Slides are prepared by Dr. Amy Peng, Ryerson University Chapter Four Measuring National Economic...

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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


Per Capita GDP

• Per Capita real GDP is an indicator of standard of living.

Population

GDP Real GDP real capitaPer


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

$


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


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


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


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

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