Chapter 20 â Measuring GDP & Economic Growth 09/16 ...
Chapter 20 – Measuring GDP & Economic Growth Real GDP (2 methods of calculating) Base year method: Q Q P P Cell phones Doughnuts Base year is given, lets say 2009 Nominal GDP in 2011 = Quantity produced in 2011 x prices in same year (2011) Real GDP in 2012 = Quantity produced in 2012 X prices in base year (2011) ChainedDollar GDP Method Quantity (2011) x Prices (2011) = Quantity (2012) x Prices (2011) = Q11 x P12
09/16/2013
Q12 x P12
Find percentage increase at 2011 prices Find percentage Increase at 2012 prices
Find average of both percentages
Take nominal GDP in 2011 (base year) and add the average of percentage prices
READ 474479
Chapter 21 – Monitoring Funds and Inflation
09/16/2013
Population divides into workingage population (WAP) WAP divides into labour force and those NOT in labour force Labour force (LF) divides into employed and unemployed Employed are divided into fulltime and parttime employed Unemployed: without work, making specific effort to find work within last 4 weeks waiting to be called back to a joab from which you have been laid off waiting to start a job within 4 weeks Unemployment rate (UR) = percentage of the people in the labor force who are unemployed UR = (# unemployed / # LF) x 100 Labour force participation rate (LFPR) = percentage of the people in the WAP who are in the LF LFPR = (# LF/# WAP) x 100 EmploymenttoPopulation ratio (EPR): percentage of the people in the WAP who have jobs EPR = (# employed/# WAP) x100 employment rate + unemployment rate do NOT equal 100% because of difference denominators
Chapter 21 – Monitoring Funds and Inflation Ex. In Aug 2013 Employment = 18,027,600 Unemployment = 1,489,300 Not in LF = 9,207,700
Find LF..
LF = Employed + Unemployed LF = 19,516,900
Find WAP.. WAP = LF + Not in LF WAP = 28,724,600 Find Unemployment Rate… UR = (1,489,300/19,516,900) x 100 UR = 7.6% Find LFPR = (#LF/#WAP) x 100 LFPR = 67.9%
09/16/2013
Chapter 21 – Monitoring Funds and Inflation
09/16/2013
EmploymenttoPopulation Ratio = (#EMP/#WAP) X100 EPR = 62.8%
Unemployment Rate Curve – No trend.. counter cyclical with GDP – Inversely proportional
Labour Force Participation and EmploymenttoPopulation Table Trends Directly proportionate to GDP.. Increasing trend due to influx of women in labour force LFPR higher than EPR because of denominator EPR is more volatile because not everyone leaves the work force Unemployment Frictional normal labour turnover Failed entrepreneurs, university graduates Structural due to changes in technology or changes in location of jobs Workers replaced by assembly lines Cyclical unemployment due to state of the economy Company downsizing during recession Full employment = only unemployment is frictional and structural – no cyclical unemployment
Chapter 21 – Monitoring Funds and Inflation
09/16/2013
Real GDP produced at Full employment is Potential GDP (the quantity we can produce at full employment) Natural unemployment is unemployment that is frictional and structural
th Wed. September 18 , 2013
Consumer Price Index: Measure of the average of the prices by urban consumers for a fixed basket of consumer goods and services Every good in the basket is weighed by its importance
Chapter 22 – Economic Growth
09/16/2013
If tuition rates rise at 6% per year, how long will it take for tuition to double 70/6 = 11.6 years If you invest $10,000 at 12% per year, how long will it take to double your money? 70/12 = 5.8 years If real GDP per person had grown 1% faster per year since 1960, on average each Canadian household would have an additional $50,000 more income per year (each individual $21,200) How do we know from the aggregate production function that labor is subject to diminishing returns? An increase in population increase in supply of labour
