w.1 chapter 2 - completed ppt

8/10/2019 W.1 Chapter 2 - Completed PPT

1/30

Welcome to

Macroeconomics (ECON22358G)

Text:Canadian Macroeconomics:Problems and Policies (10thedition)Brian Lyons, Pearson Prentice Hall

Text includes a Study Guide withreview questions and answersat the end of each chapter.

Instructor: Brian LyonsE-mail: [email protected]

SLATE e-mail


2/30

Organization of the Course

Classes:How you learn it: Cover main pointsand highlights

Page-referenced to:

Textbook:Adds details re:the objectives

What you need to know: Learning 1. RecallOutcomes 2. Understanding

3. Application

How you check

your progress:

How you are

evaluated:See next slide.

In the text:Review Questions

Critical Thinking Questionsafter each chapter(with answers)

On SLATE:Self-Check Questions

after each chapter(with answers & feedback)

What you needto do:

A To Do list foreach chapter,on SLATE


3/30

Quiz/Test Coverage Marks

Quiz #1

Chapters 2-3

10

Test #1

Chapters 2-5

20

Quiz #2 Chapters 6-7 10

Test #2

Chapters 6-8

25

Quiz #3

Chapters 9-10

10

Test #3

Chapters 9-10; 12

25

Total 100

Macroeconomics

EVALUATION SYSTEM


4/30

A typical To Do list for a chapter

To Do List for Chapter 2 Done

Learning Activities:1. Read the Overview of Chapter 2.

2. Read the Learning Outcomes for Chapter 2.

3. Read Chapter 2 in the text.

4. Review the PowerPoint slideshow for Chapter 2.

Practice Exercises:

1. Do the self-check questions on SLATE.

2. Do the Review Questions in the text (pages 48-49); check your

answers (page 329).

3. Do Critical Thinking questions #1-5 in the text (p.150); check youranswers (p.329).


5/30

QUESTIONS?

See the Frequently Asked Questions Filein the Introduction and Orientation module

on SLATE.


6/30

Chapter 1

What Is Economics?

Same as Chapter 1 of the Microeconomics course

not covered in this courseFor a quick refresher, run through the self-check

questions for Chapter 1 on SLATE.


7/30

Chapter 2

Introduction to

Macroeconomics


8/30

The Market for ComputersA Microeconomic Market

Capital Equipment

LabourManagementIncentive of GainIncentive of Competition

Ability to produce

as measured by:

THE DEMAND SIDE

= Buying o f computers , by

Demand

Interactionof

Demand & Supply

Performance of

the industry,in terms of:

The SUPPLY SIDE

= Product ion of comp uters

Supply

Productivity(output/worker/hour)

Capacity(potential total output/year)

OutputEmployment

Prices

Etc.

ConsumersBusinessesGovernmentsForeign buyers

Demandfor computers

or

Total spendingon computers


9/30

The Economy on a Macroeconomic Scale

The SUPPLY SIDE

= Totalproduct ion of

good s and serv ices

Supply

Consumers

BusinessesGovernmentsForeign buyers

OutputEmployment

Prices

Productivity(=output per worker per hour)

Ability of the whole econom y

to produce goods & services,as measured by:

Capital EquipmentLabourManagementIncentive of Gain (after tax)Incentive of Competition

THE DEMAND SIDE

= Buying of goods and

servic es, by

Demand

Aggregate Demand

for Goods and Services

Grand TotalSpending on

goods and services in

the entire economy, or

Interactionof

Demand & Supply

Performance ofthe entireeconomy,

in terms of:

Capacity Output

(= potential totaloutput/year)


10/30

When the economy is operating smoothly:

Supply side:

Strong high ability to produce goods & services,which is growing each year

Demand side:Aggregate demand is neither too low nor too high;

high enough to buy all the goods & services thatcan be produced.BUT not so high that prices rise rapidly, becausesupply cannot keep up with demand.

RESULTS:Output:Employment:

Inflation rate:

HighHigh

Low


11/30

The MEANING of CAPACITY OUTPUT

Feeding more gas to a car will make it go faster. But a car has amaximum sustainable speed,(eg-240 kmph), set by physical

limits such as engine size, etc.BUT if the car is pushed beyond this limit, it will

Similarly, higher aggregate demand will push the economy to produce

goods & services at a faster speed. But like a car, the economy has afastest sustainable pace(eg $1.9 trillion per year) at which it canproduce goods and services, which is also set by physical limits such asthe number of workers available (the labour force) and output perworker (productivity).

overheat, threatening the engine with serious damage.

