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Economics 12 Final Project: Macroeconomics

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Jacob Wharrie

on 17 June 2013

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Transcript of Economics 12 Final Project: Macroeconomics

Jacob's Hot Tubs
You might as well say that my business, Jacob`s Hot Tubs, is one of the reasons why our country has a high GDP.
Xbox Go Home!
You have to remember that not only am I a producer, but I`m a consumer as well.
Based on my time studying aggregate demand along with aggregate supply, I concluded that they were created just to help the government determine policies.
Reflection on Aggregate Demand
Studying microeconomic concepts peaked my interest, but macroeconomics was without a doubt more fascinating.
Reflection on GDP
As an upcoming graduate, finding employment will soon become a significant part of my life.
Reflection on Employment
I consider the unemployment rate to be such an important indicator.
GDP (gross domestic product)
Aggregate Demand
GDP is the
final output
of all goods/services by a country in a year.
GDP (Gross Domestic Product)
exists, comparing GDP's can be misleading (GDP rises, but it
may be only because prices rose
, not output).
The solution is to adjust nominal GDP (GDP before deflating) into
Real GDP
. From that we have a more accurate comparison.
economic growth (%)
of a country can be derived from comparing Real GDP with Real GDP of the previous year.

Calculating Real GDP
When demand gets high enough, I can invest money towards expanding factories and assembling more machinery to increase my output (I), ultimately increasing GDP as well.
Economics 12 Final Project: Macroeconomics
By Jacob Wharrie
As previously mentioned, I had some goals that I wished to fulfill by studying Economics 12. These included:
Increasing awareness of the economic and financial world and how it affects me as an individual.
Using this awareness to aid myself in financial, political and personal decisions after graduation.
About My Goals
This time the focus is on using
concepts, the economy in the perspective of
the government and industries as a whole.
There are
macroeconomic ideas that I like to discuss:
There are two approaches towards measuring this output:
Expenditure Approach
: how much is
on goods/services produced.
Income Approach
: how much
income is received
from producing goods/services.
In this case, we were taught the expenditure approach, so we will be referring to that.
This equation is used in determining GDP:
GDP ($)=
Consumer Spending (C)
how much all households spend
includes services (restaurants, car maintenance, etc.) and all goods (houses, appliances, cars, food, etc.)
About 2/3 of all GDP is from consumer spending.
+ G
Government Spending (G)
how much governments (federal, provincial and municipal) spend on goods and services
Things like public projects,
...and more.
However social assistance (welfare, employment insurance, etc.) and subsidies are
government expenditures!
They are considered
transfer payments
, meaning they simply give people money for spending.
They may not spend the money right away. Until they do, it is not counted towards GDP. This is to avoid the multiple counting problem.
+ I
Business Investment (I)
money spent by businesses towards capital goods that will raise output
money towards changing business inventory is also included, since they are goods ready to be sold to consumers (but not yet sold)
+ (X-M)
Exports (X)
Imports (M)
Net Exports(X-M)
Exports (X) are domestic products bought by
consumers from other countries
. They are considered
(money added into the economy).
Imports (M) are foreign products bought by
our own consumers
. They are considered
(money lost from the economy).
If there are more exports than imports, then
GDP rises
. More exports means more output is being created to satisfy demand overseas, so more money is earned. Buying imports is simply giving money away to other countries.
Global Market
Adding all expenditures above yields a country's
nominal GDP .
Growth= (Real GDP year 2- Real GDP year 1)/ Real GD year 1
Problems with GDP
Keep in mind that GDP is a tool to help determine a country's economic conditions. It
can't be a true reflection
of a country's quality of life since there are
seven main flaws
associated with it.
#1: Changes in population size
Growing populations usually means more labour to increase GDP, but it doesn't mean that each person works more.
It could be that there is less output per person (ex: 10% rise in pop., but only 2% rise in GDP).

