Real vs. Nominal GDP and Business Cycles

• Gross Domestic Income at factor cost equals the money paid for work, land, and investments.
• An indirect tax is paid by consumers, increasing the market price.
• A subsidy reduces the factor cost as the government pays the producer.
• Nominal GDP includes price changes, while real GDP shows production growth.
• Real GDP helps economists gauge economic growth, distinguishing it from price increases.
• Real GDP per person indicates the economic well-being of individuals.
• Potential GDP grows consistently, but Real GDP can fluctuate.
• Slower growth leads to significant long-term economic losses, known as the Lucas Wedge.
• Economic activity follows a business cycle with expansions and recessions.
• Real GDP per person is calculated by dividing real GDP by the population.

Business Cycle Phases

• Expansion: A period of increasing GDP.
• In early expansion, real GDP returns to potential GDP.
• Expansion progression sees real GDP grow and exceed potential GDP.
• Recession: A period of declining GDP, lasting at least two quarters.
• A recession involves a decline in output, income, employment, and trade over 6-12 months.
• Recession starts at a business cycle peak, the highest real GDP achieved.
• Recession ends at a trough and real GDP reaches a low point; the next expansion follows.
• Real GDP is the total value of goods and services produced, adjusted for inflation reflecting current production levels.
• Potential GDP is what a country could produce with optimal resource use.
• Real GDP grows with increased production due to technological advances, more workers and better resources.
• Potential GDP grows with productivity increases from technology, education, and capital improvements.
• Real GDP growth leads to a better standard of living by increasing jobs, incomes, and available goods.
• If real GDP growth doesn't improve living conditions, it could indicate wealth concentration.
• The business cycle includes phases of economic activity, causing ups and downs.

Phases of the Business Cycle

• Expansion: The economy grows, GDP rises, businesses perform well, and unemployment is low.
• Peak: The highest point before an economic slowdown.
• Contraction (Recession): The economy shrinks, GDP falls, and unemployment increases.
• Trough: The lowest point where the economy stops shrinking and begins to recover.
• Turning Points: Points where the economy switches between phases.
• PPP assists international real GDP comparisons by equating the value of money across countries
• Without PPP, exchange-rate-only comparisons are misleading

Unreliable Real GDP Indicators

• Excludes important factors: Leisure time, health, or education impact personal quality of life
• Environmental Impact: Disregards economic growth's harms to the environment, such as pollution
• Unequal Distribution: Growth may not benefit all, increasing wealth disparity
• Non-Market Activities: Unpaid household work contributes to well-being, but is not counted.
• Unemployment leads to lost skills and lowers income and spending.
• The working-age population includes individuals 15 years and over who are divided into those in and not in the labor force.
• The labor force is the sum of people employed full-time or part-time and unemployed.
• To be counted as unemployed, you must be on temporary layoff, be without work but seeking employment in the past four weeks, or have a job starting within four weeks.

Formulas & Rates

• Unemployment Rate: (Number of People Unemployed / Labor Force) x 100
• Involuntary Part-Time Rate: (Number of Involuntary Part-Time Workers / Labor Force) x 100
• Labor Force Participation Rate: (Labor Force / Working-Age Population) x 100
• Employment Rate: (Number of People Employed / Working-Age Population) x 100
• The employment rate falls in a recession and rises in an expansion.

Unemployment Types

• Discouraged Searchers: Those who stopped seeking work, but would like to be employed
• Long-Term Future Starts: With jobs starting in over four weeks, they are not counted as unemployed
• Involuntary Part-Timers: Hold part-time jobs, but seek full-time work.
• Long-term unemployment has a high financial impact.
• Frictional unemployment arises from normal labor market turnover.
• Structural unemployment results from mismatch between skills and job requirements due to technological changes.
• Cyclical unemployment occurs during recessions and expansions.
• Natural unemployment equals frictional and structural unemployment.
• Younger populations have more frictional, and older populations have less unemployment.
• High minimum wages and generous unemployment benefits can cause more unemployment.
• Real GDP shows country's actual value of production, while potential GDP shows the best possible value
• The output gap reveals variance between real and potential GDP

Negative & Positive Output Gaps

• The economy performs at full employment and output gap is zero if real GDP equals potential GDP
• A positive output gap exists if real GDP exceeds potential GDP when unemployment is low.
• A negative output gap exists if real GDP is lower than potential GDP with high unemployment.
• The price level is the average of all prices.
• Inflation means prices rise, reducing people's purchasing power
• Deflation means prices drop, increasing people's purchasing power.

