Macro and Micro Economics

Macroeconomics and Microeconomics

• Macroeconomics analyzes the entire Canadian and global economies through combined microeconomic choices.
• Microeconomics analyzes individual choices within households, businesses, and governments plus their market interactions.

Fallacy of Composition and Paradox of Thrift

• The fallacy of composition says what's true for one isn't true for all; the whole is more than its parts.
• The paradox of thrift says increased saving decreases total savings due to falling employment and incomes.

Economic Models

• An economic model simplifies reality to focus on key factors for understanding.
• The circular-flow model shows how households, businesses, and governments interact in markets for better understanding.
• The model reduces the Canadian economy to three interacting players: households, businesses, and governments.
• Inputs are productive resources: labor, natural resources, capital equipment, and entrepreneurial ability
• Households sell, and businesses buy, in input markets.
• Households buy, and businesses sell, in output markets
• Input markets determine incomes.
• Output markets determine the value of sold products and services.
• Microeconomics focuses on demand and supply in single markets whereas macroeconomics focuses on connections between the input and output markets.
• Money, banks, and expectations are part of a macro focus on the whole economy.
• Governments establish rules and interact with any aspect of the economy, including policy.
• Economic models assume other non-model factors do not change.
• Say's Law states that supply creates its own demand.

Performance Outcomes and Players in the Candian economy

• Three key outcomes of Canada's economy; GDP, unemployment, and inflation result from consumers, businesses, government, the Bank of Canada/banking system and the rest of the world.
• Good outcomes include a higher GDP, lower unemployment, and low, predictable inflation.
• Consumer choices - spend income or save, and buy Canadian products/services or imports.
• Business choices include investment spending on new factories/equipment, hiring workers or not, buying inputs domestically or importing, or selling outputs domestically or exporting.
• Government chooses to buy products/services as well as fiscal policies (government purchases, taxes/transfers) to achieve macroeconomic outcomes.
• The Bank of Canada and banking systems choices include monetary policy (changing interest rates and money supply) and making loans or not.
• The rest of the world chooses to buy Canadian exports or not, sell imports to Canada or not, and invest money or accept Canadian investments or not.
• Personal economic success affected by GDP (higher GDP per person increases living standards), unemployment (affects odds of finding a job), inflation (reduces living standards), and interest/exchange rates coupled with government taxes/transfer payments.

GDP

• GDP concepts measure the annual value of all final products and services in a country.
• Nominal GDP combines changes in prices and quantities.
• Real GDP measures only changes in quantities.
• Real GDP per person is the best measure of a material standard of living.
• Nominal GDP measures value at current prices during the year.
• Real GDP measures value at constant prices.
• GDP includes products/services produced within a country's borders no matter its source.
• GDP measures a "flow" per unit of time while stock is fixed at a moment in time.
• Potential GDP equals the real GDP with all inputs fully employed.
• The short-run goal for economic performance occurs if the invisible hand works perfectly.
• Potential GDP per person is the potential GDP divided by population.
• Real GDP per person is the real GDP divided by population.
• Real GDP per person is the best measure of a material standard of living
• Aggregate expenditure equals aggregate spending and aggregate income.
• Value added solves double counting and distinguishes final/intermediate products/services such that aggregate spending equals aggregate income.
• A final product or service is consumed directly by consumers whereas an intermediate product/service is an input bought from other businesses.
• Value added represents the output value minus the value of intermediate products/services that were purchased.
• Value added solves double counting and distinguishes final/intermediate products and services.
• The value of final products and services equals value added and the value of final products and services (GDP) equals input's income.
• Spending on final products and services equals payments to input owners (wages + profits + rent); this expresses that expenditure approach equals income approach.
• C - consumption spending consumers refers to spending consumers do
• I - business investment spending refers to spending on factories and machines made by businesses.
• G - spending by the rest of the world refers to spending on Canadian exports of products and services.
• IM - Canadian spending refers to spending on imports of products and services by the rest of the world.
• Business cycles equal real GDP fluctuations around potential GDP that define periods of real GDP expansion and contraction.
• Output gaps measure the difference between real GDP and potential GDP.
• Closing the gap is a major policy target and language of business cycles involves up and down fluctuations of real GDP around potential GDP.
• Expansion is the period when real GDP increases until the peak, which is the highest point of an expansion.
• Contraction is period during which real GDP decreases until the trough, which is the lowest point of a contraction.
• Recession equals 2+ successive quarters of real GDP contraction.
• Real GDP can be described as real GDP minus potential GDP
• Recessionary gap equals real GDP below potential GDP where the gap yields a negative number while Inflationary gap equals real GDP above potential GDP where the gap yields a positive number.
• Real GDP per person is a limited measure of well-being due to non-market production (household production), the underground economy (illegal or untaxed activities) as well as environmental damage (resource depletion without cost subtraction) and leisure (lowers real GDP).
• Growth rates of real GDP per person are useful for judging economic progress, under the conditions that there are no major changes in the limitations.
• The United Nations Human Development Index measures quality of life by combining life expectancy, educational achievement, and income.