Increase in labour productivitiy increase in demand for labour increase in real wage rate increase equilibrium quantity of labor aggregate production function shifts upward potential GDP increases Potential GDP per person increases Standard of living increases To Foster growth: Saving Research and development Improve education Provide aid to developing nations Encourage international trade
Chapter 23 – Finance, Saving, & Investment Finance – activity of providing the funds used for investment
09/16/2013
Chapter 23 – Finance, Saving, & Investment
09/16/2013
Money – what we pay for goods and services Saving Loans market Bond market – bond is a promise to make specified payments at specified dates Stock market – shares certificate of ownership, therefore claim to firm’s profits Firms go to these markets to increase their physical capital, which includes: Tools, investments, machines, buildings Made in the past to produce goods/services today Total amount spent on new capital gross investment Change in value of capital net investment
Gross investment – Net investment = Depreciation Gross investment – Depreciation = Net Investment
Depreciation the decrease in the value of a firm’s capital that results from wear and tear and obsolescence
Wealth – the value of everything that you own (a stock; something at a point in time) Saving – the amount of income that is not spent on taxes or consumption (a flow; saving increases wealth) Stocks, bonds, and loans are all financial assets
Chapter 23 – Finance, Saving, & Investment
09/16/2013
The price of a financial asset and its interest rate are inversely related (the higher the price of the asset, the lower the interest rate/when the price of the asset increases, the interest rate of the asset decreases)
Ex. Suppose a bond pays $5 a year in interest and has a price of $50. What is the interest rate? = 10% Suppose the demand for this bond increases, and the price rises to $100. What is the interest rate? = 5%
Y = C + I + G + NX Y = C + S + T C + I + G + NX = C + S + T (subtract C from both sides) I + G + NX = S + T (subtract G from both sides) I + NX = S + T – G (subtract NX from both sides) I = S + (T – G) – NX S = personal/household saving T – G = government saving – NX = saving by the rest of the world S + (T – G) = national saving nominal interest rate: the number of dollars that a borrower pays and a lender receives expressed as a percentage of the number of dollars loaned or borrowed real interest rate: the nominal interest rate adjusted to remove the effects of inflation on the buying power of money
Chapter 23 – Finance, Saving, & Investment
09/16/2013
Real interest rate = nominal interest rate – inflation rate
Suppose you have $1000 in the bank earning a nominal interest rate of 3% p.a. At the end of the year, you have $1030. Inflation rate is 1%. So, At the end of the year, it cost you $1010 to buy goods and services that cost $1000 at the beginning of the year. So your money has really only increased by $20. Real interest therefore is $20 Real interest rate is 2% (nominal 3% inflation 1% = real 2%) Loanable Funds Market Aggregate of all the financial markets Includes bonds, loans and stock market Real interest rate is the opportunity cost of loanable funds (you can either use money in loanable funds market or put it in the bank for interest) Demand for Loanable Funds (DLF) Market is a downwards slope Depends on real interest rate Expected profit rate (EPR) increases in expansion and decreases in recession (EPR increases, DLF increases) Supply of Loanable Funds (SLF) – savings Depends on real interest rate Disposable Income: income (Y) – net taxes (NT)
Chapter 23 – Finance, Saving, & Investment
09/16/2013
Increase in disposable income = increase in SLF Expected future income: Increase in expected future income = decrease in SLF Wealth: Increase in wealth = decrease in SLF Default risk: Increase in default risk = decrease in SLF The stock market boom of 20022007 increased wealth in the world by trillions of dollars. Explain the effect on the real interest rate, investment, and saving.
