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
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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
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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
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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