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Western SOS Economics 1022B

Western SOS Economics 1022B. About Me…. Richa Parihar 2 nd year Honors Specialization in Physiology Western SOS Economics Course Coordinator and Tutor rpariha@uwo.ca. Chapter 20 Measuring GDP and Economic Growth . Gross Domestic Product:

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Western SOS Economics 1022B

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  1. Western SOS Economics 1022B

  2. About Me… • RichaParihar • 2nd year Honors Specialization in Physiology • Western SOS Economics Course Coordinator and Tutor • rpariha@uwo.ca

  3. Chapter 20 Measuring GDP and Economic Growth

  4. Gross Domestic Product: • GDP or Gross domestic product is the market value of all the final goods and services produced within a country in a given time period • A final good (or service) is an item that is bought by its final user during a specified time period • An intermediate good (or service) is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service

  5. The economy consists of: o Firms o Households o Governments o Rest of world Aggregate economic markets are: o Goods markets (goods and services) o Factor markets (productive resources)

  6. Expenditure approach: Y = C + I + G + NX Income approach: o Sums incomes paid by firms to households o Net domestic income at factor cost + Indirect taxes - Subsidies = Net domestic product at market prices o Net domestic product at market prices+ depreciation = GDP

  7. Real GDP: The value of final goods and services produced in a given year when valued at constant prices. Nominal GDP: The value of the final goods and services produced in a given year valued at the prices that prevailed in that same year.

  8. When all the economy’s labour, capital, land, and entrepreneurial ability are fully employed, the value of production is called potential GDP. Real GDP fluctuates around potential GDP

  9. A recession: • A period during which real GDP decreases—the growth rate of real GDP is negative—for at least two successive quarters. • An expansion: • A period during which real GDP increases. • A peak is an upper turning point where an expansion ends and a recession begins. • • A trough is a lower turning point where a recession ends and an expansion begins.

  10. Chapter 21 Monitoring Jobs and Inflation

  11. The working-age population : The total number of people aged 15 years and over. • Can be divided into two groups: • In labour force • Not in labour force • The labourforce: • divides into two groups: • the employed • the unemployed.

  12. A person is employed if they have either a full-time job or a part-time job. A person is unemployed if they are in one of the following categories: - Without work but has made specific efforts to find a job within the previous four weeks - Waiting to be called back to a job from which he or she has been laid off - Waiting to start a new job within four weeks

  13. The unemployment rate: The percentage of the people in the labour force who are unemployed. Unemployment rate = (Number of people unemployed ÷ Labour force) × 100.

  14. Involuntary part-time rate = (Number of involuntary part-time workers ÷ Labour force) X 100. Employment-to-population ratio = (Number of people employed ÷ Working-age population) × 100. Labour force participation rate = (Labour force ÷ Working-age population) × 100.

  15. Some Trends: The unemployment rate increases in recessions and decreases in expansions. The upward trends in the labour force participation rate and the employment-to-population ratio: - by the increasing participation of women in the labourmarket.

  16. A marginally attached worker: A person who currently is neither working nor looking for work but has indicated that he or she wants and is available for a job and has looked for work sometime in the recent past. A discouraged worker: A marginally attached worker who has stopped looking for a job because of repeated failure to find one.

  17. • People become unemployed if they: o Lose their jobs and search for another job o Leave their jobs and search for another job o Enter or re-enter the labour force to search for a job • People end a spell of unemployment if they: o Are hired or recalled o Withdraw from the labour force

  18. • People who are laid off from their jobs, either permanently or temporarily, are called job losers. • People who voluntarily quit their jobs are called job leavers. • People who enter or re-enter the labour force are called entrants and re-entrants.

  19. Frictional unemployment: • The unemployment that arises from normal labour market turnover. • • Structural unemployment: • The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs.

  20. • Seasonal unemployment The unemployment that arises because the number of jobs available has decreased because of the season. • Cyclical unemployment: The unemployment that fluctuates over the business cycle.

  21. Full employment: occurs when there is no cyclical unemployment or, equivalently, when all the unemployment is frictional, structural, and seasonal. • The unemployment rate at full employment is called the natural rate of unemployment. • The quantity of real GDP at full employment is called potential GDP.

