Slides are prepared by Dr. Amy Peng, Ryerson University
Chapter FourChapter FourMeasuring National Economic Measuring National Economic
Activity and PerformanceActivity and PerformanceMacroeconomics by Curtis, Irvine, and BeggMacroeconomics by Curtis, Irvine, and Begg
Canadian Edition, Canadian Edition, McGraw-Hill Ryerson, 2007McGraw-Hill Ryerson, 2007
©2007 McGraw-Hill Ryerson Ltd. Chapter 4 2
Learning Outcomes
This chapter explains:This chapter explains:• Macroeconomics as the study of the whole national
economy• Three main indicators of macroeconomic activity and
performance• The facts about recent Canadian macroeconomic
activity• The circular flow of outputs and incomes• The basic national income accounting framework• The relationship between national and real national
income• Per capita real GDP and standards of living
©2007 McGraw-Hill Ryerson Ltd. Chapter 4 3
Macroeconomics is ...
• The study of the economy as a whole
• It deals with broad aggregates
• It has important policy dimensions
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.1 4
Three Main Indicators in Macroeconomic Activity - Output
• Output– Real gross domestic product (real GDP) measures output
and income
• it is the quantity of final goods and service produced in the
economy in a specific time period
– Rate of growth of real GDP
– In 2003, real GDP was 1092 billion
– In 2004, real GDP was 1124 billion
%100GDP Real
GDP RealGDP Real
1year
1year 2year
%9.2%1001092
109211242004in growth of Rate
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.1 5
Three Main Indicators in Macroeconomic Activity - Inflation
• The Price Level– Is a measure of the weighted average of prices of a wide
variety of goods and services
– Consumer Price Index (CPI)
– The Inflation Rate
– In 2003, CPI at 122.3
– In 2004, CPI at 124.6
%100C
CC
1year
1year 2year
PI
PIPI
%9.1%100122.3
3.1226.1242004for rateInflation
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.1 6
Three Main Indicators in Macroeconomic Activity –
Employment• Employment
– The number of adults (15 years of age and older) employed
full-time and part-time and self-employed
– The civilian labour force
– Unemployment rate
– In October 2005, Canadian labour force – 17.423 million
– In October 2005, total employment of 16.267 million
%100forceLabour
Employed-forceLabour
%6.6%10017.423
267.16423.172005October ratent Unemployme
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.2 7
Canadian Economic Performance
United StatesCanadaTable 4.1
5.27.22000-2005
5.89.51990s
7.39.41980s
Unemployment rateUnemployment rate
2.22.52000-2005
3.02.21990s
5.66.51980s
Inflation rateInflation rate
2.62.52000-2005
3.02.51990s
3.03.01980s
Real GDP Growth RateReal GDP Growth Rate
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.2 8
Real GDP and Growth of Real GDP in Canada
0
200000
400000
600000
800000
1000000
1200000
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Year
Rea
l G
DP
-6
-4
-2
0
2
4
6
8
An
nu
al r
ate
of
Gro
wth
Real GDP Growth Rate
Recessions
Recessions
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.2 9
Annual Inflation Rate in Canada
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001
Year
Infl
ati
on
Ra
te
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Annual Unemployment Rates in Canada
5
6
7
8
9
10
11
12
13
1980 1983 1986 1989 1992 1995 1998 2001 2004
Year
Un
emp
loym
ent
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.3 11
The Circular Flow and National Account
Goods &Goods &ServicesServices
Goods &Goods &ServicesServices
$ Consu
mptio
n
$ Consu
mptio
n $ Revenue
$ RevenueProductProductMarketMarket
HouseholdHousehold BusinessBusiness
Factor Factor InputsInputs
Factor Factor InputsInputs
$ Cost
s
$ Cost
s
$ Income
$ Income
FactorFactorMarketMarket
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.3 12
Measuring GDP
• Nominal GDP– Expenditure Approach– Income Approach
• Value Added Approach
• Nominal GDP is market value of all final goods and services at current prices
• Quarterly GDP and annual GDP
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.3 13
The Expenditure Approach to GDP
• Consumption expenditure (C)• Investment (I)
– Gross investment
• Government expenditure (G)– Transfer payments
• Exports and Imports– Net Exports NX = X - Z
NXGICGDP
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.3 14
The Income Approach to GDP
• Employment Income