For this reason, GDP per capita was made (GDP per person).
#2: Non-marketed work
Work that has no value measured, such as volunteering, self home renovations, homemaking, charity and more are impossible to include in GDP.
#3: Underground economies
Markets that keep no records of spending (no "paper trails"), such as illegal trades (guns, drugs, animals) and certain industries (to avoid taxes) are also impossible to include in GDP.
#4: Types of goods/services made
Some people believe that spending on some goods (ex: guns) and some services (ex: policing, disaster relief, security) indicates that a country is not improving or well-off. Including them in GDP renders it difficult to measure beneficial changes.
If people were working all the time, a country's standard of living should rise according to GDP. However it's argued that more leisure time (lowering output) means that people are actually better off, and overworking is never great for a person's health.
#5: Leisure time
#6: Environmental issues
Usually expanding production (raising GDP) requires damaging the environment (more deforestation, more air pollutants, higher risk of oil spills, etc.). Increased GDP from this would ignore environmental destruction, and therefore not truly reflect the quality of life.
An economy's Real GDP could had increased substantially, but it could be that one area in the country is doing much of the spending while another barely does. Some places and household will prosper from more production while others will barely benefit. GDP doesn't reflect this uneven spread of wealth
#7: Distribution of income
The concepts resonated even more with my goals...
...rewarding me with insight,
and fun, compelling facts.
I feel I can make more efficient, more wise decisions in the marketplace as a consumer.
I happen to live in Canada, one of the most developed countries in the world.
And GDP figures help to prove it.
According to the CIA World Factbook, Canada`s GDP in 2012....
$ 1, 513, 000, 000, 000 USD
This places us at 14th in the world.
Also Canada`s GDP per capita...
...is at
$43,400 USD.
This places us at
in the world.
When customers purchase hot tubs, water care products or other accessories, they end up accumulating money into the GDP equation (C).
Who knows, maybe people around the world will recognize my uber presitigous hot tubs.
They will be exported from my factory (X), increasing GDP even further.
After a hard day`s work, I would want to play my recently purchased Xbox 360.
However I do recognize problems with GDP where I live.
For example, income is distributed unevenly in Canada (StatsCan, 2011).
Ontario= $ 654, 561, 000, 000
British Columbia= $ 217, 749, 000, 000
Newfoundland and Labrador= $ 33, 624, 000, 000
Nunavut= $ 1, 964, 000, 000
It also does not help that my production of hot tubs will introduce
greenhouse gases and leftover chemicals
into the environment.
My business, and my production facilities are based
only in British Columbia
, and their part of the reason why BC is more affluent

. Only the
workforce in BC
will benefit. People in Newfoundland, Nunavut and other provinces will never reap from my hot tub production.
Despite raising Canada's GDP, my business is jeopardizing the environment...
...ironically diminishing the quality of life.

Usually when more money is invested into production, more workers are hired. We can say that
increased GDP= decreased unemployment
Being employed means that someone has paid work.
They have the ability to afford some of life's dire necessities, and provide stability for themselves and their families.
It happens that purchasing these things benefits others as well: producers
gain more profit
and more
workers will be hired
since demand increased (the
multiplier effect
will occur, where the first spending will cause more spending, actually
increasing GDP more than intended
Measuring employment is a great way in understanding economic conditions.
It's a topic that everyone can relate to, which is why the average person likes to refer to it more than other indicators like GDP.
Usually because the majority of people in the
labour force
do have jobs, it's the
unemployment rate (%)
that is measured.
Labour force
: the total amount of workers in a country that fulfill the following criteria:
to work
for work
work OR has
Despite being a clear, simple statistic, there are
(like other measures) that the rate can't address. These include:
#1: How people
wanting more hours
are not accounted for.
#2: How people that
gave up looking for work
(now no longer considered part of the labour force) are not accounted for.
#3: How people
(have skills, education and experience beyond job description) are not accounted for.
The following should also be noted:
The rate will
always be higher
than determined.
It's considered natural to always have unemployment. This is referred to as
(Ex: Canada's full employment rate= 6-7% unemployment).
Types of
#1: Structural Unemployment: the skills/location of a worker are no longer needed due to changes in demand.
#2: Technological Unemployment: More technology and machinery used by industries replace labourers.
#3: Replacement Unemployment: Workers in one country are replaced by cheaper labourers elsewhere.
#4: Frictional Unemployment: based on people transitioning between jobs or recently completing education.
#5: Cyclical Unemployment: this is due to overall drop in consumer spending (less demand means less labour needed).
#6: Seasonal Unemployment: certain activities decline due to changes in climate.
And one more note...
Okun's Law
: for every 1% unemployment over the natural rate, 2% of potential GDP is lost.