  22. When the unemployment rate is less than the natural rate of unemployment, real GDP is greater than potential GDP. • • And when the unemployment rate is greater than the natural rate of unemployment, real GDP is less than potential GDP.

  23. The Consumer Price Index (CPI) : A measure of the average of the prices paid by urban consumers for a fixed “basket” of consumer goods and services

  24. The CPI calculation has three steps: o Find the cost of the CPI basket at base period prices o Find the cost of the CPI basket at current period prices o Calculate the CPI for the base period and the current period CPI = (Cost of CPI basket at current period prices ÷ Cost of CPI basket at base period prices) ÷ 100

  25. The inflation rate is the percentage change in the price level from one year to the next. • Inflation rate = [(CPI this year – CPI last year) ÷ CPI last year] × 100

  26. The main sources of bias in the CPI are: o New goods bias o Quality change bias o Commodity substitution bias o Outlet substitution bias

  27. Alternative Price Indexes: • The GDP deflator : • An index of the prices of all the items included in GDP and is the ratio of nominal GDP to real GDP. • • The chained price index for consumption: • An index of the prices of all the items included in consumption expenditure in GDP and is the ratio of nominal consumption expenditure to real consumption expenditure.

  28. Chapter 22 Economic Growth

  29. The economic growth rate: The annual percentage change of real GDP. - The standard of living depends on real GDP per person, which is real GDP divided by the population.

  30. Rule of 70: The Rule of 70 states that the number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable.

  31. Potential GDP increases if there is an increase in population or an increase in labour productivity • • An increase in population increases the supply of labour.

  32. With an increase in population, potential GDP per hour of work decreases.

  33. Labour productivity: The quantity of real GDP produced by an hour of labour, calculated by dividing real GDP by aggregate labour hours. Labour productivity increases if there is: o An increase in physical capital o An increase in human capital o An advance in technology

  34. The law of diminishing returns: As the quantity of one input increases with the quantities of all other inputs remaining the same, output increases but by ever smaller increments. if a given number of hours of labour use more capital (with the same technology)  the additional output that results from the additional capital gets smaller as the amount of capital increases

  35. One-third rule: - With no change in technology, a 1 percent increase in capital per hour of labour brings a one-third of 1 percent increase in real GDP per hour of labour.

  36. Classical growth theory: Real GDP growth is temporary and that when real GDP per person rises above the subsistence level, a population explosion eventually brings real GDP per person back to the subsistence level

  37. A technological advance occurs, and wage rates increase •  increases population • A growing population means that labour hours grow, so capital per hour of labour falls • real GDP per hour of labour falls and keeps falling as long as the population grows • back to subsistence level

  38. Neoclassical growth theory: Real GDP per person grows because technological change induces a level of saving and investment that makes capital per hour of labour grow. It implies that growth rates and income levels per person around the globe will converge.

  39. New growth theory: Real GDP per person grows because of the choices people make in the pursuit of profit and that growth can persist indefinitely. • The theory begins with two facts about market economies: - Discoveries result from choices. - Discoveries bring profit and competition destroys profit.

  40. Want a higher standard of living • Incentives to make the innovations • Gives new and better techniques and new and better products •  new firms and new and better jobs •  Higher standard of living

  41. Chapter 23 Finance, Saving, and Investment

  42. Physical capital: The tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services The funds that firms use to buy physical capital are called financial capital. A financial institution is a firm that operates on both sides of the market for financial capital

  43. Y = C + S + T (households use their income to: buy consumption goods, save, and pay taxes) Y = C + I + G + NX Which gives: S + T = I + G + NX I = S + T - G - NX

  44. S is household (private) saving • T - G is government saving (or dissaving) • (-) NX is foreign saving • - The sum of private saving (S) and government saving (NT – G) is called national saving. I = S + T - G - NX

  45. The nominal interest rate: The number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed or lent.

  46. The real interest rate The nominal interest rate adjusted to remove the effects of inflation on the buying power of money. It is equal to: The nominal interest rate minus the inflation rate.

  47. The quantity of loanable funds demanded: The total quantity of funds demanded to finance investment, the government budget deficit, and international investment or lending during a given period. Other things remaining the same: - the higher the real interest rate  the smaller is the quantity of loanable funds demanded

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