Unemployment Rate

• The unemployment rate measures the percentage of the labor force actively searching for jobs, not involuntary part-time workers and discouraged searchers.
• Frictional unemployment occurs because of the time it takes to match workers and jobs
• Structural unemployment occurs because of skill mismatch between workers and jobs.
• Cyclical is classified as unnhealthy and a problem
• Employed refers to working full-time or part-time at paid job while Unemployed refers to not doing paid work and actively searching for job or on temporary layoff or about to start a new job and while those "not in the labour force" are not employed or unemployed full-time student, homemaker, retiree
• The labour force is calculated as the number of employed plus the number of unemployed
• The formula for the unemployment Rate is: Unemployed / Labour Force X 100
• Labour force particpation rate is equal to Labour Force divided by Working Age population ALL multiplied by 100
• The unemployment rate misses involuntary part-time workers (employed part time who would rather have full-time job) and discouraged searchers (want to work but have stopped actively searching).
• Total underemployment rate is the R8 unemployment rate including unemployed, involuntary part-time workers, discouraged searchers, and other categories.
• A healthy Frictional unemployment results from normal turnover and job search but structural unemployment requires training.
• Unhealthy Cyclical unemployment results from business cycle fluctuations requiring government aid.
• The natural rate of unemployment includes only healthy frictional and structural unemployment at full employment where rate is higher in a recessionary gap and lower in an inflationary gap.
• Full employment is not zero unemployment but has zero percent cyclical unemployment

Relationship Between Natural Rate of Unemployment and Potential GDP

The relationship is as follows:

• The natural rate of unemployment exists when real GDP equals potential GDP, signifying full employment.
• If there is an unemployment rate greater than the natural rate then real GDP will be measured as ledd than potential and the output gap will be recessionary.
• If there is an unemployment rate less than the natural rate then real GDP will be measured as greater than potential and the output gap will be inflationary
• Inflation is measured by changes in the Consumer Price Index (CPI) that hurts those on fixed incomes, creates risk for business investment, and diverts resources from production.
• The inflation rate overstates increases in the cost of living by missing switches to cheaper substitutes and new/improved products/services.
• There is a persistent rise in average prices and fall in value of money thus one must spend more to get the same products and services, as money is worth less.
• Consumer Price Index (CPI) measures average prices of fixed shopping basket of products/services where the CPI equals 100 for the base year, currently at 2002.
• The Inflation rate equals the annual percentage change in CPI

Inflation

• Core inflation excludes volatile categories.
• The CPI-trim, CPI-median, and CPI-common are all better way of measuring underlying inflation trend.
• CPI Bias fixes quantities in the shopping basket to isolate the impact of changing prices on the cost of living.
• CPI misses quantity switches to cheaper substitutes and new/improved products when prices rise thus CPI inflation rates overstates increases in the cost of living.
• Inflation leads to a falling value of money, production diversion, decrease in income, benefits, and discourage investment while deflation hurts borrowers but helps lenders, causing spending postponements, economic contraction, and rising unemployment.
• Economic growth is an expansion of economy's capacity to produce products and services including increasing potential GDP (per person), shifting a country's PPF outward, and incresing inputs both quantity and quality wise.

PPF and Economic Growth Rate

• Production possibilities frontier (PPF) shows combinations of products and services a country can produce when all inputs are fully employed
• All points on PPF signify that all inputs is fully employed as economy producing at potential GDP when Inside PPF signifies that some inputs is unemployed or the economy produces below potential GDP
• Inside PPF shows some inputs are unemployed thus economy producing below potential GDP while when real GDP is greated than potential GDP then points outside PPF, are temporarily attainable
• Economic Growth Rate is equal to: Real GDP per person in a year divided by Real GDP Per person in the previous year - all multiplied by 100
• Canada's average economic growth rate from 1926-2017 was 2%
• Canada's economic growth rate was
  • 2% in 2018
  • 1.7% in 2019
• Rule of 70 roughly states that the number of years it takes for an initial anount to double is 70 divided by the annual percentage growth rate, where differences has large consequences over time
• Potential GDP refers to a quantity of real GDP that has been produced at full employment from Model determining by the aggregate labour market as well as aggregate production function.
• The Labour market equilibrium occurs whenever quantity labour demanded equals quantity labour supplied.
• The aggregate production function shows how real GDP changes as quantity of labour changes.
• Potential GDP grows by inceasing labour supplies and productivity of the labour.
• Labour productivity is the quantity of real GDP produced by an hour of labour, which is equivalent to Real GDP divided by aggregate labour hours.
• Labour productivity increases by increased capital as well as with increased human capital which results from increase in education, training, on job experience.
• Technological advances boost both the quantity and quality of inputs, leading to productivity and potential GDP per person, thus improving living standards and raising living standards
• There is More abundance of available capital and can be produced while reducing work time and costs to buy products/services
• Creative destruction competitive business innovations generate profits improving living standards but destroying less products and production methods