Chapter 24 – Money, the Price Level & Inflation
09/16/2013
Money is any commodity generally accepted as a means of payment Credit cards and cheques are not money Money = currency + deposits Barter = double coincidence of wants Money is A medium of exchange – generally accepted as a means of payment A unit of account A store of value Money is categorized as: M1 consists of currency held by individuals and businesses plus chequable deposits owned by individuals and businesses M2 consists of M1 plus all other deposits – nonchequable deposits and fixed term deposits Bank of Canada: Assets: Government Securities (government bonds) Loans to depository institutions (Bank of Canada loans money to other banks) Liabilities: Bank of Canada notes Depository institution funds (reserves) Monetary Base = Bank of Canada Liabilities + Coins issued by the Royal Mint Open Market Purchases / Open Market Sales
Chapter 24 – Money, the Price Level & Inflation
09/16/2013
Open market purchases increase monetary base By increasing the monetary base, Bank of Canada can increase quantity of money in the market
Desired reserves/Deposits x 100 = desired reserve ratio Desired reserves (how much of your deposits the bank keeps. If you deposit $5000, they will loan out a portion of that and make interest, the rest that they keep for when you wish to withdraw is called desired reserves)
Currency drain/deposits x 100 = currency drain ratio
Currency drain = 50% Desired reserves ratio = 10% Moneybasemultiplier (MBM); Deposits (D); Currency (C); Reserves ® M = D + C MB = R + C MM = M/MB = D+C/R+C divide RHS by D 571573 READ ‘The Multiplier Effect of an Open Market Operation’
Midterm Review
09/16/2013
1. GDP = Expenditure = Income • Expenditure: Y = C + I + G + X – M • B READ UN’s ALTERNATE METHOD OF MEASURING GDP AND HOW CHINA’s GDP COMPARES WITH CANADA Pretend the reference base period is 2002 and calculate CPI Baskets!! 2. Net domestic income at factor cost = wages, salaries and supplementary labor income and other factor incomes A 3. Real GDP is market value of all the final goods/services produced in a country within a given period of time Potential GDP is what we produce at full employment (when all labor is fully employed, when all factors of production are fully employed) Real GDP can be more, less or equal to potential GDP Real GDP cannot be more than potential GDP for a long period of time, because everything is working overtime in order to sustain real GDP = potential GDP E Nominal GDP values production at current year prices Real GDP values production at base year prices Things that are missing from GDP: Underground economy Value of leisure Household production Ch. 21
Midterm Review
09/16/2013
4. Unemployment rate = # unemployed/ LF x 100 Employment to population ratio = # employed/#WAP x 100 LFPR = #LF/#WAP x 100 LF = #employed + #unemployed 13m unemployed + 1.5m employed = 14.5 in LF C Increase in REAL GDP decrease in unemployment Increase in REAL GDP Increase in LFPR and EtoP ratio Female LFPR + EP ratio has increased (more jobs for women) Male LFPR + EPR has decreased (men staying in school longer + early retirement) Types of unemployment: Structural: assembly line example (technology replaced) Frictional: after leaving university (normal unemployment) Cyclical: because of the business cycle (during recession) Some of structural and frictional unemployment is called natural unemployment When REAL GDP is greater than Potential GDP, actual unemployment is LESS than natural unemployment When REAL GDP is less than Potential GDP, actual unemployment is GREATER than natural unemployment When REAL GDP = Potential GDP, actual unemployment is equal to natural unemployment (no cyclical unemployment) 5. C
Midterm Review
09/16/2013
CPI = 100 in the base year Must use a market basket to calculate CPI
Inflation rate using CPI = CPI this year – CPI last year/ CPI last year x 100
6. B
Ch. 22 Rule of 70. Variable will double in 70/growth rate in %
7. 70/4 = 17.5 years C 8. increases, increases, increases B 9. A READ DIFFERENT GROWTH THEORIES AND KNOW PRINCIPLES BEHIND EACH ONE! CH. 23 10. There is only movement along the curve when one (y) of the axes increase/decrease
Midterm Review
09/16/2013
READ THINGS THAT SHIFT SLF AND DLF CURVE B
11. When government has a deficit, increases DLF, increases real interest rate and crowds out investment A
12. Ricardo barro is an effect that says when the government has a budget deficit, the interest rate doesn’t change and the investment doesn’t change D Ch. 24 13. Quantity of money M1 = total chequable deposits and currency 500 + 5,500 = 6000 A 14. When bank of Canada sells government securities, their assets (securities) decrease and liabilities stay the same. E 15. When people sell bonds, the price of a bond falls, and the interest rate r C
