1. of 73 Welcome to Econ 102! 1

2. of 73 Time: Tuesday 11:00 to 2:00pmA101 Thursday 11:00 to 2:00pmA101 Instructor: Alfred Kong Office: Buchanan Tower 627 Office Hours: Thursday 10:00 to 11:00am or by appointment Email: alfred.kong@ubc.ca Course Information 2

3. of 73 Start: Wednesday, 13 th May Tutorials TA: Office: Office Hours: Email: 3

4. of 73 Ragan, Christopher Macroeconomics, 14th Canadian Edition, 2014 Pearson Textbook 4

5. of 73 Connect http://elearning.ubc.ca/connect/ What you can get from the website: - Lecture Slides -Tutorial questions -Sample exams Course Website 5

6. of 73 Midterm 140%(Ch.19,20,21,22,23,24,26) Date:May 29 Time: 11:00-1:00pm Final 60% (Cumulative) Date:TBA * Final is worth 100% if your final score is higher than your midterm Course Evaluation 6

7. of 737 ClassTopicsReading 1 Introduction What Macroeconomics is AboutCh.19 2 The Measurement of National Income A Simple Macro Model Ch.20 Ch.21 3A Simple Macro Model ContinuedCh.22 4 Short Run Equilibrium Long Run Equilibrium Ch.23 Ch.24 5Long Run Economic GrowthCh.26 6Midterm (May 29 11:00-1:00pm) 7Money and BankingCh.27 8Interest Rates and Economic ActivityCh.28 9Canadian Monetary PolicyCh.29 10Government Debt and DeficitsCh.32 11International Trade and Trade PoliciesCh.33 and 34 12Exchange RatesCh.35

8. of 73 You can understand what people are talking about in the news regarding the economy We will discuss the following issues during the semester: 1)What is GDP and why is it so important? 2)What is a recession? 3)What causes unemployment? 4)What causes the price level to fluctuate? 5)What is the government’s role in our economy? 6)What determines Canada’s economic growth? and more…. Course Objectives 8

9. of 73 1)Part time work 2)Chance of get into the grad school 3)Price of TV, computer game, clothing 4)Wealth Why does the economy matter to you? 9

10. of 73 The following graphs show how Canada is doing for the past 30 years in terms of: 1)Production 2)Employment 3)Price Level 4)Interest Rates 5)Foreign exchange and trade Welcome to Canada! 10

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20. of 73 Chapter 19 What Macroeconomics Is All About 20

21. of 73 In this chapter you will learn… 1. …the meaning and importance of the key macroeconomic variables, including national income, unemployment, inflation, interest rates, exchange rates, and trade flows. 2. …that most macroeconomic issues are about either long- run trends or short-run fluctuations, and that government policy is relevant for both. 21

22. of 73 Output and Income This gives nominal national income or nominal gross domestic product (GDP). With base-period prices, we get real national income or real GDP. The production of output generates income. To measure total output in dollars, we add up the values of the many different goods produced. 19.1 Key Macroeconomic Variables 22

23. of 7323 GDP Deflator is another measure of inflation (like CPI).

24. of 73 Real GDP (our production) fluctuates around a rising trend: - the trend shows long-run economic growth - the short-run fluctuations show the business cycle 24

25. of 73 Trough Recession Recovery Peak Potential GDP Time Recessionary Gap Inflationary Gap Peak Actual GDP Real GDP 25 Potential output is what the economy could produce if all resources were employed at their normal levels of utilization - often called full-employment output

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27. of 73 Question Total national income measured in current dollars is known as ________. 1A) net national income 2B) nominal national income 3C) real national income 4D) constant dollar national income 27

28. of 73 Question Fluctuations of national income around its trend value that follow a more or less wavelike pattern is referred to as the ________. 1A) output gap 2B) business cycle 3C) exchange rate 4D) recessionary gap 28

29. of 73 Question Real GDP is ________. 1A) GDP valued at current prices 2B) GDP valued at base-year prices 3C) a measure of inflation 4D) nominal GDP 29

30. of 73 Employment, Unemployment, and the Labour Force Employment: the number of workers (15+) who hold jobs. Unemployment: the number who are not employed but are actively looking for one. Labour force: the total number of employed + unemployed. 30

31. of 73 Unemployment Rate = Number of people unemployed Number of people in the labour force X 100 frictional unemployment Some unemployment is inevitable: structural unemployment 31 Unemployment rate: the number of unemployed expressed as a percentage of the labour force.

