Transfer Payments - These are payments the government makes to households where it does not receive a new good or service in return. , Four Major Categories of Components of GDP (Consumption, Investment, Government Purchases, Net Exports) (C) Personal Consumption Expenditures (aka consumption) Includes expenditures include; Food, clothing, services like haircuts and school, vacation, and cars. (I) Gross Private Domestic Investment (aka Investment) Split into three separate categories Business Fixed Capital investments - These are investments made by companies in new factories, equipment, etc. Residential Structures - These are investments made by households, individuals, or firms on NEW houses. Investment in Inventory - These are investments made by companies on their inventory. If Honda has 100,000,000 dollars' worth of new unsold cars in inventory at the beginning of the year, and 200,000,000 dollars' worth of unsold new cars in inventory at the end of the year, Honda has spent 100,000,000 dollars on inventory investment over the year. (G) Government Consumption and Gross Investment (aka Government Purchases) Includes money spent by federal, provincial, and local governments on goods and services such as teachers, salaries, highways, and hospitals. This DOES NOT INCLUDE transfers to individuals. (NX) Net Exports of Goods and Services (aka Net Exports) This is the total of exports minus imports. (aka Net Exports) Exports - Goods and Services produced domestically and sold to foreign households or firms. Imports - Goods and services produced in foreign countries, but purchased domestically. Net Exports - The value of a counties total exports minus the value of a counties total imports. EQUATION FOR GDP Y = C + I + G + NX Total GDP = Consumption + Investment + Government Purchases + Net Exports , Value Added - The additional market value a firm adds to a product. For example, a raw diamond is worth $500. A gem cutter cuts the diamond and increases the total value to $700. The value added is $200. Then a Jewellery designer sets the diamond and increases its value to $1000. The value added is $300. Then a jewellery store buys it and sells it for $1500. The value added is $500. Note the final seller adds an equal amount of value added when compared to all the other players who added value. Shortcomings of GDP as a Measure of Total Production Household Production This refers to any sort of good people build or make for themselves. (I.E. if you make a bookcase for yourself, that amount is not include

There are three reasons a company may try to hide the purchase or sales of a given product. They're dealing with illegal products or drugs. They want to avoid paying income on profit they make They want to avoid government regulation (I.E. Quotas put on milk) These kinds of transactions are defined as the Underground Economy , Shortcomings of GDP as a Measure of Well-Being The Value of Leisure is Not Included in GDP If someone decides to retire, the GDP of a country will inevitably decrease unless they are replaced. While this will decrease the GDP of the country, it may increase that person's satisfaction with their place in life. Therefore, GDP would not be a good representation of that person’s happiness just because GDP is lower. GDP Does Not Consider the State of the Environment GDP is not adjusted to include the cost of creating pollution. GDP is Not Adjusted for Changes in Crime and Other Social Problems. Increases in crime rates can reduce well-being, but may increase GDP spending on police, security, etc. GDP Measures the Size of the Pie but Not How the Pie is Divided. Does not account for unequally distributed goods or services throughout a country. (I.E. There are some very rich and very poor parts in places like China.) Nominal GDP - When GDP is calculated using the current inflation rates at the end of the year. (Includes inflation) Real GDP - When GDP is calculated using the prices from a nominal year (excluding GDP) I.E. A nominal year such as 2007, where all the years proceeding it are compared to it to see if the economy has actually grown or not. Using Real GDP is a more accurate representation of how well an economy is doing, and if it has actually grown or not. One problem with Real GDP is if prices have changed in markets relative to each other. I.E. The price of cell phones may have come down in relation to that of a pizza. But since we are using a frozen year in time, it may not be 100% accurate. Price Level - A measure of the average prices of goods and services in the economy. GDP Deflator - A measure of the price level, calculated by dividing nominal GDP by Real GDP and multiplying by 100 GDP Deflator = Nominal GDP / Real GDP x 100 , Other Measures of Total Production and Total Income Gross National Product (GNP) The value of final goods and services produced by the labour and resources of Canadians, even if the production takes place outside of Canada. Therefore, while GNP includes the production of Canadian companies outside of Canada, it does not include the production of companies outside of Canada in Canada. National Income Consumption of Fixed Capital - AKA depreciation of the value of the machinery used to produce various goods and services. If we take the value of GDP and subtract the depreciation costs from all the machinery used to produce in Canada, we get the National Income. Household Income Income received by households. To calculate, we subtract the earnings that corporations retain rather than pay to shareholders through dividends. We also add in payment that households receive from the government as transferable payments Household Disposable Income Household income minus any tax payments that must be made. This is the most accurate representation of the money that households actually have to spend as they see fit. Chapter 5 Notes Unemployment Rate - The percent of the workforce actively seeking a job that cannot find or do not have one. Working Age Population - People that are 15 years of age or older who are legally entitled to work in Canada. Employed - Anyone who did paid work, unpaid work for a family business, or worked for themselves. Unemployed - People who do not have a job, but are willing and able to work, and have looked for a job in the last 4 weeks. Not in the Labour Force - People who are unwilling or unable to perform paid work. This includes people who have given up trying to find a job. Labour Force - The sum of employed and unemployed workers in the economy. Calculating Unemployment rate; Unemployment rate = Number of unemployed / Labour Force x 100