Chapter 25 – The Exchange Rate and Balance of Payments
09/16/2013
The Foreign Exchange Market Foreign currency – money of other countries regardless of whether that money is in the form of notes, coins, or bank deposits Trading Currencies Foreign exchange market – anywhere where you can exchange one country’s currency with another (online, bank, store, etc) Currency depreciation – a fall in the value of one currency relative to another currency Currency appreciation – a rise in the value of one currency relative to another Demand of CDN dollars (xaxis
Chapter 28 – Canadian Inflation, Unemployment & Business Cycle 09/16/2013 Inflation Cycles: In the long run, inflation is a monetary phenomenon Occurs if qty. of money grows faster than potential GDP In the short run, many factors can start an inflation Real GDP and the price level interact Two sources of inflation: DemandPull Inflation: An inflation that starts because aggregate demand increases CostPush Inflation
09/16/2013
Q12 x P12
Find percentage increase at 2011 prices Find percentage Increase at 2012 prices
Find average of both percentages
Take nominal GDP in 2011 (base year) and add the average of percentage prices
READ 474479
Chapter 21 – Monitoring Funds and Inflation
09/16/2013
Population divides into workingage population (WAP) WAP divides into labour force and those NOT in labour force Labour force (LF) divides into employed and unemployed Employed are divided into fulltime and parttime employed Unemployed: without work, making specific effort to find work within last 4 weeks waiting to be called back to a joab from which you have been laid off waiting to start a job within 4 weeks Unemployment rate (UR) = percentage of the people in the labor force who are unemployed UR = (# unemployed / # LF) x 100 Labour force participation rate (LFPR) = percentage of the people in the WAP who are in the LF LFPR = (# LF/# WAP) x 100 EmploymenttoPopulation ratio (EPR): percentage of the people in the WAP who have jobs EPR = (# employed/# WAP) x100 employment rate + unemployment rate do NOT equal 100% because of difference denominators
Chapter 21 – Monitoring Funds and Inflation Ex. In Aug 2013 Employment = 18,027,600 Unemployment = 1,489,300 Not in LF = 9,207,700
Find LF..
LF = Employed + Unemployed LF = 19,516,900
Find WAP.. WAP = LF + Not in LF WAP = 28,724,600 Find Unemployment Rate… UR = (1,489,300/19,516,900) x 100 UR = 7.6% Find LFPR = (#LF/#WAP) x 100 LFPR = 67.9%
09/16/2013
Chapter 21 – Monitoring Funds and Inflation
09/16/2013
EmploymenttoPopulation Ratio = (#EMP/#WAP) X100 EPR = 62.8%
Unemployment Rate Curve – No trend.. counter cyclical with GDP – Inversely proportional
Labour Force Participation and EmploymenttoPopulation Table Trends Directly proportionate to GDP.. Increasing trend due to influx of women in labour force LFPR higher than EPR because of denominator EPR is more volatile because not everyone leaves the work force Unemployment Frictional normal labour turnover Failed entrepreneurs, university graduates Structural due to changes in technology or changes in location of jobs Workers replaced by assembly lines Cyclical unemployment due to state of the economy Company downsizing during recession Full employment = only unemployment is frictional and structural – no cyclical unemployment
Chapter 21 – Monitoring Funds and Inflation
09/16/2013
Real GDP produced at Full employment is Potential GDP (the quantity we can produce at full employment) Natural unemployment is unemployment that is frictional and structural
th Wed. September 18 , 2013
Consumer Price Index: Measure of the average of the prices by urban consumers for a fixed basket of consumer goods and services Every good in the basket is weighed by its importance
Chapter 22 – Economic Growth
09/16/2013
If tuition rates rise at 6% per year, how long will it take for tuition to double 70/6 = 11.6 years If you invest $10,000 at 12% per year, how long will it take to double your money? 70/12 = 5.8 years If real GDP per person had grown 1% faster per year since 1960, on average each Canadian household would have an additional $50,000 more income per year (each individual $21,200) How do we know from the aggregate production function that labor is subject to diminishing returns? An increase in population increase in supply of labour
Increase in labour productivitiy increase in demand for labour increase in real wage rate increase equilibrium quantity of labor aggregate production function shifts upward potential GDP increases Potential GDP per person increases Standard of living increases To Foster growth: Saving Research and development Improve education Provide aid to developing nations Encourage international trade
