Macroeconomic Policies API 5125 Fall 2010

1. MacroeconomicPoliciesAPI 5125Fall 2010 Power Point presentation Brian VanBlarcom (Acadia University) and André Downs (PRI)

2. Content • Some insights on economicindicators • Comparing Canada , US, EC, Japan and China • Agregate output, unemployment and inflation

3. Introduction Three Measures of Macroeconomic analysis: • Output • Unemployment rate • Inflation rate

4. Canada and The United States Question for discussion: How do they compare?

5. Growth, Unemployment, andInflation in Canada, 1962-2009 What do we observe?

6. The Unemployment Rate in Canada, 1950-2008 What do we observe?

7. Canadian Government Balances as a Percent of Output What do we observe?

8. Growth, Unemployment, andInflation in United States, 1962-2009 What do we observe?

9. The U.S. Fiscal Policy 1998-2008 Should Canadians Worry about the US Federal Budget Deficit?

10. The European Union The Euro Area • As of 2009, “the euro” is the common currency of sixteen countries: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal Slovakia, Slovenia , and Spain

11. The European Union What do we observe?

12. Growth, Unemployment, andInflation in the Euro Area, 2003-2009 What do we observe?

13. European Unemployment • In the past decade, much focus has been on the high European unemployment rate. • Many argue that the euro area labour markets are “too rigid” (that the unemployment rate is too high/workers are unemployed too long/minimum wages too high). • Others argue that such characteristics are elements of a “just society.”

14. Unemployment Rates inEurope and North America, 2000-2007 What do we observe?

15. Unemployment Rates in Europe and North America • Figure 7-1 suggests the Canadian labour market falls somewhere between the euro area and that in the United States/United Kingdom.

16. Japan and China 2004

17. Real Output per Capita in Japan and China, 1952-2004 (in constant US$)

18. Annual Growth Rates in Output Per Capita in China and Japan, 1953-2004

19. Japan and China Rapid Growth in China • China’s growth took off after 1972. • Some of China’s growth has come form exports – particularly manufactured goods. • Growth in China has been rapid as it has accumulated capital, roads, factories, other infrastructure and technology.

20. Japan and China Slow Growth in Japan • Figure 1-9 shows Japan’s slow growth 1994-2004. • Such a long period of slow growth is unprecedented on a modern economy after World War II.

21. Looking Ahead: Other Regions • India, with a large population and increasingly productive workforce, has grown rapidly in much of the last decade. • Uneven performance of Latin American countries. Some, like Chile, appear in good shape, Argentina has experienced problems.

22. Looking Ahead: Other Regions • Shift to market economy in Central and Eastern Europe in the 1990’s, brought sharp decline initially, and only some have grown from pre-transitional levels. • Many countries in Africa have suffered decades of economic stagnation but some are now starting to grow

23. Chapter Topics • Aggregate Output • The Unemployment Rate and • Inflation rate

24. Aggregate Output Aggregate Output (national income and expenditure accounts) • Gross Domestic Product (GDP) • The value of the final goods and services produced in an economy during a given period

25. Aggregate Output Defining GDP: Three Approaches 1) Final goods and services 2) Value added 3) Income

26. Firm 1: Steel Company Revenues from sales $100 Expenses (wages) $80 Profit $20 Firm 2: Car Company Revenues from sales $210 Expenses $170 Wages $70 Steel purchases $100 Profit $40 Aggregate Output GDP: 1) The final goods approach What is GDP? $310 or $210

27. Aggregate Output Defining GDP • Answer: $210 • If both firms are summed ($100 + $210) the $100 in steel is counted twice • Counting only the final good (cars) includes the intermediategood (steel)

28. Value added = value of production - value of intermediate goods Aggregate Output Defining GDP: Three Approaches 2) Value Added Approach

29. Aggregate Output Two Firm Example • Steel • No intermediate goods • Value added = $100

30. Aggregate Output Two Firm Example • Cars • Intermediate goods (steel) = $100 • Value added = $210 - $100 = $110

31. Aggregate Output Two Firm Example

32. Aggregate Output • Defining GDP

33. Aggregate Output • Defining GDP • Approach 1 & 2 define GDP from the production side • Approach 3 defines GDP from the income side

34. Aggregate Output Consider • Revenues after payment for intermediate goods • Some pay indirect taxes (sales taxes) • Some pay workers (labour income) • Remainder to the firm (capital income)

35. = GDP (income) indirect taxes + labour income + income Aggregate Output Defining GDP • GDP from the income side capital

36. Firm 1: Steel Company Revenues from sales $100 Expenses (wages) $80 Profit (capital income) $20 Firm 2: Car Company Revenues from sales $210 Expenses $170 Wages $70 Steel purchases $100 Profit (capital income) $40 Aggregate Output GDP: Income Approach

37. Income (steel) Labour = $80 Capital = $20 $100 Income (car) Labour = $70 Capital = $40 $110 Aggregate Output Compared to:

38. The Composition of Canadian GDP by Type of Income, 1961 and 2007

39. Aggregate Output Defining GDP – A Summary • Output Approach = Income Approach • Final goods & value added = sum of indirect taxes + labour income + capital income

40. Aggregate Output Nominal & Real GDP • Recall • GDP = the value of final goods and services produced • Value is the price of the final good

41. Aggregate Output Nominal & Real GDP • Therefore, • GDP = Price x Quantity of final goods produced

42. Aggregate Output Questions for Discussion • If price increases and quantity remains constant, what happens to the value of final output?

43. Aggregate Output Observation • Higher prices bias the GDP measurement of production upward over time

44. Year Quantity of Cars Price of Cars Nominal GDP 1991 10 $10,000 $100,000 1992 12 $12,000 $144,000 1993 13 $13,000 $169,000 Aggregate Output • Nominal & Real GDP (correcting for inflation) • One good economy

45. Year Quantity of Cars Price of Cars Nominal GDP(% increase) 1991 10 $10,000 $100,000 (--) 1992 12 $12,000 $144,000 (44%) 1993 13 $13,000 $169,000 (17.4%) Aggregate Output • Nominal & Real GDP (correcting for inflation) • One good economy

46. Did the real output of cars increase 44% from 1991 to 1992? Question Aggregate Output Nominal GDP = Pcars x Qcars

47. Aggregate Output Calculating Real GDP • Real GDP = value of final goods in constant prices

48. Aggregate Output Real GDP in Units • 1991 -- 10 • 1992 -- 12 (20% increase) • 1993 -- 13 (8% increase) Production of cars

49. Aggregate Output Real GDP in 1992 $s • 1991 -- 10 x $12,000 = $120,000 • 1992 -- 12 x $12,000 = $144,000 (20% increase) • 1993 -- 13 x $12,000 = $156,000 (8% increase) Car Production x 1992 Prices Note: Nominal 1992 GDP = Real 1992 GDP

50. Aggregate Output Calculating Real GDP in Practice • Accounting for all final goods • Weighted average of the output of final goods • Relative prices serve as weights • Must consider the change in relative prices • Canadian Real GDP is Real GDP in chained (2002) dollars