Introductory

Macroeconomics
Pre-Class 3
Measuring the Economys Output
Economic Growth and Business Cycles

Measuring the Economys Performance: GDP

National Income Accounting is Useful
to assess the of the economy
to track the .. over time
as a basis for

GDP - Definitions
GDP is a measure of the economys total

output resulting from all productive activities

in a given period.

It is the total .. value of all goods

and services produced in a given period in an

economy

It is the sum of .................................. in an

economy in a given period

Value Added
in a Five-Stage Production Process
Production Stage Sales Value Value Added
Sheep Ranch
$120
Wool Processor

$180

Suit Manufacturer

$220

Wholesaler
Retailer
Total

$270
$350
$1140

Gross Domestic Product

GDP Excludes ...Transactions

..Transactions

. Sales

Gross Domestic Product

Total Value of
goods and services

How much is needed

To Buy them?

How much is needed

To Produce them?

Total __________ = Total Output = Total ____________

The Expenditures Approach

Includes several types of spending:
Personal Consumption Expenditures (C)
Durables and nondurables, ..
Gross Investment (Ig)

Machinery, equipment, tools

C
changes in

Change in inventory

Initial inventory level: 100

Current period production: 10
Price: 1
Expenditures = 10

Initial
inventory

Production

Sold
(C)

Year end
inventory

100

10

10

100

Change in
inventory

Investment
(Ig)

Expenditures
C + Ig

Gross Investment, Depreciation, Net

Investment & the Stock of Capital

Gross
Investment
Stock of
capital
January 1

Net
investment

Stock

Depreciation

Of
Capital

December 31

The Capital Stock of an Economy

includes all materials / equipments used in production

e.g. machinery, buildings, raw materials, semi-finished

products
Depreciation (Capital consumption)
Investment
Gross Investment
Net Investment
= Gross investment .

Investment and capital stock

Example: capital stock = 1 machine, worth $10,000

The machine is broken!

1.

Buy a new machine

2.

Buy 2 new machines

The Expenditures Approach

Includes several types of spending:
Personal Consumption Expenditures (C)
Gross Investment (IG)

Government Purchases (G)

Public expenditure on goods and services
Public fixed capital expenditure
exclude ............. payments

The Expenditures Approach

Includes several types of spending:
Personal Consumption Expenditures (C)
Gross Investment (Ig)
Government Purchases (G)

Net Exports (XN)

must ................ spending on imports

must ............ sales abroad
XN = Total ............ Total ............

Calculating GDP in 2014:

The Expenditure Approach
GDP = C + IG+ G + XN
GDP ($billions)
C
IG

1073
467

G
XN

417
+18

GDP

% Share

100

GDP: Global Perspective

The Income Approach

Wages, Salaries & Supplementary ........... Income

Profits of Corporations & Government
Enterprises ............. Taxes
profits can be divided into three categories:
1.
corporate .
2.
D
3.
undistributed .

Interest & .................. Income

Net Income from Farms & .....................Businesses

The Income Approach

Adjustments: ................. charges

Factor cost to market price

Indirect taxes

Direct taxes

Subsidies

Calculating GDP in 2014:

The Income Approach
GDP
($billio
ns)
Wages, salaries, etc.

$994

Profits of corporations, etc.

278

Interest & investment income

169

Net income of farms & unincorp.

businesses

55

Taxes less subsidies on factors of

prod.

77

Indirect taxes less subsidies on

products

121

Capital consumption allowances

280

Statistical discrepancy

%
Share

Output-based GDP
GDP by
Published on a .. basis

Output-based and income-based GDP

Expenditure-based GDP

Sectoral Distribution of GDP

The percentage share of each sectors value added in

total GDP (production-based) can show the

.. of each sector in total output.
The change in the sectoral shares over time is an

indicator of . of an economy.
Primary sectors (Agriculture)
Secondary sectors (Industry)
Tertiary sectors (Services)

GDP by industry (% of total)

Goods-producing industries

2003

2014

Primary industries

2.3

Mining, Oil and gas

5.0

Manufacturing

16.6

Construction

5.5

Utilities

2.7

Services-producing Industries

?
Transport

4.6

Financial services,
real estate

19.0

Wholesale & retail trade

10.8

Healthcare

6.4

Educational services

4.8

Measures of National Income

Gross National Product (GNP):
Total income that residents of a country earn within a time
period
Measures output by Canadians ., but
excludes the contribution to Canadian output from
investments of ..
Gross National Product (GNP)
= GDP + .
Gross National Product (GNP)
= GDP .

GDP vs GNP: examples

1.

Canada:

Net investment from non-residents .

GDP GNP

2.

Saudi Arabia:

Foreign workers effect .

Foreign assets effect .

(Foreign workers + foreign assets) effects ..

GDP GNP

3.

The Philippines:

Foreign workers effect

Foreign assets effect

(Foreign workers + foreign assets) effects ..

GDP GNP

Measure of living standard

GDP
measures the of an economy
Determine whether the economy is relatively
.
GDP per capita = GDP / ..
GDP per capita is a better indicator of the

..

