Macro Economics Book Notes Chapter 2

Chapter 2 GDP is the sum of the dollar value of all final goods and services produced over a specified period within Canada. GDP can be calucated in two ways, income approach or expindeture approach. Income is expressed as the sum of the total amount paid to various inputs such as labour wages and capital(intrest payaments). GDP can also be caluacated as the total value added, which is the total output price minus the inputs(raw material or unfinished goods) it purchased. GDP calucation can be thought of by the laws of supply and demand. Whatever is produced must be sold, if its not sold its counted as inventory. So you can you can measure gdp by adding up the final value of all goods produced(supply) or by adding up the final value of all goods purchased(demand). Inputs such as labour and capital are called factors of production and payments such as wages and interest is called factor payments. Production function is the relation showing how much output can be produced for a given combination of inputs. Net domestic product at factor cost is the total payment to factors of production. Intermediate goods are components used by business’s before they do their value add. A car company buys intermediate goods because putting it into building the new car. To prevent double counting intermediate goods are not calculated. GDP = Y = C + I + G +NX Y = income C = consumption I = investment G = government NX = net exports Definition of disposable income = YD = Y + YNR + TR – TA YD = disposable income Y = income YNR = net investment income from non-residents TR = government transfers(welfare/social security,etc..) TA = Tax revenue Constant dollar or real GDP is measuring gdp between two periods,holding the price level constant. Chain weighted GDP is calculating by averaging the base over two years, the current and the preceding year and so the averaging moves over time as the current year moves over time.

GDP deflator is the ratio of nominal gdp in a given year to real gdp of that year(GDP deflator = nominal GDP/ Real GDP). Some things such as cooking, cleaning, child care in the home are not calucated within GDP because they are not traded, thus we can get a spike in GDP when one of these things moves into the commercial market. An example of this is if women stop doing this and start taking employment, or if they start selling child care services, etc.. Nominal GDP calculates the total value of final goods and services at current prices, from the same period that the quantities were measured. Real GDP calculates the total value of final goods and services at constant prices. Therfore the only way to change real GDP is to change the quanitity produced(and not simply increase your price). Real GDP is a measure of physical production and nominal gdp is the value of that output in current dollars(at prevailing prices). Inflation is measured as ‫( = תּ‬Pt – Pt – 1)/(Pt-1) GDP deflator is defined as the ratio of nominal GDP to real GDP. Its backet of goods changes every year to reflect the actual composition of output. Okun’s law says an increase in the unemployment rate of 1% is associated with a 1.7% reduction in growth of real GDP. Variables There are 3 types of exogenous variables. those that are given by nature(weather) or taken to be outside the scope of a particular model(investor psychology). Policy variables(those that are set by policy makers such as taxes or government spending) Parameters (variables that may affect the reactions of economic agenets but not of direct interest themselves). The relationship between exogenous and endogenous variables is one of cause and effect. Economist usually ask “When an exogenous variable changes by one unit, how much does the endogenous variable change in response?”. A change in an endogenous variable is always the result of some more fundamental change in one or more exogenous variables. Nominal interest rate measures how much money you received above the amount that you invested, expressed as a %. Real interest rate is the nominal interest rate with the inflation rate subtracted.

Natural rate of unemployment. Rate of unemployement at which the flows into and out of the unemployment pool balance, also, the point on the augmented Phillips curve at which expected inflation equals actual inflation. Frictional unemployment is the unemployment that exists when the economy is at full employment(people normally changing jobs,etc..). Structural unemployment is long-term unemployment that arises because of a lack of matching between the skills of workers and the needs of employers.