Macroeconomics Lecture notes PDF

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Class 2: Chapter 19What is Macro economicsPolicy Issues and Tradeoffs ● Fiscal policy (Government - Federal / Provincial) - tax rates, government spending, trade policy (spending money or not) ● Monetary policy (Bank of Canada) - Bank regulation, money supply, interest rates, inflation, currency reg...

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Class 2: Chapter 19 What is Macro economics

Policy Issues and Tradeoffs ● Fiscal policy (Government - Federal / Provincial) - tax rates, government spending, trade policy (spending money or not) ● Monetary policy (Bank of Canada) - Bank regulation, money supply, interest rates, inflation, currency regimes and int’l exchange (rules for spending money) ● Most policy choices involve trade offs ○ Importers vs exporters ○ Lenders to borrowers ○ Short-run benefits vs long-run benefits ○ Unemployment vs. inflation

Macroeconomic Variables Real GDP ● Measure of total output in some base year Nominal GDP ● Total output measures the value at current prices

The Output Gap Actual GDP ● Output in the economy even if the economy isn’t “normal” Potential ● Hypothetical output if the economy is “normal” **We can produce more than potential but it normally leads to a recession** Inflationary gap ● When actual GDP > Potential GDP

Terminology of the business cycle Recession ● 2 quarters of negative growth Trough ● The bottom of each recession Potential GDP ● Rises at constant rate

Understanding Employment ● Employment rate = employed / population (15+) (Core age employment (25-54) ● Unemployment rate = unemployed / labour force ○ Identical to unemployed / (employed + unemployed) ○ Unemployed (looking for work) ■ Calculated by doing labour force - employed ○ Labour Force ■ Calculated by doing unemployed + employed ● Canada vs U.S. unemployment rates - calculations differ ○ Canada is 15+, US is 16+ ○ US - active search required ○ Canada passive search OK ○ Labour Force Survey ● Types of unemployment ■ Recession unemployment ■ Frictional unemployment ● Unemployment that occurs because it takes time for employers and workers to find each other is called frictional unemployment. ■ Structural unemployment ■ Cyclical unemployment

Average price across base year

Nominal is the interest rate you pay on a loan or mortgage

Exchange rate is how many canadian dollars does it take to buy one dollar of foreign currency

The consumer price index ● Measures the cost of an unchanging basket of goods and services Real interest rate ● Calculated by doing: nominal - inflation

Class 3: Chapter 19 Review and 20 Core Labour Force Participation

Participation, Employment, Unemployment ● ●

People either in the labour force or not ○ In the labour force is either employed or unemployed If unemployed - why are you unemployed? ○ Frictional unemployment ■ Job search ○ Structural unemployment ■ Job market isn’t looking for your given skills ○ Cyclical unemployment ■ Attached to inflationary gap, recessionary gap

Cyclical - referred to as demand-deficient unemployment

Measuring GDP in Complex Economy ● GDP is total production in a country ● If all production was sold and consumed, GDP would be easy to measure ● Most processes occur in stages ● Outputs of one company are inputs to another Measuring Only Final Output ● Can we measure final output

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Who knows if something is final output Seller? Does Apple know if I purchase my Ipdad for my own use, or for work Buyer? Sure - so how do we do this?

Measuring Value Added ● To avoid double counting - measure value added by all firms ● Value added is sales revenue - cost of intermediate goods ● Value added is definitionally equal to factor payments ● Factor payments = wages paid to workers plus profits paid to owners ● Total value added in the economy is a measure of total output

Adding Up Value Added

Circular Flow Model

Consumption ● Expenditure on final goods and services, for final users ○ Durable goods - much more than 1 year (cars, appliances, etc) ○ Semi-durable goods (clothing, footwear, etc) ○ Non-durable goods - less than 1 year (food, flowers) ○ Services (including restaurant meals, education, etc) ● Measured at final price, including taxes and tips

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Does not include spending by foreign residents temporarily in Canada (those are exports)

Investing

Gross vs. Net Investment ● Gross investment is total spending on capital goods ○ Goods to be used in production of future goods and services ● Some capital goods wear out - this is depreciation ● Net investment is the change in the capital stock ○ Net investment = gross investment - depreciation ● GDP measurement based on gross investment (or net investment plus depreciation) Government Purchases (Not government Spending) ● Measured at cost ○ Most government services are not sold at market value-impossible to account for value of output ● Ideally - differentiate between consumption and investment ● Only count purchases of goods / services, not transfer payments ○ Transfer payments don’t pay for a good or service ○ Pensions, EI payments, interest on debt (transfer payments) ○ Recipients often spend transfer payments (at which point they are counted as consumption as consumption/investment) ● Government spending would be something like scholarship (transfer payments) ● Government Purchase - buying ship for navy, paying for firefighters

Net Exports ● Exports ○ Goods/services produced in Canada consumed by non-Canadian households ○ Includes goods/services purchased by tourist/visitors in Canada (including international student tuition) ● Imports ○ Consumption goods (whether consumed in Canada or by residents of Canada on vacation) ○ Investment goods (computers or equipment produced abroad) ○ Government purchases

Class 3: Chapter 19-20

Positive cyclical means recessionary gap and thus meaning actual is less than potential Inflationary and Recessionary Gaps ● If actual GDP is greater than potential GDP ○ More production than normal ○ Lower unemployment ○ Inflationary gap ○ Pressure for prices to rise ● If actual GDP is less than potential GDP ○ Less production than normal ○ Higher unemployment ○ Recessionary gap ○ Pressure for prices to fall (or not rise as fast)

Depreciation is added answer=2508

GDP tells us the price level

Class 4: Chapter 21

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Consuming more than income so negative savings

If income changes we move along the line

Wealth goes down implies consumption goes down which means AE goes down

Class 6 - Chapter 22

Autonomous expenditure is (300+I) Autonomous expenditure is total spending

Autonomous means that it happens even at 0 income Autonomous means not affected by income

Exports are 75 and imports are 20% of income

Y always = income m = slope

Mutually consistent The amount of stuff we want to buy = amount of stuff we want to sell...