Econ203 - CH4 and CH5
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What are the 3 main indicators of Macroeconomic Activity?
- 1. GDP (Real Gross Domestic Product)
- 2. Inflation
- 3. Employment
What is GDP (Real Gross Domestic Product)? And The Formula?
looks at the amount of final goods and services in the economy and how much real income is created by that production (using prices from a base year) - Also not affected by inflation
Price(BASE) X Quantity(CURRENT)
An increase in Real GDP. It is measured using the rate of economic growth
Whats the formula for rate of economic growth?
Real GDP yr2 - Real GDP yr1 / Real GDP yr1 x 100
Whats A Price Level?
A measure of the average prices of all goods and services produced.
What is inflation?
the annual percentage change in the general price level. The inflation rate uses the same equation as the rate of economic growth except we replace Real GDP with the CPI
What is the formula for inflation rate?
[(CPI2010 - CPI2009)/CPI2009)] X 100
The CPI looks at the price change of a ____ basket of goods so remember to use the quantities as the ____ year
What is Employment?
The number of adults in the entire country that are employed full-time, part-time or self-employed
Formula of unemployment rate
[(Labour Force - Employed)/Labor Force]X100
What is Participation Rate?
The percentage of the population 15 years or older that is either working or unemployed (ex in the labor force). It is used to see the size of the labor force compared to the whole population.
What's the formula for the Participation Rate?
Labour Force/Population 15yrs+ X 100
What is Cyclical Unemployment?
unemployment that would be eliminated by higher levels of economic activity. This is mainly due to changes in seasons.
What is Structural Unemployment?
Unemployment that is due to the general structure (or lack of it) in the labor market
What is Frictional Unemployment?
the unemployment that occurs in the time frame when transitioning between jobs or searching for jobs
What is Natural Unemployment Rate?
shows the structural unemployment and frictional unemployment as a percentage. In Canada, there is normally a natural unemployment rate of 6%
What is the formula for employment rate?
(Employment/Population 15+ yrs) X 100
What is Recession?
This occurs when there is 2 consecutive quarters (quarter = 3 months) of negative growth in real GDP. Basically, it indicates a decline in economic activity
What are the 4 ways to measure economic activity?
1)Total expenditure on goods and services at market prices
2) Output of goods and services at market prices
3) Inputs to production at market prices
4) Incomes received ny households for inputs (i.e. working etc..)
What is Nominal GDP?
Looks at the output of final goods and services, the income generated by the production of that output and expenditure on the sale of that output - using current prices.
What are 3 ways to measure nominal GDP?
- 1) Output Based GDP
- 2) Expenditure- Based GDP
- 3) Income-Based GDP
The Output and Income based measures describe the ______ side of the economy because they look at goods _____
The expenditure based method describes the ____ side because it looks at how much goods are ___
What is "Value Added"?
The difference between the market value of the product and the cost of "Intermediate inputs" - services and materials purchased from other businesses and used to make final goods
What is Intermediate Inputs?
Services and materials purchased from other businesses and used to make final goods.
What is "Final Goods and Services"?
The finished product bought by the final user (NOT ANOTHER BUSINESS)
What is the formula for Expenditure-Based GDP?
GDP = C + I + G + (X-Z)
What is the Consumption Expenditure (C)
spending by households on currently produced final goods and services
What is the investment expenditure?
spending by businesses on currently produced final goods and services. It adds to the buildings, machinery and inventories that businesses use to make goods.
What is Government Expenditure (G)?
Government spending on currently produced final goods and services
What is Exports?
locally made products being bought by foreign countries
What is Imports?
Foreign countries' products being bought by the local market
What is the Income-Based GDP?
The income-based approach looks at the incomes of everyone involved in providing the goods and services. Other costs and taxes are then added to include everything that goes in to the final prices of the goods.
What is the Employment Income (W)
Is the total of all wages, Salaries, and benefits paid to workers
What is Profit and Business Income?
The total of large corporations' profit and small business income. It measures the costs of management and entrepreneurship
What is Interest and Investment Income?
Income earned by Financial Assets
What is Business and Investment Income (BI)?
