Macroeconomics Intro to GDP

Macro The study of the economy as a whole. All the markets, consumers, workers, and firms together create the ‘big picture.’

What we focus on: Focus on: Output, Employment, and Price Stability.

Why We Study: To learn about: government’s tax policies how effective their economic policies are to compare our economy with other economies to see the impact of some industries on the economy as a whole to know what investment decisions to make so unions can negotiate fairly.

What We Study - GDP Gross Domestic Product - the total market value of all final goods and services produced within a country in 1 year.

Per Capita GDP GDP can be stated as GDP per capita (per person) - total GDP is divided by the resident population on a given date.

2 Approaches to GDP Expenditure Approach: Add up the total that is spend on all final goods and services in 1 year. Income Approach: Add up all the income that is earned by the different factors of production (wages, rent, interest, profit). Both approaches should equal the same. Money spent = income earned.

How We Calculate: GDP = C + G + I + (X-M) Or GDP = consumption + government purchases + investment + (exports - imports)

Consumption What households spend on goods and services. Durable goods: stuff that lasts a long time (cars, houses est.) Semi-durable goods: stuff that lasts a reasonable amount of time (clothing) Non-durable goods: stuff that is consumed right away (food) Services: haircuts, car maintance, eating out, est.

REAL GDP Results from removing the effect of price increases from the nominal (current-dollar) GDP This means: if prices increase fast the growth of GDP may not actually reflect what has been bought or sold by that given economy! Increased output does not exist

Change in GDP (real GDP year 2 - Real GDP = real GDP year 1) Growth Rate ------------------------- x 100 real GDP year 1

Therefore: If Canada’s GDP for year 1 was 900 billion and year 2 was 999 billion the calculation would be: 999 - 900 ------------ x 100 = 11% growth 900

Supply and Demand When we combine all the markets for individual goods and services in society, we are looking at aggregate or total of the entire economy.

Aggregate Demand AD - The total demand for all goods and services produced for society. As price levels rise, the total real output falls. For real economic growth to occur the GDP must grow

Understanding Economic Growth AGGREGATE SUPPLY Assume to add up all the producer supply for goods and services at various price levels for an economy to get a Total or Aggregate Supply for those goods and service produced in a society.   AS Price Level Real GDP Supplied

AGGREGATE SUPPLY   When unemployment is high there is too little competition among labour. Therefore wages and costs of production stay mostly unaffected. AS Price Level Full-employment Output Real GDP Supplied

AGGREGATE SUPPLY   AS As output increases limited factors of production such as Land, Labour and Capital become more scarce. This pushes the costs of production up and therefore the prices of goods and services produced. Price Level Full-employment Output Real GDP Supplied

AGGREGATE SUPPLY Eventually the economy will run out of resources altogether. Producers in an attempt to gain access to more resources would “bid up” the value of inputs This would make the Aggregate Supply perfectly Inelastic This would be equal to producing on the Production Possibility Curve where it is not possible to produce more without improvements to technology or discovery of new resources of Land, Labour or Capital   AS Price Level Maximum Capacity Output Full-employment Output Real GDP Supplied

Inelasticity This is achieved as prices and resources are being maxed out the curve goes perfectly vertical. An economy producing at that level is producing at a point that it cannot physically produce more without improvements in technology or new physical outputs.

Equilibrium Output and Price Level The point at which AD and AS meet is the equilibrium level of price and output. This is also known as full employment.

EQUALIBRIUM OUTPUT AD3 AD1 AS AD2 FE Recessionary Gap Inflationary Gap   AD3 AD1 AS AD2 Price Level Full employment equilibrium occurs when the aggregate demand (AD1) Intersects aggregate supply (AS) at full employment output (FE). If aggregate demand (AD2) intersects below full employment output a recessionary gap exists with low employment levels low output levels and low inflation. If aggregate demand (AD3) intersects above full employment output an inflationary gap exists with high employment levels, higher output levels and higher inflation. Recessionary Gap Inflationary Gap FE Real GDP Supplied

Absolute Capacity At some point, the economy will produce at its max and will become vertical. Full employment is where levels begin to rise more rapid. Recessionary Gap - Below full employment when the AD and AS intersect Inflationary Gap - When the AD and AS intersect to the right of full employment Recessionary gap - high unemployment, low inflation, low GDP Growth Inflationary gap - high inflation, high employment levels, high levels of GDP growth

AD Changes INCREASE IN AD DECREASE IN AD Increase in Consumption Decrees in taxes Decrease in savings decrease in import spending Increase in investment Increase in government spending Increase in exports DECREASE IN AD Decrease in consumption Increase in taxes Increase in savings Increase in import spending Decrease in investment Decrease in government spending Decrease in exports

AS Changes AS INCREASE AS DECREASE Price decrease of land, labour or capital Improvement in technology AS DECREASE Price increase for land, labour or capital New resources, more capital goods are made available or the workforce grows