Chapter 4
Measuring National Economic
Activity and Performance
1
MACROECONOMICS BY CURTIS, IRVINE,
AND BEGG
SECOND CANADIAN EDITION
MCGRAW-HILL RYERSON, © 2010
Learning Outcomes
2
This chapter explains:
 Three main indicators of macroeconomic
activity and performance
 Canadian economic performance
 National accounting measures of the economy
 Nominal and real GDP and the GDP deflator
 Per capita real GDP
Chapter 4
©2010 McGraw-Hill Ryerson Ltd.
Macroeconomics
3
Macroeconomics studies:
The national economy as a system in terms of:
The economy’s output of goods & services
Employment & incomes
Expenditures on current output
Prices and inflation
Money & financial markets
Macroeconomic performance & policies.
Chapter 4
©2010 McGraw-Hill Ryerson Ltd.
Indicators of Macroeconomic Activity
4
 Output, Incomes
 Real gross domestic product (real GDP) measures

Quantity of final goods & services produced in the
economy in a specific time period

The real incomes generated in producing those goods &
services
Chapter 4.1
©2010 McGraw-Hill Ryerson Ltd.
Indicators of Macroeconomic Activity
5
Rate of growth of real GDP
Real
GDP

Real
GDP
year
2
year
1


100
Real
GDP
year
1
In 2005, real GDP was $1248 billion
In 2006, real GDP was $1282 billion
$
1282

$
124
Rate
of
growth
in
2006


10

2
.
7
%
$12
Indicators of Macroeconomic Activity
6
 The Price Level

Weighted average price of a basket of goods &
services

Consumer Price Index (CPI)
• The Inflation Rate:
•
Annual % Change in the Price Level
C
PI

C
PI
year
2
year
1


100
C
PI
year
1
Chapter 4.1
©2010 McGraw-Hill Ryerson Ltd.
Indicators of Macroeconomic Activity
7
Recent Inflation in Canada
In 2006, CPI at 109.1
In 2007, CPI at 111.5
111
.
5

109
.
1
Inflation
rate
for
2007


100

2
.
2
%
109.
Indicators of Macroeconomic Activity
8
Use of indexes
CPI expressed as index
Index is value relative to base year
•2009, unemployment = 10%
•2010, unemployment = 9%
•Index of unemployment in 2010 relative
to 2009
9%
× 100= 90
10 %
Indicators of Macroeconomic Activity
9
Labour Force, Employment & Unemployment
•
•
Canada, Sept 2008 (000 persons):
1.
27,013
Labour force
18,326
1.
Employment
17,206
2.
Unemployment [(2 – 3)]
3.
Participation rate [(2)/(1)]x100
67.8%
4.
Employment rate [(3)/(1)]x100
63.7%
5.
Unemployment rate [(4)/(2)]x100
2.
Chapter 4.1
Non-Institutional pop 15+ yrs
1,120
6.1%
©2010 McGraw-Hill Ryerson Ltd.
Canadian Economic Performance
Real GDP 1980-2008
10
Real GDP
Recession
Recession
Note:
•The strong growth trend over the period of 1980-2008.
•The recessions in the early 1980s & 1990s, late 2008
Chapter 4.2
©2010 McGraw-Hill Ryerson Ltd.
Canadian Economic Performance
Annual Rates of growth in Real GDP 1980-2008
11
Recession
Recession
• Growth rates fluctuate from year to year
• Negative growth rates mark recessions
Chapter 4.2
©2010 McGraw-Hill Ryerson Ltd.
Canadian Economic Performance
Annual Inflation Rate in Canada
12
• Strong rise in the inflation rate in the in 1970s
•Drop in inflation in recession of early 1980’s
•Further drop in inflation in recession of early 1990’s
Chapter 4.2
©2010 McGraw-Hill Ryerson Ltd.
Canadian Economic Performance
Annual Unemployment Rates in Canada
13
• Changes in GDP growth rates  changes in
unemployment rates
• High unemployment rates reflect 1983 and 1993
recessions
Chapter 4.2
©2010 McGraw-Hill Ryerson Ltd.
National Accounts Measures of Economic Activity
14
National Accounts provide:
 A set of definitions and concepts for use in
measuring GDP
 A framework for an aggregate demand (AD) and
supply (AS) model of the economy
Chapter 4.3
©2010 McGraw-Hill Ryerson Ltd.
National Accounts Measures of Economic Activity
15
Three ways to define GDP:
 Income-based
 Sum
of all income earned in the economy
 Expenditure-based
 Sum of all expenditures in the economy
 Value-added
 Sum of the value-added at each stage or
production across all industries
Chapter 4.3
©2010 McGraw-Hill Ryerson Ltd.
National Accounts Measures of Economic Activity
16
The Circular Flow Diagram
Money
payments
$$
Expenditure
on goods &
services
Money
receipts$$
Output of goods
& services
Households
Businesses
Factor inputs
to business
Money incomes
$$
Factor incomes
paid households
Production
costs $$
The Expenditure-Based GDP
17
Expenditure based GDP =
Consumption expenditure (C) by households, plus
Investment expenditure (I) by business on buildings,
machinery, & inventories, plus
(note: new residential home sales also included)
Government expenditure (G) on currently produced
final goods & services, plus
(Transfer payments are not included in GDP)
Exports (X) - Imports (Z) = Net Exports (NX)
GDP

