Macroeconomics (Econ 102) PDF

2. Gross Domestic Product 1. Defining the Macroeconomy a) The Circular Flow Diagram [depreciation] [consumption] 𝛿∗𝐾 𝐶 [consumption] Goods...

2. Gross Domestic Product 1. Defining the Macroeconomy a) The Circular Flow Diagram [depreciation] [consumption] 𝛿∗𝐾 𝐶 [consumption] Goods 𝐶 Market [net taxes] [gov. expenditures] 𝑇 𝐺 Government Firms [investment] 𝐼 [gov. saving] 𝑆 [household saving] Households 𝐾, 𝐿 → 𝑌 Financial Market 𝑆 [capital cost] [current account] 𝐶𝐴 [exports] [capital income] 𝐸𝑋 Foreign Markets 𝑟∗𝐾 [income] [imports] 𝐼 𝐼𝑀 Labour Market [labour income] [labour cost] 𝑊∗𝐿 𝑊 − 𝑤𝑎𝑔𝑒 𝑟 − 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝐾 − 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝐿 − 𝑙𝑎𝑏𝑜𝑢𝑟 (ℎ𝑜𝑢𝑟𝑠) ECON 102 Page 1 b) Identities (1) Government 𝑆 = 𝑇−𝐺 ⇒government budget  budget surplus: 𝑆 > 0  budget deficit: 𝑆 < 0 (2) Foreign Markets 𝑁𝑋 = 𝐸𝑋 − 𝐼𝑀 = 𝐶𝐴 ⇒ to buy Canadian goods, foreign businesses need to buy Canadian dollars first. Capital flows into the country and vise versa. (3) Firms 𝑌 = 𝐹 (𝐾, 𝐿) = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋 (4) Households 𝑌 = 𝑊𝐿 + 𝑟𝐾 + 𝛿𝐾 ≡ 𝑊𝐿 + 𝑅 𝐾 ECON 102 Page 2 2. Measuring Gross Domestic Product a) Value Added Approach (Production) ► Sum of all final goods and services 𝑌 = 𝐹(𝐾, 𝐿) ECON 102 Page 3  in Canada: b) Expenditure Approach (Spending) ► Sum of all spending on final goods and services 𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋 ECON 102 Page 4 in Canada: c) Income Approach (Factor Payments) ► Sum of all factor (and non-factor) payments 𝑌 = 𝑊𝐿 + 𝑅𝐾 ECON 102 Page 5  in Canada: Example: ECON 102 Page 6  3. GDP and the Standard of Living a) real GDP per capita ► nominal GDP per person is the average income of residents in terms of the domestic currency.. $. in Canada (2021): ⎯⎯⎯⎯⎯⎯⎯⎯ = ⎯⎯⎯⎯⎯⎯⎯= 𝐶$65,300. Note: Median income (2021) = 𝐶$41,650 is this a lot? ⇒ depends on how much we can buy with this income. 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 = ⎯⎯⎯⎯⎯⎯⎯⎯ $𝑌 𝑌 = ⎯⎯⎯ 𝑃 ECON 102 Page 7  %Δnom. GDP ≈ %Δ real GDP + %Δ prices Note: Real GDP lets us compare average income in a country over time. To compare average income between countries, we also need to adjust for exchange rates! b) The Limitations of GDP ► GDP is a very bad measure of the standard of living (1) Prices are not values (2) Nonmarket activities are excluded (3) The shadow economy is missing (4) Environmental degradation is not counted (5) Leisure doesn't count (6) GDP ignores distribution ECON 102 Page 8 c) Other Measures of the Standard of Living ► GDP is the best measure of the standard of living Real GDP per capita very strongly correlates with many other measures of the standard of living! ECON 102 Page 9 ECON 102 Page 10