Labour Force Participation Rate - The percentage of the working age population in the labour workforce. Participation Rate = Labour Force / Working Age Population Employment-Population Ratio - A measure of the portion of the population engaged in paid work. Employment-Population Ratio = Number of Employed / Working Age Population x 100 , Problems with Measuring the Unemployment Rate Discouraged workers - These are workers who are willing and able to work, but have not been able to find a job and therefore have not been searching for a job in the last four weeks. In this case, these people are considered to not be a part of the labour force. ,, Four Main Types of Unemployment (Frictional, Structural, Cyclical, Seasonal) Frictional Unemployment and Job Search This is the short term unemployment that arises with the process of matching workers with certain skills to the correct job. This is natural when searching for a job, as it is the typical time that a person spends finding a job, and the typical time a business spends trying to find a worker to fill a position. Structural Unemployment Unemployment that arises from a persistent mismatch between the skills and attributes of workers and the requirements of the job. Cyclical Unemployment Unemployment caused by a business cycle recession. (Aka when the economy goes into a recession, people are either let go or businesses are simply not looking to expand their workforce, so people are unable to find jobs and are left to be unemployed. Seasonal Unemployment Unemployment that is due to season factors, such as weather or the fluctuation in demand for some products during the year like bathing suits or snowmobiles., Natural Rate of Unemployment - The normal rate of unemployment, consisting of frictional and structural unemployment. There are always people between jobs, just getting out of school, etc. that do not have a job. The natural rate of unemployment is also the point at which an economy would be considered at FULL EMPLOYMENT. , Government Policies and the Unemployment Rate Employment Insurance Employment insurance is paid to those who are unemployed. Often times, if someone loses their job, they can either quickly pick up a low paying job somewhere like Wal-Mart, or they can hold out and wait for a better job and still get some support from the employment insurance. Minimum Wage Laws If the minimum wage is above the market clearing wage (The wage determined by the supply and demand graph), there will be excess supply and not enough demand. (Too many people wanting jobs and not enough businesses offering jobs.), Labour Unions - Organizations of workers that bargain with employers for better wages and working conditions. Efficiency Wages - A higher-than-market average wage that a firm pays to motivate workers to be more productive. Inflation - The average rise in market prices over a given period of time. Inflation Rate - The percentage that prices rise over a given period of time. Price Level - Measures the average price of goods and services in an economy. Consumer Price Index - An average of the prices of the goods and services purchased by a typical household. The easiest way to make this basket is to make it out of 100. I.E. Each point for each section is 1% of a household’s income. (I.E. If food is 16, that means it accounts for 16% of the households income.) When calculating CPI, there is typically a base year like comparing real GDP, and all the other years are compared to it. CPI = Expenditures Now / Expenditures in base year x 100 How to measure change over the years? Change in cost of living = (More recent year CPI - Less recent year CPI) / Less recent year CPI x 100 Four Biases that cause changes in the CPI to overstate the real inflation experienced by households Substitution Bias Statistics Canada is assuming that households buy the same amount of every product every month. In reality, households buy less of a product the more expensive it gets, especially in relation to substitutes. Therefore, since they sometimes change products, the prices in the basket the household actually experiences vs that of statistic Canada rise less. Increase in Quality Bias

Often times goods and services included in Statistics Canada's basket increase in quality. An example of this could be a car, that becomes safer, more fuel efficient, nicer inside, or faster. All of these characteristics of the car warrant the added cost, and therefore the price is actually increasing less than Statistics Canada says it is. New Product Bias The basket is not adjusted as new products come out. Therefore, if since the last time the basket was updated IPad came out, any price fluctuation in IPads would not be captured in the CPI. Additionally, if IPads replaced computers all together, this would also not be captured in the basket. Outlet Bias Many people have begun buying products either online or in big box stores like Costco, because it saves them money. If the CPI does not account for the places where people buy their goods and services, and the discounts that are offered to them for shopping in new places, it will overstate the actual inflation. Producer Price Index (PPI) - An average of the prices received by producers of goods and services at all stages of production. It's like CPI, only it is a basket of goods for producers and not consumers. Real Interest Rate - The nominal interest rate minus the inflation rate. Nominal Interest Rate - The stated interest rate of a loan. Real Interest Rate = Nominal Interest Rate - Inflation Rate Inflation Affects the Distribution of Income Since there are very few average people, households will find their income raising faster than the rate of inflations, while others slower. This leaves people in two groups. Either those with rising purchasing power or those with falling purchasing power. This causes the distribution of income to be uneven, and buying power to also be uneven in an economy. Menu Costs - The cost to firms of changing prices. Nominal income generally increases with inflation because when inflation is anticipated, average nominal income also increases by the same percentage as the rate of inflation. Since nominal income increases with inflation, expected inflation does not affect the purchasing power of the average consumer. Real GDP = Nominal / Price Deflator. Change = later year / earlier year CPI = Expenditures now / base year. Finding inflation CPI of New Year - CPI of old / cpi of old x 100 Chapter 6 Notes Long-Run Economic Growth - The process by which rising productivity increases the average standard of living. Rule of 70 - How many years will it take real GDP per capita to double. - Number of years to double = 70/Growth Rate Labour Productivity - The quantity of goods and services that can be produced by one worker or by one hour of work. Capital - Manufactured goods that are used to produce other goods and services. Examples are machines, computers, factories, and buildings. Potential GDP - The level of real GDP attained when all firms are producing at capacity. Output Gap - The gap between real GDP and potential GDP. Financial System - The system of financial markets and financial intermediaries through which firms acquire funds from households. Channels funds from savers to borrowers and channels the returns on borrowed funds back to savers. Financial Markets - Markets where financial securities, such as stocks and bonds, are also sold. Financial Intermediaries - Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers. Investment = Y (GDP) - C (Consumption) - G (Government Purchases) Private Savings = Y (GDP) + TR (Government Transfers) - C (Consumption) - T (Paid Taxes) Public Savings = T (Paid Taxes) - G (Government Spending) - TR ( Government Transfers) Savings = Private Savings + Public Savings Savings = Y (GDP) - C (Consumption) - G (Government Spending) Total Savings MUST Equal total investment Balanced Budget - When the government spends as much as it collects in tax dollars. Budget Deficit - When the government spends more than it collects in tax dollars. Market for Loanable Funds - The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.  An increase in the demand for loanable funds increases the equilibrium interest rate.  A decrease in the demand for loanable funds decreases the equilibrium interest rate.  An increase in the supply of loanable funds decreases the equilibrium interest rate.

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A decrease in the supply of loanable funds increases the equilibrium interest rate. This often happens when the government is running a budget deficit. This causes both saving and investments to decrease. Crowding Out - A decline in private investment expenditures as a result of an increase in government purchases. During a recession……. Inflation decreases dramatically Unemployment increases a notable amount. Leading up to a recession……. Inflation often spikes No given pattern for unemployment, but it is normally slowly rising from a low. ,, Real Wages = Nominal Wages / CPI (Decimals) -----> What if the CPI raises by 2%, but your employer says they can only give you a 1% raise. Therefore, your income actually went down. When real wages go down (CPI increases more than Wages), employers can actually hire more people. , When real wages fall, you begin to hire more people because the cost is going down, so your demand for labour is actually increasing. , Real GDP Per Capita - Real output per person in the country. Been going up steadily in Canada for the past 55 odd years based on the graph in the text book. , Real GDP - Drawing the graph, there will be an average trend line. Whenever there is a gap, we are either sitting above or below the line. When you're below, we're in or entering a recession. If we are above the line, we are operating above potential. (I.E. If you own a business and you are working more than 40 hours a week, you could be working over potential. (Looks like a curvy line with a straight line through the middle.) One cycle is a high to a high or a low to a low or a mid to a mid. , Whenever you are sitting on the trend line, you have no issues with unemployment. If you are sitting above the line, unemployment will be below its natural rate. If you are sitting below the line, unemployment will be above its natural rate. ,, Chapter 7 Notes Industrial Revolution - The application of mechanical power to the production of goods, beginning in England 1750’s The change in real GDP Between two years uses the following equation. (Year 1 - Year 0 / Year 0) x 100 = Percentage change in real GDP between the two years. The Average growth rate per year between a set of years uses the following equation. Average Annual Growth Rate = (Year(t)/Year(0)) ^(1/t) - 1 Economic Growth Model - A model that explains growth rates in real GDP per capita over the long-run. Labour Productivity - The quantity of goods and services that can be produced by one worker or by one hour of work. Technological Change - A change in the quantity of output a firm can produce sing a given quantity of inputs. Three Main Sources of Technological Change Better Machinery and Equipment Increases in Human Capital Better Means of Organizing and Managing Production Per-Worker Production Function - The relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant. Equal Increases in capital per worker lead to diminishing increases in output per hour worked. Technological change causes the per-worker production to increase. This also causes the resulting real GDP to increas...