MACROECONOMICS BY CURTIS, IRVINE, AND BEGG SECOND CANADIAN EDITION MCGRAW-HILL RYERSON, © 2010 Chapter 4 Measuring National Economic Activity and Performance 1

Learning Outcomes ©2010 McGraw-Hill Ryerson Ltd. Chapter 4 2 This chapter explains: Three main indicators of macroeconomic activity and performance Canadian economic performance National accounting measures of the economy Nominal and real GDP and the GDP deflator Per capita real GDP

Macroeconomics ©2010 McGraw-Hill Ryerson Ltd. Chapter 4 3 Macroeconomics studies: The national economy as a system in terms of: The economy’s output of goods & services Employment & incomes Expenditures on current output Prices and inflation Money & financial markets Macroeconomic performance & policies.

Indicators of Macroeconomic Activity Output, Incomes Real gross domestic product (real GDP) measures  Quantity of final goods & services produced in the economy in a specific time period  The real incomes generated in producing those goods & services ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.1 4

Rate of growth of real GDP In 2005, real GDP was $1248 billion In 2006, real GDP was $1282 billion 5 Indicators of Macroeconomic Activity

The Price Level  Weighted average price of a basket of goods & services  Consumer Price Index (CPI) The Inflation Rate: Annual % Change in the Price Level ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.1 6

Recent Inflation in Canada In 2006, CPI at In 2007, CPI at Indicators of Macroeconomic Activity 7

Use of indexes CPI expressed as index Index is value relative to base year 2009, unemployment = 10% 2010, unemployment = 9% Index of unemployment in 2010 relative to 2009 Indicators of Macroeconomic Activity 8

Labour Force, Employment & Unemployment Canada, Sept 2008 (000 persons): 1. Non-Institutional pop 15+ yrs27, Labour force18, Employment17, Unemployment [(2 – 3)] 1, Participation rate [(2)/(1)]x % 4. Employment rate [(3)/(1)]x % 5. Unemployment rate [(4)/(2)]x % ©2010 McGraw-Hill Ryerson Ltd. Chapter 4.1 9

Canadian Economic Performance Real GDP ©2010 McGraw-Hill Ryerson Ltd. Chapter Note: The strong growth trend over the period of The recessions in the early 1980s & 1990s, late 2008 Recession Real GDP

Canadian Economic Performance Annual Rates of growth in Real GDP ©2010 McGraw-Hill Ryerson Ltd. Chapter Recession Growth rates fluctuate from year to year Negative growth rates mark recessions

Canadian Economic Performance Annual Inflation Rate in Canada ©2010 McGraw-Hill Ryerson Ltd. Chapter Strong rise in the inflation rate in the in 1970s Drop in inflation in recession of early 1980’s Further drop in inflation in recession of early 1990’s

Canadian Economic Performance Annual Unemployment Rates in Canada ©2010 McGraw-Hill Ryerson Ltd. Chapter Changes in GDP growth rates  changes in unemployment rates High unemployment rates reflect 1983 and 1993 recessions

National Accounts Measures of Economic Activity ©2010 McGraw-Hill Ryerson Ltd. Chapter National Accounts provide: A set of definitions and concepts for use in measuring GDP A framework for an aggregate demand (AD) and supply (AS) model of the economy

National Accounts Measures of Economic Activity ©2010 McGraw-Hill Ryerson Ltd. Chapter Three ways to define GDP: Income-based  Sum of all income earned in the economy Expenditure-based  Sum of all expenditures in the economy Value-added  Sum of the value-added at each stage or production across all industries

National Accounts Measures of Economic Activity The Circular Flow Diagram Expenditure on goods & services HouseholdsBusinesses Output of goods & services Factor inputs to business Factor incomes paid households Production costs $$ Money incomes $$ Money payments $$ Money receipts$$ 16

The Expenditure-Based GDP Expenditure based GDP = Consumption expenditure (C) by households, plus Investment expenditure (I) by business on buildings, machinery, & inventories, plus (note: new residential home sales also included) Government expenditure (G) on currently produced final goods & services, plus ( Transfer payments are not included in GDP ) Exports (X) - Imports (Z) = Net Exports (NX) ©2010 McGraw-Hill Ryerson Ltd. Chapter

