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Principles of Macroeconomics - Wiskin

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John Wiskin

on 28 April 2011

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Transcript of Principles of Macroeconomics - Wiskin

Introduction to Macroeconomics What is macroeconomics?
- macroeconomics is the study of the economy as a whole
- microeconomics deals with smaller economics, individual markets and consumer purchasing decisions
You can think of microeconomics as the individual pixels on a computer screen.
Each pixel doesn't look like much but if you zoon out and look at the whole then you can see the entire picture (macroeconomy). Why is macroeconomics important?
Helps governments make decisions about policies and check whether policies are working (tax and spending policies).
Helps individuals and unions in contract negotiations (they look at macroeconomic trends)
Helps small business owners and individuals make investment decisions.
Help small business owners decide to open new stores or make business decisions. Based on the previous pictures, 1.) define First, Second and Third World country, and 2.) list 10 characteristics that cause a country to be labelled as First, Second, or Third World. http://www.worldometers.info/population/ What are the macroeconomic indicators?
1.) Unemployment Rate
2.) Consumer Price Index
3.) Gross Domestic Product The Unemployment Rate - measures employment in Canada; personal and easily observable
- unemployment rate is the percentage of the labour force that is unemployed
- full employment is considered 93-94%
- StatsCanada calculates this once/month by surveying 59 000 households
- in Canada, the natural unemployment rate is 6.5% The Labour Force StatsCan divides people into three categories:
1.) under fifteen and/or institutionalized (in jail) and therefore not eligible to work;
2.) Those old enough but choose not to work (stay at home mom, student) and;
3.) Those who are working or those seeking employment.

This third group makes up the labour force
So who are the unemployed? People who are in the labour force who are without work and actively seeking it. Unemployment Rate is Wrong... - Discouraged workers are those who have given up on finding work and therefore not
part of unemployment rate (if they were unemployment rate would be higher)
- Underemployed - people who are not using their skills to the fullest (i.e. a university graduate who has to work in a minimum wage job) Gross Domestic Product total market value of all goods and services produced in a country
two approaches to calculate GDP, expenditure approach (total that is spent and all final goods and services in Canada)
Statistics Canada gathers data for the Canadian government on the economy and the people. Calculating GDP GDP = C + I + G + (X - M) C = consumption (what households spend on goods and services)
I = investment (in capital goods and infrastructure for the production process to produce revenue)
G = government purchases (wages, supplies, public capital goods (highways, schools, hospitals)
X = exports
M = imports (subtracted because not made in Canada)

You can remember this by the phrase "Cowboys smoke CIGarette X for Men" What is not included?
second-hand purchases - the product has already been purchased so it woun't be counted twice
Illegal transactions - drugs and prostitution
intermediate goods - goods that are part of the final product
financial transactions - stocks and bonds, public and private transfer payments (just shifts pruchasing power)
non-market transactions - volunteer work and house work Consumer Price Index The consumer price index (CPI) tells us about the average changes over time in the prices of a fixed group of goods and services that are bought by consumers. The CPI is based on prices of food, clothing, housing, fuels, transportation fares, charges for medical services, drugs, and other goods and services that people buy for day-to-day living.The increase of prices over time is known as inflation. Inflation can be bad because if we keep making the same and prices increase, then it's like we have less money. The CPI is a measure of the most common household goods and services. StatsCan measures the inflation of those goods and services and checks prices over time for stability. Two Types of GDP Real GDP - the GDP when price increases have been removed
Nominal GDP - current GDP gefore price increases have been removed Limitations Doesn't account for population growth. GDP/capita does though. It does not take into account income distribution as well so the majority of people may have a poor standard of living. "Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product ... if we should judge America by that - counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children.

"Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans." Finding the CPI price of basket in current year
price index = ___________________________ X 100
price of basket in base year Indexing to the CPI CPI year 1 wage or pension amount year 1
________ = ________________________
CPI year 2 wage or pension amount year 2
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