Chapter 23 – Finance, Saving, & Investment Finance – activity of providing the funds used for investment
09/16/2013
Chapter 23 – Finance, Saving, & Investment
09/16/2013
Money – what we pay for goods and services Saving Loans market Bond market – bond is a promise to make specified payments at specified dates Stock market – shares certificate of ownership, therefore claim to firm’s profits Firms go to these markets to increase their physical capital, which includes: Tools, investments, machines, buildings Made in the past to produce goods/services today Total amount spent on new capital gross investment Change in value of capital net investment
Gross investment – Net investment = Depreciation Gross investment – Depreciation = Net Investment
Depreciation the decrease in the value of a firm’s capital that results from wear and tear and obsolescence
Wealth – the value of everything that you own (a stock; something at a point in time) Saving – the amount of income that is not spent on taxes or consumption (a flow; saving increases wealth) Stocks, bonds, and loans are all financial assets
Chapter 23 – Finance, Saving, & Investment
09/16/2013
The price of a financial asset and its interest rate are inversely related (the higher the price of the asset, the lower the interest rate/when the price of the asset increases, the interest rate of the asset decreases)
Ex. Suppose a bond pays $5 a year in interest and has a price of $50. What is the interest rate? = 10% Suppose the demand for this bond increases, and the price rises to $100. What is the interest rate? = 5%
Y = C + I + G + NX Y = C + S + T C + I + G + NX = C + S + T (subtract C from both sides) I + G + NX = S + T (subtract G from both sides) I + NX = S + T – G (subtract NX from both sides) I = S + (T – G) – NX S = personal/household saving T – G = government saving – NX = saving by the rest of the world S + (T – G) = national saving nominal interest rate: the number of dollars that a borrower pays and a lender receives expressed as a percentage of the number of dollars loaned or borrowed real interest rate: the nominal interest rate adjusted to remove the effects of inflation on the buying power of money
Chapter 23 – Finance, Saving, & Investment
09/16/2013
Real interest rate = nominal interest rate – inflation rate
Suppose you have $1000 in the bank earning a nominal interest rate of 3% p.a. At the end of the year, you have $1030. Inflation rate is 1%. So, At the end of the year, it cost you $1010 to buy goods and services that cost $1000 at the beginning of the year. So your money has really only increased by $20. Real interest therefore is $20 Real interest rate is 2% (nominal 3% inflation 1% = real 2%) Loanable Funds Market Aggregate of all the financial markets Includes bonds, loans and stock market Real interest rate is the opportunity cost of loanable funds (you can either use money in loanable funds market or put it in the bank for interest) Demand for Loanable Funds (DLF) Market is a downwards slope Depends on real interest rate Expected profit rate (EPR) increases in expansion and decreases in recession (EPR increases, DLF increases) Supply of Loanable Funds (SLF) – savings Depends on real interest rate Disposable Income: income (Y) – net taxes (NT)
Chapter 23 – Finance, Saving, & Investment
09/16/2013
Increase in disposable income = increase in SLF Expected future income: Increase in expected future income = decrease in SLF Wealth: Increase in wealth = decrease in SLF Default risk: Increase in default risk = decrease in SLF The stock market boom of 20022007 increased wealth in the world by trillions of dollars. Explain the effect on the real interest rate, investment, and saving.
Chapter 24 – Money, the Price Level & Inflation
09/16/2013
Money is any commodity generally accepted as a means of payment Credit cards and cheques are not money Money = currency + deposits Barter = double coincidence of wants Money is A medium of exchange – generally accepted as a means of payment A unit of account A store of value Money is categorized as: M1 consists of currency held by individuals and businesses plus chequable deposits owned by individuals and businesses M2 consists of M1 plus all other deposits – nonchequable deposits and fixed term deposits Bank of Canada: Assets: Government Securities (government bonds) Loans to depository institutions (Bank of Canada loans money to other banks) Liabilities: Bank of Canada notes Depository institution funds (reserves) Monetary Base = Bank of Canada Liabilities + Coins issued by the Royal Mint Open Market Purchases / Open Market Sales
Chapter 24 – Money, the Price Level & Inflation
09/16/2013
Open market purchases increase monetary base By increasing the monetary base, Bank of Canada can increase quantity of money in the market