The Income-Based GDP ©2010 McGraw-Hill Ryerson Ltd. Chapter Net Domestic Income (NDI) = Employment Income (W): the sum of all wages, salaries, & benefits paid to labour, plus Profits & business Income is the sum of corporate profit & small business income, plus Interest & investment income is income earned from financial sources Business and investment income (BI) is the sum of profit, interest, investment, & business income NDI = W + BI

The Income-Based GDP Income based GDP = Net Domestic Income NDI = W + BI, plus Capital Consumption Allowance (CCA) to cover the depreciation of capital stock = GDP at basic price = NDI + CCA, plus Net indirect Tax (T IN ) = sales + excise taxes – subsidies GDP at market price = NDI + CCA + T IN ©2010 McGraw-Hill Ryerson Ltd. Chapter

Canadian National Accounts, 2008 (bil $, current prices) ©2010 McGraw-Hill Ryerson Ltd. Chapter GDP at market prices = $ billion Net foreign income = -$14.7 billion GNP = GNI = $ billion

Nominal & Real GDP & the GDP Deflator ©2010 McGraw-Hill Ryerson Ltd. Chapter Nominal GDP ≡ output & incomes of a given year measured with current market prices of goods & services. Real GDP, or GDP in constant dollars ≡ output & incomes of given year measured with base year prices of goods & services. Changes in nominal GDP = Changes in prices & quantities Real GDP = Nominal GDP is adjusted by GDP deflator. Changes in real GDP = Changes in quantities

Nominal & Real GDP & the GDP Deflator The GDP deflator of a given year = (Nominal GDP/Real GDP) x 100. The GDP deflator index differs from the consumer price index (CPI). The CPI is based on “representative baskets” of goods & services that consumers buy, while GDP deflator covers all the goods & services included in GDP. GDP deflator deflates the dollar value of current output to what it would have been in base year’s prices. ©2010 McGraw-Hill Ryerson Ltd. Chapter

Nominal & Real GDP & the GDP Deflator ©2010 McGraw-Hill Ryerson Ltd. Chapter Between 1990 – 2008, nominal GDP increased by 200% Between , real GDP increased by 56.9%. Between , GDP deflator increased by 91.2%.

The GDP Deflator (P) Nominal GDP = W + BI + CCA + T IN Real GDP = Y = C + I + G + X - Z Nominal GDP = P x Y = P x (C + I + G + X – Z) P x Y = W + BI + CCA + T IN ©2010 McGraw-Hill Ryerson Ltd. Chapter P= ∑ (Unit labour-cost, Unit gross business income,Unit net indirect tax)

Using the GDP Deflator ©2010 McGraw-Hill Ryerson Ltd. Chapter Canadian Nominal & Real GDP

Per Capita GDP Per Capita real GDP : an indicator of standard of living. ©2010 McGraw-Hill Ryerson Ltd. Chapter

Per Capita Real GDP in Canada, ©2010 McGraw-Hill Ryerson Ltd. Chapter Per capita GDP in Canada ↑ by 50% between 1980 & ↑ has not been smooth & stable Per capita GDP ↓ in recessions

Limitations of GDP ©2010 McGraw-Hill Ryerson Ltd. Chapter Some production causes pollution & other externalities Unreported income & output Non-marketed goods & services Composition of output affects standard of living  (military production vs health care) Income distribution

Top Twelve Countries Based on the 2005 Human Development Index ©2010 McGraw-Hill Ryerson Ltd. Chapter High GDP may not necessarily be a good measure of economic well-being. Human Development Index (HDI) provides a broader measure of country’s wellbeing and progress

Chapter Summary ©2010 McGraw-Hill Ryerson Ltd. Chapter 4 30 Macroeconomics Macroeconomics studies the whole national economy as a system Real Gross Domestic Productinflation ratesunemployment rates Real Gross Domestic Product, prices, inflation rates & unemployment rates are indicators of macroeconomic performance Circular flow shows macroeconomic linkages national accounts The national accounts provide a framework for the measurements of national output & income Nominal GDP Nominal GDP measures the output of final goods & services at market prices in the economy

Chapter Summary ©2010 McGraw-Hill Ryerson Ltd. Chapter 4 31 Real GDP Real GDP measures the country’s output of final goods & services GDP deflator The GDP deflator is a measure of the price level Fluctuations in the growth rate of real GDP, in inflation rates, and in unemployment rates are important aspects of recent economic performance in Canada per capita real GDP Real GDP and per capita real GDP are crude measures of national and individual welfare