This is simply the addition of Profit and Business Income + Interest and Investment Income from above
What is Net Domestic Income (NDI)
Total income earned by factors of production. Factors of production are all the previous terms we just looked at: incomes earned by labor, businesses and by holders of investment assets. Therefore: NDI = W + BI
What is Capital Consumption Allowance (CCA)
measures depreciation of the capital stock. This refers to how a company's capital is getting older and less productive
What is Net Indirect Taxes (Tin)
Sales and Excise Taxes - Subsidies
What is the formula for Income-based GDP?
GDP = W + B+ I + CCA+ Tin
What is GDP Deflator? And it's formula?
Shows us the relationship between nominal and Real GDP
(Nominal GDP/Real GDP) X 100
What's the point of the AD/AS model?
it's used to explain the behaviour of real output and prices in the national economy
What is Aggregate Demand? How do we calculate it?
Is the planned aggregate expenditure on final goods and services at different price levels, with all other factors staying the same.
We calculate it using the Expenditure-Based Approach for GDP
What Is Aggregate Supply? What approach do we use to calculate it?
The output of final goods and services that businesses would produce at different price levels, with all other factors remaining the same (wage rates and net indirect taxes). We calculate it using the income-based approach
What's the difference between AD and market demand for an individual product?
Market demand assumes that income is constant. AD means that income and price are simultaneously increasing at the same amount
What happens to AE when prices of some products increase in the short run?
it remains unchanged because there are no alternatives in the short run so people have to consume less of other products
What are the 3 reasons for the AD curve sloping downwards?
- 1 - Interest Rate Effect
- 2 - Substitution Effect
- 3 - Wealth Effect
What's the Interest Rate effect?
a) As prices increase, people and businesses need more money to pay their expenses
b) This increases the demand for loans which makes the interest rate go up and cost of expenditure increases.
c) As a result, people's planned expenditure would decrease and others would rather wait until interest rates drop
d) This helps show us the negative relationship between price levels and planned aggregate expenditure
What is the Substitution Effect?
The change in net exports when relative national prices change
If canadian prices increase, canadians will import more from the US cause its cheaper. Vice versa.
Both of these changes cause AD using the expenditure based approach to decrease as prices increase
What is the Wealth Effect?
The change in planned consumption when household wealth changes.
Changes in prices of Aggregate Supply are because of (3):
- 1) Changes in Labour Cost
- 2) Changes in business and investment income (profit) plus capital consumption.
- 3)Changes in net indirect taxes
The AS curve has a ___ slope because there is a ___ relationship between the price level and output of goods that businesses are willing to supply
What is the Equilibrtium real GDP and price?
the point where planned expenditure equals current output and provides business revenues that cover costs and their expected profits
What is the Potential Output (Yp)? What type of line is it? and why?
This is also known as the Long-Run Aggregate Supply (LAS). It is the output the economy can produce with the current labour and technology level being fully utilized. - not affected by the price level - its a vertical line
What is the business cycle?
The short term fluctuation of actual real GDP.
What's an Output Gap? What's the formula for the ordinary and the percentage?
The differences between actual Output (Y) and potential output (Yp)
What is the Equilibrium - Natural Unemployment Rate? and the formula?
Un =[ (Labour Force - equilibrium employment)/Labor force] X 100
it's the unemployment rate when the economy is at potential output
What is Okun's Law? and the formula?
it states that changes in unemployment rates are because of differences between the growth rate of actual real GDP (Y) and the growth rate of potential GDP
change in unemployment rate = -0.5 (growth rate of Y - growth rate of Yp)
What is the automatic way to adjust output gaps during a recession?
- -During a recessionary gap, unemployment rises and workers are willing to work less so wage rates and other factor prices will become lower.
- - This will lead to a lower price level and the actual output level will increase as shown by the new equilibrium
What is the automatic way to adjust output gaps during an inflation?
price levels are higher so workers will demand more money, wages will be higher and that will shift AS to the left to equilibrium
What are two ways the gov and central bank can adjust output gaps?
- Fiscal Policy
- Monetary Policy
What is Fiscal Policy?
Gov Expenditure (G) and Tax Changes (T) used to influence AD
What is Monetary Policy?
Changes in interest rates and money supply used to influence AD
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