Desired reserves/Deposits x 100 = desired reserve ratio Desired reserves (how much of your deposits the bank keeps. If you deposit $5000, they will loan out a portion of that and make interest, the rest that they keep for when you wish to withdraw is called desired reserves)
Currency drain/deposits x 100 = currency drain ratio
Currency drain = 50% Desired reserves ratio = 10% Moneybasemultiplier (MBM); Deposits (D); Currency (C); Reserves ® M = D + C MB = R + C MM = M/MB = D+C/R+C divide RHS by D 571573 READ ‘The Multiplier Effect of an Open Market Operation’
Midterm Review
09/16/2013
1. GDP = Expenditure = Income • Expenditure: Y = C + I + G + X – M • B READ UN’s ALTERNATE METHOD OF MEASURING GDP AND HOW CHINA’s GDP COMPARES WITH CANADA Pretend the reference base period is 2002 and calculate CPI Baskets!! 2. Net domestic income at factor cost = wages, salaries and supplementary labor income and other factor incomes A 3. Real GDP is market value of all the final goods/services produced in a country within a given period of time Potential GDP is what we produce at full employment (when all labor is fully employed, when all factors of production are fully employed) Real GDP can be more, less or equal to potential GDP Real GDP cannot be more than potential GDP for a long period of time, because everything is working overtime in order to sustain real GDP = potential GDP E Nominal GDP values production at current year prices Real GDP values production at base year prices Things that are missing from GDP: Underground economy Value of leisure Household production Ch. 21
Midterm Review
09/16/2013
4. Unemployment rate = # unemployed/ LF x 100 Employment to population ratio = # employed/#WAP x 100 LFPR = #LF/#WAP x 100 LF = #employed + #unemployed 13m unemployed + 1.5m employed = 14.5 in LF C Increase in REAL GDP decrease in unemployment Increase in REAL GDP Increase in LFPR and EtoP ratio Female LFPR + EP ratio has increased (more jobs for women) Male LFPR + EPR has decreased (men staying in school longer + early retirement) Types of unemployment: Structural: assembly line example (technology replaced) Frictional: after leaving university (normal unemployment) Cyclical: because of the business cycle (during recession) Some of structural and frictional unemployment is called natural unemployment When REAL GDP is greater than Potential GDP, actual unemployment is LESS than natural unemployment When REAL GDP is less than Potential GDP, actual unemployment is GREATER than natural unemployment When REAL GDP = Potential GDP, actual unemployment is equal to natural unemployment (no cyclical unemployment) 5. C
Midterm Review
09/16/2013
CPI = 100 in the base year Must use a market basket to calculate CPI
Inflation rate using CPI = CPI this year – CPI last year/ CPI last year x 100
6. B
Ch. 22 Rule of 70. Variable will double in 70/growth rate in %
7. 70/4 = 17.5 years C 8. increases, increases, increases B 9. A READ DIFFERENT GROWTH THEORIES AND KNOW PRINCIPLES BEHIND EACH ONE! CH. 23 10. There is only movement along the curve when one (y) of the axes increase/decrease
Midterm Review
09/16/2013
READ THINGS THAT SHIFT SLF AND DLF CURVE B
11. When government has a deficit, increases DLF, increases real interest rate and crowds out investment A
12. Ricardo barro is an effect that says when the government has a budget deficit, the interest rate doesn’t change and the investment doesn’t change D Ch. 24 13. Quantity of money M1 = total chequable deposits and currency 500 + 5,500 = 6000 A 14. When bank of Canada sells government securities, their assets (securities) decrease and liabilities stay the same. E 15. When people sell bonds, the price of a bond falls, and the interest rate r C
Chapter 25 – The Exchange Rate and Balance of Payments
09/16/2013
The Foreign Exchange Market Foreign currency – money of other countries regardless of whether that money is in the form of notes, coins, or bank deposits Trading Currencies Foreign exchange market – anywhere where you can exchange one country’s currency with another (online, bank, store, etc) Currency depreciation – a fall in the value of one currency relative to another currency Currency appreciation – a rise in the value of one currency relative to another Demand of CDN dollars (xaxis
Chapter 28 – Canadian Inflation, Unemployment & Business Cycle 09/16/2013 Inflation Cycles: In the long run, inflation is a monetary phenomenon Occurs if qty. of money grows faster than potential GDP In the short run, many factors can start an inflation Real GDP and the price level interact Two sources of inflation: DemandPull Inflation: An inflation that starts because aggregate demand increases CostPush Inflation
