MACROECONOMICS BY CURTIS, IRVINE, AND BEGG SECOND CANADIAN EDITION MCGRAW-HILL RYERSON, © 2010 Chapter 4 Measuring National Economic Activity and Performance

MACROMACROECONOMICS BY ECONOMICS BY CURTIS, IRVINE, CURTIS, IRVINE, AND BEGGAND BEGG

SECOND CANADIAN EDITION SECOND CANADIAN EDITION MCGRAW-HILL RYERSON, MCGRAW-HILL RYERSON, © © 20102010

Chapter 4Measuring National Economic

Activity and Performance1

Learning Outcomes

©2010 McGraw-Hill Ryerson Ltd.Chapter 4

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This chapter explains:This chapter explains:Three main indicators of

macroeconomic activity and performance

Canadian economic performanceNational accounting measures of the

economyNominal and real GDP and the GDP

deflatorPer capita real GDP

Macroeconomics


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Macroeconomics studies:The national economy as a system in terms of:The economy’s output of goods & services Employment & incomesExpenditures on current output Prices and inflationMoney & financial marketsMacroeconomic performance & policies.

Indicators of Macroeconomic Activity

Output, Incomes

Real gross domestic product (real GDP) measures

Quantity of final goods & services produced in the economy in a specific time period

The real incomes generated in producing those goods & services

©2010 McGraw-Hill Ryerson Ltd.Chapter 4.1

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100GDP Real

GDP RealGDP Real

1year

1year 2year

Rate of growth of real GDP

%7.2100$1248

1248$1282$2006in growth of Rate

In 2005, real GDP was $1248 billionIn 2006, real GDP was $1282 billion

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The Price Level Weighted average price of a basket of goods

& services

Consumer Price Index (CPI)

• The Inflation Rate: • Annual % Change in the Price Level

100C

CC

1year

1year 2year

PI

PIPI


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%2.2100109.1

1.1095.1112007for rateInflation

Recent Inflation in Canada

In 2006, CPI at 109.1In 2007, CPI at 111.5


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Use of indexes

CPI expressed as indexIndex is value relative to base year

•2009, unemployment = 10%•2010, unemployment = 9%•Index of unemployment in 2010 relative to 2009


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9%10 %

×100=90


• Labour Force, Employment & Unemployment • Canada, Sept 2008 (000 persons):

1. Non-Institutional pop 15+ yrs 27,013

2. Labour force 18,326

1. Employment 17,206

2. Unemployment [(2 – 3)] 1,120

3. Participation rate [(2)/(1)]x100 67.8%

4. Employment rate [(3)/(1)]x100 63.7%

5. Unemployment rate [(4)/(2)]x100 6.1%


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Canadian Economic PerformanceReal GDP 1980-2008


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Note:•The strong growth trend over the period of 1980-2008. •The recessions in the early 1980s & 1990s, late 2008

Recession

Recession

Real GDP

Canadian Economic PerformanceAnnual Rates of growth in Real GDP 1980-2008


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Recession

Recession

• Growth rates fluctuate from year to year• Negative growth rates mark recessions

Canadian Economic PerformanceAnnual Inflation Rate in Canada


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• Strong rise in the inflation rate in the in 1970s

•Drop in inflation in recession of early 1980’s

•Further drop in inflation in recession of early 1990’s

Canadian Economic PerformanceAnnual Unemployment Rates in Canada


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• Changes in GDP growth rates changes in unemployment rates

• High unemployment rates reflect 1983 and 1993 recessions

National Accounts Measures of Economic Activity


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National Accounts provide:

A set of definitions and concepts for use in measuring GDP

A framework for an aggregate demand (AD) and supply (AS) model of the economy



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Three ways to define GDP:

Income-basedSum of all income earned in the economy

Expenditure-basedSum of all expenditures in the economy

Value-addedSum of the value-added at each stage or

production across all industries


The Circular Flow DiagramExpenditure on goods & services

Households Businesses

Output of goods & services

Factor inputsto business

Factor incomes paid households

Production costs $$

Money incomes $$

Money payments $$

Money receipts$$

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The Expenditure-Based GDP

Expenditure based GDP =Consumption expenditure (C) by households, plusInvestment expenditure (I) by business on buildings, machinery, & inventories, plus