C

I

G

X

Z
Chapter 4.3
©2010 McGraw-Hill Ryerson Ltd.
The Income-Based GDP
18
Net Domestic Income (NDI) =
Employment Income (W): the sum of all wages,
& benefits paid to labour, plus
salaries,
Profits & business Income is the sum of corporate profit &
small business income, plus
Interest & investment income is income earned from
financial sources
Business and investment income (BI) is the sum of
profit, interest, investment, & business income
NDI = W + BI
Chapter 4.3
©2010 McGraw-Hill Ryerson Ltd.
The Income-Based GDP
17
Income based GDP =
Net Domestic Income NDI = W + BI, plus
Capital Consumption Allowance (CCA) to cover the
depreciation of capital stock =
GDP at basic price = NDI + CCA, plus
Net indirect Tax (TIN) = sales + excise taxes –
subsidies
GDP at market price = NDI + CCA + TIN
Chapter 4.3
©2010 McGraw-Hill Ryerson Ltd.
Canadian National Accounts, 2008
(bil $, current prices)
20
 GDP at market prices = $1602.5 billion
 Net foreign income = -$14.7 billion
 GNP = GNI = $1587.8 billion
Chapter 4.3
©2010 McGraw-Hill Ryerson Ltd.
Nominal & Real GDP &
the GDP Deflator
21
 Nominal GDP ≡ output & incomes of a given year measured
with current market prices of goods & services.
 Real GDP, or GDP in constant dollars ≡ output & incomes
of given year measured with base year prices of goods &
services .
 Changes in nominal GDP = Changes in prices & quantities
 Real GDP = Nominal GDP is adjusted by GDP deflator.
 Changes in real GDP = Changes in quantities
Chapter 4.4
©2010 McGraw-Hill Ryerson Ltd.
Nominal & Real GDP & the GDP Deflator
22
 The GDP deflator of a given year =
(Nominal GDP/Real GDP) x 100.
 The GDP deflator index differs from the consumer
price index (CPI).
 The CPI is based on “representative baskets” of
goods & services that consumers buy, while
 GDP deflator covers all the goods & services
included in GDP.
 GDP deflator deflates the dollar value of current
output to what it would have been in base
year’s prices.
Chapter 4.4
©2010 McGraw-Hill Ryerson Ltd.
Nominal & Real GDP & the GDP Deflator
23
 Between 1990 – 2008, nominal GDP increased by 200%
 Between 1990-2008, real GDP increased by 56.9%.
 Between 1990-2008, GDP deflator increased by 91.2%.
Chapter 4.4
©2010 McGraw-Hill Ryerson Ltd.
The GDP Deflator (P)
24
P= ∑ (Unit labour-cost, Unit gross business income,Unit
net indirect tax)
 Nominal GDP = W + BI + CCA + TIN
Real GDP = Y = C + I + G + X - Z
 Nominal GDP = P x Y
= P x (C + I + G + X – Z)
 P x Y = W + BI + CCA + TIN

W
BI

CCA
T
IN
P



GDP
deflator
and
Y Y Y
W

BI

CCA

T
IN
Y


Real
income
P
Chapter 4.4
©2010 McGraw-Hill Ryerson Ltd.
Using the GDP Deflator
25
Nominal
GDP
Real
GDP


100
GDP
deflator
Canadian Nominal & Real GDP 1987-2008
Nominal
GDP
Real
GDP


100
GDP
deflator
$1602.5
Real
GDP


100

$
1325
.
5
in
2002
$
2008
$120.9
Chapter 4.4
©2010 McGraw-Hill Ryerson Ltd.
Per Capita GDP
26
 Per Capita real GDP : an indicator of
standard of living.
Real
GDP
Per
capita
real
GDP

Populat
Chapter 4.5
©2010 McGraw-Hill Ryerson Ltd.
Per Capita Real GDP in Canada,
1980-2008
27
↑
Per capita GDP in Canada by
50% between 1980 & 2008.
↑ has not been smooth & stable
Per capita GDP
Chapter 4.5
↓ in recessions
©2010 McGraw-Hill Ryerson Ltd.
Limitations of GDP
28
 Some production causes pollution & other
externalities
 Unreported income & output
 Non-marketed goods & services
 Composition of output affects standard of living

(military production vs health care)
 Income distribution
Chapter 4.5
©2010 McGraw-Hill Ryerson Ltd.
Top Twelve Countries Based on the 2005 Human
Development Index
29
•High GDP may not necessarily be a good measure of
economic well-being.
•Human Development Index (HDI) provides a broader
measure of country’s wellbeing and progress
Chapter 4.5
©2010 McGraw-Hill Ryerson Ltd.
Chapter Summary
30
 Macroeconomics studies the whole national
economy as a system
 Real Gross Domestic Product, prices, inflation
rates & unemployment rates are indicators of
macroeconomic performance
 Circular flow shows macroeconomic linkages
 The national accounts provide a framework for the
measurements of national output & income
 Nominal GDP measures the output of final goods
& services at market prices in the economy
Chapter 4
©2010 McGraw-Hill Ryerson Ltd.
Chapter Summary
31
 Real GDP measures the country’s output of final
goods & services
 The GDP deflator is a measure of the price level
 Fluctuations in the growth rate of real GDP, in
inflation rates, and in unemployment rates are
important aspects of recent economic
performance in Canada
 Real GDP and per capita real GDP are crude
measures of national and individual welfare
Chapter 4
©2010 McGraw-Hill Ryerson Ltd.