• Profits and Business Income
• Interest and Investment Income
• Net Domestic Income NDI = W + BI
• Capital Consumption Allowance (CCA)
• GDP at basic price = NDI + CCA
• Net indirect Tax (TIN)
• GDP at market price = NDI + CCA + TIN
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.3 15
Canadian National Account, 2005
1321.3GNI1321.3GNP
-26.3Net foreign property income
-26.3Net foreign property income
1347.61347.6GDP at Market PricesGDP at Market Prices1347.61347.6GDP at Market PricesGDP at Market Prices
155.4Net indirect taxes
1192.2GDP at basic prices
178.0Capital consumption2.0Statistical discrepancy
1014.2Net domestic income43.6 NX (net exports)
58.0 Investment Income250.0 I by industry
284.3 Profit & business Income295.5 G by government
671.9 Employment Income756.5 C by households
Income source:At Market Price:
Income MeasuresIncome MeasuresExpenditure MeasuresExpenditure Measures
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.3 16
The Circular FlowWith Government and Trade
PY = W+BI
C + I + G + X
I
CS
Households BusinessesGovernment
C + I + G + NX
T-GG
TDN
PY – TDN
X
TIN
CCA
Z
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.3 17
GDP and GNP
• Gross domestic product (GDP)– measures the output produced by factors
of production located in the domestic economy
• Gross national product (GNP)– measures the total income earned by
domestic citizens• GNP or GNI
= GDP + net income from abroad
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.4 18
Nominal and Real GDP and the GDP Deflator
56.956.945500455002900029000Real GDPReal GDP
80004000Hamburgers
3750025000Blue jeansValue in 1990 $
20020087000870002900029000Nominal GDPNominal GDP
120004000Hamburgers
7500025000Blue jeansValue in current $
32Hamburgers
5025Blue jeansPrice in $
40002000Hamburgers
15001000Blue jeansQuantity
Change20051990Table 4.4 Nominal and Real GDP
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.4 19
The GDP Deflator
• Nominal GDP = W + BI + CCA + TIN
• Real GDP Y = C + I + G + NX• Nominal GDP = P x Y
= P x (C + I + G + NX)
• P x Y = W + BI + CCA + TIN
income Real
and deflator, GDP
P
TCCABIWY
Y
T
Y
CCABI
Y
WP
IN
IN
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The GDP Deflator
100GDP Real
GDP Nominal deflator GDP
1152998833664Real GDP (billion 1997 $)
117.0107.897.273.2GDP deflator (1997=100)
13481076810486Nominal GDP (billion $)
2005200019951985Table 4.5
$ 1997in 998$100$107.8
$1076 GDP Real
100deflator GDP
GDP Nominal GDP Real
2000
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Per Capita GDP
• Per Capita real GDP is an indicator of standard of living.
Population
GDP Real GDP real capitaPer
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.5 22
Per Capita Real GDP in Canada, 1981-2005
22000
24000
26000
28000
30000
32000
34000
36000
38000
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Year
19
97
$
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.5 23
Limitation of GDP
• Some output production do not contribute to economic welfare
• Many valuable goods and services are excluded from GDP
• May not necessarily be a good measure of economic well-being
©2007 McGraw-Hill Ryerson Ltd. Chapter 4.5 24
Top Ten Countries Based on the 2002 Human Development Index
-70.9360.980.960.86Ireland
60.9380.930.940.94Japan
-40.9390.980.970.87United States
10.9410.950.960.91Iceland
70.9420.940.990.90Belgium
60.9420.950.990.89Netherlands
50.9430.950.980.90Canada
90.9460.940.990.90Australia
190.9460.930.990.92Sweden
10.9560.990.990.90Norway
HDI Rank Minus GDP
HDIGDPEducationLife Expectancy
Country
©2007 McGraw-Hill Ryerson Ltd. Chapter 4 25
Chapter Summary
• MacroeconomicsMacroeconomics studies the whole national economy as a system
• Real Gross Domestic ProductReal Gross Domestic Product, prices and inflation ratesinflation rates, and unemployment unemployment ratesrates are macroeconomic indicators
• Circular flow• The national accountsnational accounts provide a
framework for the measurements of output of the economy
©2007 McGraw-Hill Ryerson Ltd. Chapter 4 26
Chapter Summary
• Nominal GDPNominal GDP measures the output of final goods and services at market prices in the economy
• Real GDPReal GDP measures the output of final goods and services produced
• The GDP deflatorGDP deflator is a measure of the price level
• Real GDP and per capita real GDPper capita real GDP are crude measures of national and individual welfare