(note: new residential home sales also included) Government expenditure (G) on currently produced final goods & services, plus (Transfer payments are not included in GDP)Exports (X) - Imports (Z) = Net Exports (NX)ZXGICGDP


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The Income-Based GDP


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Net Domestic Income (NDI) =

Employment Income (W): the sum of all wages, salaries, & benefits paid to labour, plus

Profits & business Income is the sum of corporate profit & small business income, plus

Interest & investment income is income earned from financial sources

Business and investment income (BI) is the sum of profit, interest, investment, & business income

NDI = W + BI

The Income-Based GDP

Income based GDP =Net Domestic Income NDI = W + BI, plusCapital Consumption Allowance (CCA) to cover the depreciation of capital stock =GDP at basic price = NDI + CCA, plusNet indirect Tax (TIN) = sales + excise taxes – subsidiesGDP at market price = NDI + CCA + TIN


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Canadian National Accounts, 2008 (bil $, current prices)


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GDP at market prices = $1602.5 billion Net foreign income = -$14.7 billion GNP = GNI = $1587.8 billion

Nominal & Real GDP & the GDP Deflator


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Nominal GDP ≡ output & incomes of a given year measured with current market prices of goods & services.

Real GDP, or GDP in constant dollars ≡ output & incomes of given year measured with base year prices of goods & services .

Changes in nominal GDP = Changes in prices & quantities

Real GDP = Nominal GDP is adjusted by GDP deflator.

Changes in real GDP = Changes in quantities


The GDP deflator of a given year = (Nominal GDP/Real GDP) x 100.

The GDP deflator index differs from the consumer price index (CPI).

The CPI is based on “representative baskets” of goods & services that consumers buy, while

GDP deflator covers all the goods & services included in GDP.

GDP deflator deflates the dollar value of current output to what it would have been in base year’s prices.


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Between 1990 – 2008, nominal GDP increased by 200%

Between 1990-2008, real GDP increased by 56.9%.

Between 1990-2008, GDP deflator increased by 91.2%.

The GDP Deflator (P)

Nominal GDP = W + BI + CCA + TIN

Real GDP = Y = C + I + G + X - ZNominal GDP = P x Y

= P x (C + I + G + X – Z) P x Y = W + BI + CCA + TIN

income Real

and deflator, GDP

PTCCABIW

Y

YT

YCCABI

YW

P

IN

IN


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P= ∑ (Unit labour-cost, Unit gross business income,Unit net indirect tax)

Using the GDP Deflator

100deflator GDP

GDP Nominal GDP Real

$ 2002in 5.1325$100$120.9

$1602.5 GDP Real

100deflator GDP

GDP Nominal GDP Real

2008


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Canadian Nominal & Real GDP 1987-2008

Per Capita GDP

Per Capita real GDP : an indicator of standard of living.

Population

GDP Real GDP real capitaPer


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Per Capita Real GDP in Canada, 1980-2008


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Per capita GDP in Canada ↑ by 50% between 1980 & 2008.

↑ has not been smooth & stable

Per capita GDP ↓ in recessions

Limitations of GDP


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Some production causes pollution & other externalities

Unreported income & outputNon-marketed goods & servicesComposition of output affects standard of

living (military production vs health care)

Income distribution

Top Twelve Countries Based on the 2005 Human Development Index


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•High GDP may not necessarily be a good measure of economic well-being.

•Human Development Index (HDI) provides a broader measure of country’s wellbeing and progress

Chapter Summary


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MacroeconomicsMacroeconomics studies the whole national economy as a system

Real Gross Domestic ProductReal Gross Domestic Product, prices, inflation inflation ratesrates & unemployment ratesunemployment rates are indicators of macroeconomic performance

Circular flow shows macroeconomic linkages

The national accountsnational accounts provide a framework for the measurements of national output & income

Nominal GDPNominal GDP measures the output of final goods & services at market prices in the economy

Chapter Summary


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Real GDPReal GDP measures the country’s output of final goods & services

The GDP deflatorGDP deflator is a measure of the price level

Fluctuations in the growth rate of real GDP, in inflation rates, and in unemployment

rates are important aspects of recent economic performance in Canada

Real GDP and per capita real GDPper capita real GDP are crude measures of national and individual welfare

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MACROECONOMICS BY CURTIS, IRVINE, AND BEGG SECOND CANADIAN EDITION MCGRAW-HILL RYERSON, © 2010 Chapter 4 Measuring National Economic Activity and Performance