Determine whether an economy is

relatively

GDP and GDP per capita 2014:

selected economies
GDP
(US$
trillion)

Population
(million)

Canada

17.4

319

US

10.4

1,394

Japan

4.6

127

China

1.8

35

GDP per
capita (US$)

Purchasing Power Parity (PPP)

Question: Will the same sum of money buy the

same amount of goods/services in rich and

poor economies?

Purchasing power of a dollar = ?

The lower the price level, the .. the

purchasing power

Question: The same sum of money will buy

more in rich or poor economies?

Purchasing Power Parity (PPP)

Question: Can we find an exchange rate that can convert

different currencies to a common denominator with the same

purchasing power?

How?
Use the .in different currencies
The PPP exchange rate between the currencies of the two

countries equals the two countries .

Purchasing Power Parity (PPP)

EPPP = ?
Example: Big Mac (or a bundle of similar goods)

Price in the U.S.= US$5

Price in China = RMB 15
EPPP :
EMarket :

?
US$1 = RMB 6

If the GDP of China = RMB 60 trillion, then it will be

converted to ..using market exchange rate,
but will be equal to .. using PPP exchange
rate

Gross Domestic Product (GDP) in 2014

US$ trillion
World

77.9

US

17.4

China

10.4

Japan

4.6

India

2.1

Germany

3.9

Canada

1.8

Euro zone

13.4

PPP $ trillion

Source: World Bank, World Development Indicators, 2015 September 18.

Nominal GDP Versus Real GDP

GDP

= real quantities X prices

What is really changing?

price?
quantity?
both?

Get around this by:

deflating GDP when prices ..

inflating GDP when prices ..

Nominal GDP Versus Real GDP

Nominal GDP is based on prices when output

was produced

GDP valued at .. prices

Real GDP is based on prices in some

reference (base) year

GDP valued at . prices

Adjustment Process in a One-Product Economy

Method 1
find nominal GDP for each year

index numbers tell us whether prices are rising

or falling

Calculating Real GDP

Year

Units of
output

Price

Price
Index

Nominal
GDP

Real GDP

$10

100

$50

$50

20

200

140

70

25

250

200

80

10

30

11

28

Adjustment Process in a One-Product Economy

Method 2
gather separate data on physical outputs
determine market value with base year prices
leads to the implicit price index, as follows:
GDP Deflator = ?

Nominal GDP, Real GDP and GDP Deflator

Year

Nominal GDP

Real GDP

GDP Deflator
2007 =100

1981

366.6

778.8

1985

495.6

859.0

57.7

1990

690.8

989.5

69.8

1995

826.2

2000

1098.2

2007

1565.9

2010

1662.8

1152.9

144.2

2014

1974.8

1356.9

113.0

76.6
1032.6
100.0

Canadas Nominal and Real GDP 2004

(expenditure-based)
Source: Statistics Canada

Nominal GDP

Real GDP

$ billion

% of GDP

$ billion

% of GDP

Private Consumption (C)

721

55.9

641

57.0

Government purchases (G)

282

21.9

242

21.5

Private Investment (I)

234

18.1

220

19.6

Net exports (NX)

54

4.2

22

2.0

Statistical discrepancy

-1

-0.1

-1

-0.1

1,290

100

1,124

100

Total

Nominal and Real GDP Growth

Real GDP = [Nominal GDP / GDP Deflator] x 100
% change in real GDP
= % change in . % change in
.
i.e.,
Real GDP growth
= Nominal GDP growth

Chain Weighted Index

Up to 2001, Stats Canada established weights,

based on price, for a base year for 380

categories of goods & services

Fixed based price index method

Since May 2001, Stats Canada uses a chain

weighted index (Fisher index), adjusted annually

to better reflect weights of each category

Nominal GDP
2010

Quantity

Price

Expenditure

Balls

100

$1.00

$ 100

Bats

20

$5.00

$ 100

Nominal GDP in 2010

2011

Quantity

Price

Expenditure

Balls

160

$0.50

$ 80

Bats

22

$22.50

$ 495

Nominal GDP in 2011

Real GDP
2011
Quantity

2010
Price

Expenditure

Balls

160

$1.00

$ 160

Bats

22

$5.00

$ 110

2011 quantities at 2010 prices

2010
Quantity

2011
Price

Expenditure

Balls

100

$0.50

$ 50

Bats

20

$22.50

$ 450

2011 quantities at 2010 prices

Chain-weighted Output Index

2010 Quantities
2011 Quantities
% change
Average % change
Real GDP in 2010
Real GDP in 2011
(in chained 2010 dollars)

At 2010 prices

At 2011 prices

200

500

Shortcomings of GDP
GDP has several shortcomings, both
as

a measure of total output

as

a measure of well-being

The Underground Economy:

Global Perspectives

What is the relationship between GDP and

Economic Well-Being?
Economic Well-Being .. Human Well-Being
Economic Well-Being .. GDP
Economic output Marketed output
BUT GDP per capita WELL-BEING

GDP and economic well-being

How is per capita GDP related to economic

well-being?

Why not replace GDP as a measure of

well-being?