BUT if excessivedemand pushes the economy past this limit, whatwill happen?


12/30

The supply side will not be able to keep up with demand, and theeconomy will overheatin the form of more rapid inflation.

When inflation reaches an unacceptably high rate, capacity outputhas been reached, just as a cars maximum sustainable speed hasbeen reached when its engine overheats.

Conclusion:

Capacity output = the speed limitfor the economy:maximum speed (output per year) at which it can producegoods & services without demand being so high as togenerate unacceptably rapid inflation (overheating).

More on the dangers of inflation (overheating) inchapters 6 & 8.


13/30

3 things that can go wrong on a macroeconomic scale

1. Weakness on the supply sidelow productivity

economy fails to produce enough for people tohave a good standard of living

2. Problems on the demand side

Eg the former Soviet Union; much of Africa

(a) Too littleaggregate demand:Demand too far below capacity

RECESSION; high unemployment (eg 1930s)

(b) Too muchaggregate demand:Demand higher than capacity

INFLATION; rapidly rising prices (eg 1970s)


14/30

What is your impression of how the Canadian

economy has been performing recently?

How did you obtain that impression?

From media reports concerning various

economic statistics, which are reportedmonthly by Statistics Canada.


15/30

http://www.statcan.gc.ca

Where to find the economic statistics on

outputprices/inflationemployment/unemployment

that we use to measure the

economys performance:

Statistics Canadas home page:
http://www.statcan.gc.ca/start.htmlhttp://www.statcan.gc.ca/start.html


16/30

1. Measuring Output

= the market value (in $) of the total output of final

goods and services produced in the nation in that year

In short, the sum of the pr ice tags of everythingproducedan estimate of the grand tota l outputof the economy for the year.

2013, Canadas GDP was $1.88 trillion ($1,881,200,000,000).

Was this GDP good or not?

Need to compareit to:

last years GDP ( how fast is i t grow ing?)

the economys capaci ty output ( how c lose are weto our po tent ia l?)

Gross Domestic Product (GDP)

S f G ( )


17/30

Subdivisions of Gross Domestic Product (by purchaser)

% GDP

56% 1. CONSUMPTION (C)

purchased by householdsall consumer goods and services

20% 2. INVESTMENT (I)

purchased by producers (mainly businesses)capital goods (plant, machinery, equipment)

26% 3. GOVERNMENT (G)

purchased by governmentsmostly services of govt employees (health care, education, etc.)

4. NET EXPORTS (X-M)

30% Add EXPORTS (X) = output producedin Canada but purchased abroad

32% Deduct IMPORTS (M) = output bought in Canada but produced abroad

GDP = C + I + G + (X-M) = $1.88 trillion in 2013

GDP is measured in dollars -- how could this affect its accuracy?


18/30

Money Income and Real Income

If your income hasincreased by 5%, youmay feel 5% better off.

BUT if the prices of what you buy

have increased by 3%,

then your real gain theincrease in yourpurchasing

powerwould be only

Your MONEY INCOMEis up by 5%.

2%.

Your REAL INCOMEis up by only 2%.

To see what has really happened, you need to removethe effects of price increases from figures expressedin dollars.


19/30

Money GDP measures the dol lar valueof output,which is increased by inflation, so can be misleading.

Real GDP excludes inflation, and thus measures the

phys ica l vo lumeof output (how much was really produced).


20/30

Note how clearly the statistics show the major recessions.

(Quarterly data would provide a more detailed picture.)


21/30

If the economys production of goods and services didnot increase, but the general level of prices of goods

and services went up,

(a) real GDP would increase, but money GDP wouldnot increase.

(b) money GDP would increase, but real GDP wouldnot increase.

(c) neither money GDP nor real GDP would increase.(d) both

money GDP and real GDP would increase.

This brings us to the question ofprices, and howwe measure the level of prices in general.