Measures

• CPI = (Cost of CPI Basket at Current Period Prices / Cost of CPI Basket at Base-Priced Prices) x 100
• Inflation Rate = ((CPI This Month – CPI a Year Earlier) / CPI a Year Earlier) x 100
• High inflation means prices are rising rapidly.
• High price level means prices have risen over an extended period, even if rising slowly
• Chained Price Index for Consumption CPIC : (Nominal consumption expenditure / Real consumption expenditure ) x 100
• GDP Deflator: (Nominal GDP / Real GDP) x 100

Unemployment Types

• Frictional: Temporary unemployment while between jobs
• Structural: Results from mismatch between workforce skills and job availability, caused by industry changes
• Cyclical: Caused by economic downturns.
• Each unemployment type is often unavoidable
• The natural unemployment rate is the sum of structural and frictional unemployment
• The output gap shows how far the economy is from its full potential.
• Unemployment is never zero because of normal labor market changes
• CPI: Measures average price of a fixed goods basket purchased by consumers tracking cost of living
• Select CPI basket, conduct price surveys, and calculate CPI to determine the price of the current goods basket
• The formula to calculate the inflation rate is: (CPI this year - CPI last year)/ CPI last year] x 100.
• The inflation rate changes over time

CPI Upward Biases:

• New Goods Bias: The CPI overstates inflation due to the high cost of new products
• Quality Change Bias: Improved goods quality is partly the reason for rising prices, but CPI does not account for it
• Commodity Substitution Bias: Consumers switch to alternatives as prices increase
• Outlet Substitution Bias: Consumers change shopping habits by going to different locations, usually online for savings
• CPI biases distort economic decisions

CPI Distortions:

• An upward-biased CPI leads to higher wages but does not match the actual increase in cost of living
• Overstated inflation leads to unnecessary overspending
• Inflated CPI affects government decisions leading to policy mistakes
• GDP deflator addresses biases using current rather than fixed quantities
• An index measuring consumers goods and services is called, Chained Price Index for Consumption (CPIC)

Factors for More Production (Workers)

• More Workers = More Things Made
• Better Workers = More Things Made In the Same Time -Labor productivity growth happens when workers can do more work in the same amount of time.
• Technological changes, more skills, and Physical capital growth make workers more productive
• Economic growth is how much a country has improved output over time
• Use growth rate of real GDP to measure percentage increase year over year

Growth Rate

• (Real GDP in Current Year - Real GDP in Previous Year]) / Real GDP in previous Year] x 100
• Growth Rate of Real GDP ≈ Growth Rate of Real GDP - Population Growth Rate
• The Rule of 70 determines how long it takes for real GDP to double
• Years to double – 70 / growth rate

Growth Trends & Comparisons

• Canada's real GDP growth rate averaged 2%
• Top GDP per person in the group is United States and lowest Japan
• Canada ranking third, behind the United States and Germany, but ahead of France.
• Fastest-growing economies of Hong Kong, Korea, Singapore, and Taiwan have been growing much faster than Canada and Singapore is the richest
• Fastest growing BRIC country is China
• Slowest-growing are Brazil and Russia
• Aggregate production function reveals total output changes relative to labor
• More workers increase the goods and services the economy produces
• Additional workers bring less output because of the law of diminishing returns

Market Equilibrium (Labour)

• Demand for labour is how many workers firms hire at different rates of real wages
• Labour supply is how many people want at different real wage rates
• Labour market equilibrium is where number of firms seeking equals available
• Wages fall is there is a surplus, for when it is needed to make more there is a raise in wages
• Potential GDP is the ideal amount with efficient use of labor at full employment
• Potential GDP depends on the amount of labour, Labour productivity, Capital, and technology

Influenced GDP

• More people working and higher rates increase GDP
• Skilled workers with new tech increase Real GDP
• Population growth increases the supply of labor and the amount of goods to be produced with less wages
• Productivity raises wage rate, increase GDP and wages