Workers are considered a country's resource (human capital). If a country is not using all of its resources, then the peak GDP will not be reached (a country's production will be below what is possible).
Needed to allow people
choices in switching jobs and new workers to find them
. This makes up natural unemployment (full employment).
However I plan on attending Simon Fraser University to attain a degree and create more
viable opportunities for myself
. These days the job market is
very competitive
; simply obtaining a high school diploma will not guarantee me adequate career.
For this reason I won't be part of the labour force upon graduating.
When I do begin to enter the labour force, I will experience frictional employment.
When I do begin to enter the labour force, I will experience
frictional unemployment
which is a normal process for everyone starting out.
I'm thinking of applying for a
CO-OP program
while completing my degree. This will enhance me with hands-on experience and a chance to establish connections with future employers. Not only will I be
but it will
reduce my frictional unemployment
when I complete my studies.
This summer I will be working part time at Beachcomber Hot Tubs again. During this time, I will be considered part of the labour force.
I should also consider myself to be fortunate. Consider these stats from StatsCan:
National Unemployment Rate: 7.1% [May]
B.C. Unemployment Rate: 6.4% [April]
Youth Unemployment Rate (ages 15-24): 14.3% [April]
It is generally
for young job seekers such as myself to find employment or part-time work. Due to
inexperience and little training/skills
, youth unemployment will always be high.
correlates with GDP according to Okun's Law.
For example, if my business, Jacob's Hot Tubs, were to experience higher demands for its products...
...then I should be expanding production by hiring more workers and affording more machinery (and those companies will be hiring more workers for that).
GDP generally goes up. But if demand goes down for my products, my incentive for hiring more workers goes down...
And they end up getting laid off. With less disposable income for them, less of my investing and more government spending on EI and welfare...
GDP goes down.
Unemployment is never a great thing.
It usually causes the following in a society:
less taxes
more social assistance payments
family tension
civil unrest
less spending
less goods available
political instability
higher interest rates
Just like suppy and demand, GDP and unemployment are in a
positive feedback loop.
I find that both are preventing what is transpiring in some European countries at the moment.
Greece (with an unemployment rate of 27.4%) and Spain (27%) are experiencing a bleak, dooming period.
Spain Unemployment
They are example of nations suffering from perilous unemployment.
When it comes to it, being employed is a matter of survival to many people.
So to avoid recessions and trouble, I will continue to run my business, keeping this lad here employed and churning spending by customers to treat myself and GDP.
This happy employee :)
An economy is like the human body: everything inside needs to work in order for it to stay healthy.
Aggregate Demand
Aggregate Demand (AD):
all goods/services
demanded in a country.
Like the demand of a product, aggregate demand has an
inverse relationship
with the graph. Price levels (weighted for all goods/services) are along the y-axis, but this time the quantity demanded along the x-axis is replaced by
Real GDP (final output, $)
Reason for Inverse Relationship:
Income Effect
: more income means more people will spend more money.
Wealth Effect
: lowering prices allows people to save more, leading to additional spending.
Foreign trade
: if prices for domestic goods lower, foreign countries are then more willing to purchase our goods (raising GDP)
In general, when prices lower, people will purchase more and more goods will be supplied to satisfy demand. GDP would then increase.
changes to the GDP
[C+ G+ I+ (X-M)] will cause a shift in the AD curve, just like demand.
When GDP increases, a
rightward shift
(rising prices) results.
When GDP lowers, a
leftward shift
(falling prices) results.
Where AD intersects the
aggregate supply
curve (all goods/services
in a country) will determine the weighted
equilibrium price
of all goods.
It's important to know that supply curves are
more elastic to the left
more inelastic to the right
GDP's rate of growth would be higher than inflation (since costs for production change little).
Inflation would be higher than the rate of GDP growth (resources can be scarce: less and less will cause high prices until only prices rise (no more potential in GDP increase).
The area in-between is in the full-employment range. This is the ideal area for AD to fall in.
Leftward shifts result in a
(less GDP means lower prices but higher unemployment.)
Rightward shifts result in
economic recoveries and booms
(increasing GDP, employment but inflation occurs).
Monetary and fiscal policies help to lessen the impact of either a recession or high inflation, and these policies are determined from these hypothetical graphs.
For example if a recession happened, then according to the graph GDP is lower than usual.
So the best solution for the government is to increase spending on public projects, increase tax credits and (most exuberant of all) lower taxes.
Everyone would benefit from these changes.
Even my business will rejoice.
I'll be remedied of economic woes that have struck my business during the recession.
These Keynesian policies will not do that, but they will lead me to the road prosperity.
But of course all good things come to an end.
These policies will drive inflation very high. It would threaten price stability.
So high that the government must enact contractionary fiscal policies.
These include:
raising taxes
limiting spending
decreasing tax credits
These measures quell inflation, but everyone despises the idea of reduced wealth. Even my business.
Being a company selling luxury items, my business will definitely be hit hard.
As a frustrated businessman and as a soon-to-be eligible voter, it's my obligation to express discontent by voting for a political party that would reverse these policies, hoping to oust our government for reducing business.
Moral of the story: price stability has been restored, but political stability is sacrificed.
Macroeconomics is convoluted. There is so much more detail into aggregate demand, employment and GDP that this project merely skims what is discussed.
Just like life and just like nature, economies are very dynamic and unpredictable.
Despite the problems associated with economic measures, I have been able to grasp the nature of business and economies better that I did at the beginning of the course.
I feel that microeconomics and macroeconomics have both vindicated ideas I already knew and taught me new ones.
I feel that I have completed my goals for this course.
Thank You!
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