2 M i P i d I fl ti


22/30

2. Measuring Prices and Inflation

The CONSUMER PRICE INDEX (CPI)

is a measure of the cost of a basket of about 600 goods & services

bought by a typical urban household, weighted as follows:

Shelter 26.6%Household operations& furnishings 11.1

Transportation 19.9Food 17.0Recreation, reading

& education 12.2Clothing & footwear 5.4Health & personal care 4.7Tobacco & alcohol 3.1

100.0

Because the items in the CPI reflect what typical consumers buy,changes in the CPI are considered to reflect changes in consumer

prices in general.

0

20

40

60

80100

120

140

CPI(2002=

10

0)

Consumer Price Index(2002=100)


23/30

The Consumer Price Index and the Rate of Inflation

STATISTICSCANADA

monitors eachmonth thepricesof the approx.600 goods andservicesincluded in theCPI

From these, calculates

a weighted averagenumber that isrepresentative of thecost of the CPI basket,based on the 2002cost = 100.0.

=theCONSUMERPRICE INDEX (CPI)

EgAverage CPI for2013 was 122.8

Then - calculates the % increasein the CPI f rom one year earl ier:

Eg 2013 CPI = 122.8

2012 CPI = 121.7

Increase in CPI = 1.1 po in ts

% increase= 1.1/121.7 = 0.9%

the RATE of INFLATIONfrom 2012 to 2013

was 0.9%.

http://www.bankofcanada.ca/rates/related/inflation-calculator/

Calculate your own inflation rates at:

Th C P i I d d th R t f I fl ti
http://www.bankofcanada.ca/rates/related/inflation-calculator/http://www.bankofcanada.ca/rates/related/inflation-calculator/http://www.bankofcanada.ca/rates/related/inflation-calculator/http://www.bankofcanada.ca/rates/related/inflation-calculator/


24/30

The Consumer Price Index and the Rate of Inflation

The Consumer Price Index:

Shows how highconsumerprices are.

How fast prices were rising

over the past 12 months.

This is the statistic thatis reported in the mediaeach month.

So what does the Rateof Inflation tell us?

Note again how the recessions stand out (lower inflation rates).

3 MEASURING EMPLOYMENT d UNEMPLOYMENT


25/30

3. MEASURING EMPLOYMENT and UNEMPLOYMENT

STATISTICS

CANADASmonthly

LABOUR

FORCE

SURVEY

(2013 data)

# of Canadiansof working age

(WAP)

(28,673,200)

# who do not want to work(not in the labour force)

(9,593,800)

# who do want to work

=the LABOUR FORCE

(19,079,400) (66.5% of WAP)

# Employed(17,731,200)

# Unemployed

(1,348,200)

Full-time (14,380,200)

Part-time (3,351,000)

TheUNEMPLOYMENTRATE

= 1,348,200 = 7.1%19,079,400

= # unemployed# in labour force

(% of the labour forcethat is unemployed)


26/30

Note again how the recessions stand out.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Percent

Unemployment Rate


27/30

Chapter 2 Conclusion

Three of our basic economic goals are:

High rates of output of goods and services

High employment/low unemployment Low rates of inflation

Each month, Statistics Canada takes the pulse of Canadaseconomy by collecting economic statistics such as those in

this chapter: Output (GDP and Real GDP)

the CPI and the Rate of Inflation Employment, Unemployment and the UnemploymentRate

From these statistics, we can:

make forecasts of its probable future direction

determine the reasons for its present condition, and

estimate where the economy is


28/30

Benchmarks for our statisticswhat is considered good?

Real GDP a growth rate of 3% per year.

Consumer prices a rate of inflation

of 1 to 3% per yearJobs an unemployment rate of

~ 7% of the labour force

Where is the Canadian economy now?


29/30

Where is the Canadian economy now?

After a bad downturnin 2008-09, real GDPrecovered.

But after late 2009,the recovery sloweddown and failed to gainmomentum.

http://www.statcan.gc.ca/For the most recent statistics, visit

As a result,employment has

been improving onlyslowly, and theunemployment rateremains quite high.
http://www.statcan.gc.ca/http://www.statcan.gc.ca/


30/30

Next week: Chapter 3:

The Supply Side of the Economy

Do the Self-Check questions on SLATE.

Do the Review Questions and CriticalThinking questions at the end of Chapter2, and check your answers in theappendix to the text.

w.1 chapter 2 - completed ppt

Documents