Productivity Growth Conditions

• Encourage and support high productivity with incentive systems
• Increase innovation with secure property right
• Economic growth results from supply of labor, Productivity Growth, Tech advancements and investments
• Canada's slowdown contributes from labor force, productivity and growth

Growth Influences

• The Pace Of Labour Productivity is driven factors of capital, tech, investment, and global trade
• Classical growth says population offsets and living goes to subsistence level
• Neoclassical change that increase capital stops with no growth
• New growth means more productivity without diminishing
• Loan: Money borrowed from the bank
• Bonds: Lending to companies or the government
• Stocks: Owning part of a company.
• Having enough money is solvency
• Liquidity - Is Having cash ready
• Demand to borrowing depends on interest and how project
• Increase demands equals more people borrow
• Increase supply equals more savings

Capital

– Physical Capital vs. Financial Capital

• Tangibles assets used in production are, Physical Capital
• Funds to buy physical capital are financial Capital
• Gross investment is amount spent on capital additions without depreciation
• Actual increase accounts for depreciation are accounts for Net Investment
• Net investment = Gross investment - Depreciation

Markets

• Short term borrowing with short term maturity are money Market instruments
• Long term financial is stock and bonds
• Value of asset and rates are inversely correlated
• Real rate is borrowing funds and inflation
• Money is a big supply of people wanting to borrow money

Investments

• Rate if cheap equals more Investments
• Rate if high equals firms might
• Demand is both from individuals and firms on rates
• Factors that affect real rates, save save due to high rate and spend low
• How much you spend will affect saving
• High savings attract firms and households

Changes (Funded)

– Demand for / supply of loanable funds change real interest rate and cash

• Increased investment borrowing creates demand
• More supply and interest is easier and cheaper for house holds -The loanable funds market is for borrowed funds and interest
• Income, rates ,Wealth push savings
• Demand for depends on rates in the short run

Government

• Demand for, and supply affect cash

• Surplus, can add and lower and increase the supply
• Deficit needs deficit and rises rates The crowding-out effect is from government borrowing which drives interest and makes cheaper to firms Effect: Private saving will help with borrowing
• Economic events influence solvency in markets Something widely accepted is money Money: is widely accepted for payments and be used has store value Can cause problem as commodity if heavy Money includes paper and deposits Money narrow includes deposit and cash Debit transfers do not have money Depository is where business stores include trust deposits and banks Institutions loan and store money and transfers Financial balances loans and deposit money Bank want manage and balance risk Banks retain some money when needed Liquidity is when deposit is make cas Pools are given loan Borrowing all helps with coast Innovations have made composition money Banks made loads Transfers have been created Composition of cash are available Central bank has power and its of the country and to banks The base determines amount Tools control banks and economy Operations do things by buying bonds that add reserves Banks make by extending loans Banks can only create unlimited Banks wants reserves Drain when take reserves from the bank Banks give all money the don lend Influences are price level money for services Rate money has money due to interest Gdp is the real the need to borrow money Inventions help borrow and buy on apps Rate of interest helps with demand Gdp rate means less to borrow Demand and supply is how money is achieved Monetary supply will lower for bank of candy Supply effects rate
• Increase in money cause price to increase
• Interest helps money with demand and supply Money leads affect the value of price with GDP Increase in price money is inflated Is the number money its use times

Influences On Exchange

• Supply and demand is made of traders
• Influence come export needs and rates
• Trade can impact if expensive and change to another
• Influence from imports and affect rates
• Equilibrium is traded that help both parties
• Shortages are impacted in exchange rate
• Supplies cause to decrease
• Imports increase supply
• Long run can cause effects to exchange rate

Actions & Practice

• Trade one market to get better prices in Arbitage
• Low to high prices leads profit that is cheaper in countries
• The way to prevent is to keep prices everywhere
• Short term rate influence
• Export influences exports imports and government.
• Is where it's set or its changed for adjustments

Effects Of Exchange

E = (RER × P*) ÷ P. This equation says that the exchange rate equals the real exchange rate multiplied by the foreign price level, divided by the domestic price level Transactions have imports, balance account and settled between

How Are Net Exports and Balance linked?

– Net exports =Exports and imports sector influences

• More spent increases rates Influence with habits