Financial Markets

• Physical capital includes factory/equipment and is from C+I+G+X-M, for example, business investments in business made machine/factories.
• Financial capital refers to funds that can be used to buy physical capital where the financial markets channel the savings to finance invesments in the form of equipment and factories which in turn improves economic growth and increased productivity.
• Connection between saving and investment rescues Say's Law, even whem saving breaks the circular flow.
• The quantity of physical capital changes by Increased investment and decreased depreciation where gross investment is for new physical capital and replacements.
• Deppreciation indicates the decrease in the quantity of capital from wear and tear which is Net investment = Gross investment – Depreciation
• The wealth refers to one's assets while Incomes refers to what one earns.
• Wealth increases from Income – (Consumption + Net taxes) while For economic growth, saving and wealth must be transformed into financial markets.
  • Loan markets
  • Bond markets
  • Stock markets

Interest and Investing

• One can determine how money earned in the future or present value tells by comparing the price of todays investments against future earnings where to find the amounts of money available in an amount of years you divide that amount by (1 plus Interest Rate)^n
• Consider that With $100, and an interest rate equal to .12 percent then in one year that will be worth $112
• One can calcuate by saying if 112 is the year present amount value, it =112 (What is the present value of that future $1120 if interest rate = 12%) would 112/1.12 or 100
• A Smart Choice would be to Invest when present value of stream of future earnings is above the investment If Present value =1100\112 equals less than that of and not a smart investment
• Because money has been in an account there is a reduction, or discount in the money one gains
• Interest rates and bongs are related. Bond financial asset to borrow an asset until you pay back the price plus fixed rates.
• Bonds do not get promised rates Bonds can get Market price which bond funds are changed And if they drop while selling you you will loose money
• If you need to reduce markect price

Perpetuity Bonds & Interest Rates

• Perpetuity bonds means a Dollar amount forever, that price is one you look at often
• Price for bonds depends more often when looking at 0.10 then when you compare that to 100 per year
• Bonds are more reskier means it cost to rise When interest rates affect your bond Interest gets determined by loaners an mony One wants to get a balance spending. This can be expressed by C+S+T There is an equal amount given back. This can be expressed by I+G+X = S+T+IM One has a budget and this means the economy will work (S) (Private S) (T-G) goverment loan + (IM +X) rest world For an example The more one gives has to equal the same budget from each other. If its missing there might not be a budget. The same goes for the market in relation

Demands for Markets and Money

• All Market funds and money is in demand or suppply Money can be in the loaner markets. Say Markets, loaners, one needs to use supply and balance If they dont then one need and must take an approch to make it balanced! This will make for an efficent GDP If and to balance all areas more efficently then this is where people start to have more value and in retun a balanced economy

Exchange Market

Products and services both need a market the way money should be spent

• Prices rise, you dont have that much. Price goes down you can increase value

  • Exchange rates and more often used to create demand

If 1 in CAD changes it changes all. They more more more of one increases there value and if you need to get money for something else you dont.

• Market needs to stay up but more important to determine
• 1-74 balance or trade balance should never shift
• Market increase is the product and to make value of people or the world
• The better one the economy is will all impact the markets better Solo has been in trouble to fix in the last recent problems

Rates

Rates that need to come with in all countries where they make good rates

Make is the more one has rate, other country might rate it high will give that higher. A higher world is always important

Long term of good trade for solo only.

Solo rates are in check as well. You will need all forces to balance the economy

• There have rates rise and drop and each action taken make effects
• You will have need to reinforce the effects As long you know how too make. You will get a good trade.

The more one is set by that it works at the government does not come in.

Prices

Fixed Prices are early stages Keynesian and assumes more where if they dont will create a problem Planned in spending

• Income for each indiviuals -taxes Net value, plus over how you can spend it again The MPC will never work and will just run in a big loop All things are more to be to be added again

Rates and levels

Rates never affect each rates but always help. More levels you drop you drop from getting a rate