Economic Growth
Growth as a ..
Arithmetic of Growth
Rule of 70: approximate number of years required
to double real GDP = 70 / ?
Annual growth rate
1%
3%
5%
10%

Number of years to double real GDP

International Comparison

Economic Growth
Main Sources of Growth
growth
.. growth
Growth in Canada
Relative Growth Rates: international

comparison

Labour and Productivity

Labour productivity: The average .. of

labour; per worker per hour

Real GDP

= worker-hours x labour ..
% change in real GDP

= % change in worker-hours + % change in

The Supply Determinants of Real Output

Real GDP = hours of work x .
Size of
employed
labour force
Average
hours of
work

Labour
Inputs
(hours of
work)
x

Technological
advance
Quantity of
capital
Education and
training
Allocative
efficiency
Other

=
Labour
Productivity
(average
output per
hour)

Real
GDP

Average Labour Productivity Growth:

Canada

Economies of Scale and Resource Allocation

Economies of scale: Reductions in the

.cost of producing a product as the

firm expands the of plant (its output) in
the .
Improved resource allocation: workers have

moved over time from ..

employment to . employment

Recent Productivity Acceleration

1. The microchip and .. technology
2. New firms and . returns

More Specialized .
Spreading of . Costs
Simultaneous
. Effects
Learning..

3. . competition

Institutional Structures That Promote

Growth
Strong ..
Patents and Copyrights
Efficient .. Institutions
Literacy and ..
Free ..
Competitive ..System

Economic Growth in China

Growth averages past 25 years:

9% annual growth output

8% annual growth output per capita

Labour ..
More
Transition to economy
Joined . 2001
Financial system remains
Income.across geographic areas
More .................

Growth and Business Cycles

Fluctuations in the pace of expansion of . is called the

business cycle.

The business cycle is a periodic irregular up-and down movement

of total .. and other measures of economic activity.

Each cycle has 4 phases:

R..
Peak
R..
Trough

The and . of each phase varies.

Level of real output

Phases of the Business Cycle

Time

Economic Fluctuations
Causation: A First Glance

I..

changes in

money .. changes

total .. changes

Cyclical Impact: Durables & Non-Durables

Canadian Recessions Since 1930

Year
1930-33
1945
1946
1954
1982
1991
2008-2009

Change in real GDP

-27.5%
-2.4%
-2.2%
-1.1%
-3.2%
-1.7%
?

Canada: Output growth by decades

Period
1939-50
1950-60

Average output
Average output per capita
growth per year (%)
growth per year (%)
5.8
4.0
4.6
1.8

1960-70

5.2

3.3

1970-80

4.6

3.1

1980-90

2.9

1.7

1990-99

2.3

1.3

2000-07

Source: Statistics Canada

Business Cycles: Canada

Recession: at least . consecutive quarters of
negative (GDP) growth
1981-Q3 to 1982-Q4: recession ( quarters of

negative growth)

1990-Q2 to 1991-Q1: recession (.quarters of

negative growth)

2001-Q3: quarter of negative growth (911 terrorist

attack)

2003-Q2: quarter of negative growth (SARS and

mad cow diseases

Business Cycles: Canada

Growth recession: positive growth but average (trend) rate
2006: about average trend
2007: . trend
2008:
2009:
2010-11:..
2012: ...................
2013: ..

2014:..
2015:
Question: In which phase was the Canadian economy in 2016 ?

Canada Real GDP growth: 2003-Q1 to 2008Q3

Source: Statistics Canada

Real GDP growth: 2008-Q2 to 2013-Q3

Real GDP growth: 2010-Q2 to 2015-Q3

Comparison of the 2008-2010 Recession and

Recovery with previous cycles

Source: Statistics Canada, The Daily 2011 Jan 13.

Canadian Key Economic Indicators: 2008 to 2010

Growth rate
(annualized %)

Unemployment rate
(end-period) (%)

Inflation rate
(%)

2008 Jan-Mar (Q1)

0.7

6.0

1.4

2008 Apr-Jun (Q2)

0.3

6.2

3.1

2008 Jul-Sep (Q3)

0.4

6.1

3.4

2008 Oct-Dec (Q4)

3.7

6.6

2.0

2009 Jan-Mar (Q1)

7.0

8.0

1.2

2009 Apr-Jun (Q2)

2.8

8.6

0.1

2009 Jul-Sep (Q3)

0.9

8.4

0.9

2009 Oct-Dec (Q4)

4.9

8.5

0.8

2010 Jan-Mar (Q1)

5.6

8.2

1.4

2010 Apr-Jun (Q2)

2.3

7.9

1.0

2010 Jul-Sep (Q3)

2.5

8.0

1.9

2010 Oct-Dec (Q4)

3.1

7.6

2.4

Source: Statistics Canada

Canadian Key Economic Indicators: 2011-2015

Source: Statistics Canada

Growth rate
(annualized %)

Unemployment
rate
(end-period) (%)

Inflation
rate
(%)

2011

2.6

7.5

2.3

2012

1.8

7.1

0.8

2013

2.0

7.2

1.2

2014
2015