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33. of 73 The unemployment rate when the economy is producing the full employment output is called: - the natural rate of unemployment,or NAIRU What is the NAIRU? - some estimates suggest that it is now below 7% Why Does Unemployment Matter? Some unemployment is desirable, as it reflects the time required for workers and firms to “find” each other so that good matches are made. But some unemployment is associated with human hardship, especially for those individuals with skills that are not in high demand by firms. 33

34. of 73 Question Equal increases in the number of employed and the number in the labour force ________. 1A) will increase the unemployment rate 2B) will decrease the unemployment rate 3C) is not possible 4D) have no impact on the unemployment rate 34

35. of 73 Productivity Productivity: a measure of output per unit of input - often measured as GDP per worker - or GDP per hour of work Increases in productivity are probably the single largest determinant of long-run increases in material living standards. 35

36. of 73 Real GDP per worker is measured in thousands of dollars! 36

37. of 73 Question The level of real GDP divided by the level of employment refers to ________. 1A) seasonal employment 2B) labour productivity 3C) the output gap 4D) frictional unemployment 37

38. of 73 Inflation and the Price Level Price level: the average level of all prices in the economy. Inflation: the rate at which the price level is changing. The CPI is based on the price of a typical “consumption basket”, relative to the price in some base year: 38

39. of 73 Why Inflation Matters? The purchasing power of money is negatively related to the price level. Also, because it is hard to forecast accurately, inflation adds to the uncertainties of economic life. 39 Suppose you put some money in the bank now, and the bank will pay you 10% return a year from now. What is the actual return of your savings?

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41. of 73 Question A rise in the average level of prices (the price level) is known as ________. 1A) deflation 2B) appreciation 3C) depreciation 4D) inflation 41

42. of 73 Interest Rates The interest rate is the price of “credit”, and the flow of credit is crucial to firms and households in a modern economy. The burden of borrowing depends on the real interest rate. Nominal interest rate: the rate expressed in money terms. Real interest rate: the rate expressed in terms of purchasing power. 42 Suppose you put some money in the bank now, and the bank will pay you 10% return a year from now. What is the actual return of your savings if the inflation rate will be 10%?

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44. of 73 The International Economy Exchange rate: the number of Canadian dollars required to purchase one unit of foreign currency. A depreciation of the Canadian dollar means that it is worth less on the foreign-exchange market  a rise in the exchange rate Foreign exchange: foreign currencies or claims on foreign currencies. 44

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46. of 73 The balance of payments accounts record all payments made in international transactions — goods, services, and assets. - trade balance or net exports - current account balance = trade balance + net factor income + net transfer payments - capital account balance For Canada, exports and imports are both very large — roughly 35% of GDP — but the trade balance is usually small. 46

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48. of 73 19.2 Growth Versus Fluctuations Long-Term Economic Growth Long-term growth is considerably more important for a society’s living standards from decade to decade than short- term fluctuations. There is considerable debate regarding the ability of government to influence the economy’s long-run growth rate. 48

49. of 73 Short-term fluctuations are often called business cycles. Economists debate the effectiveness of monetary and fiscal policy in influencing these fluctuations. Short-Term Fluctuations 49 Trough Recession Recovery Peak Potential GDP Time Recessionary Gap Inflationary Gap Peak Actual GDP Real GDP

50. of 73 Question Broad macroeconomic policies have a role to play in both _______ trends and _______ fluctuations. 1A) short-run; long-run 2B) long-run; short-run 3C) short-run; short-run 4D) long-run; long-run 50

51. of 73 To organize our thinking about macroeconomics, we must develop some tools. These will include: discussing measurement of national income (Ch.20) building a simple model of the economy (Ch.21) modifying the model to make it more realistic (Ch.22) using our model to analyze some relevant economic issues What Lies Ahead? 51

52. of 73 Chapter 20 The Measurement of National Income 52

53. of 7353 In this chapter you will learn... 2. …the difference between GDP and GNP 1. …the income approach and the expenditure approach to measuring national income. 3. …about the many important omissions from official measures of GDP. 4. …why real per capita GDP is a good measure of average material living standards but an incomplete measure of overall well-being.

54. of 73 20.2 National Income Accounting: The Basics total expenditures on domestic output total income generated by domestic production Two methods for measuring national income (output): Because of the circular flow of income, these two measures yield the same total — GDP. 54

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56. of 73 GDP from the Expenditure Side Actual consumption expenditure (C a ) includes expenditure on all final goods during the year. Consider adding up the expenditures needed to purchase the final output produced in any given year. There are four broad expenditure categories: - consumption - investment - government purchases - net exports 56

57. of 73 Actual investment expenditure (I a ) is expenditure on the production of goods not for present consumption, including: Actual government purchases (G a ) is the purchase of currently produced goods and services by government - excluding transfer payments. inventories plant and equipment residential housing 57

58. of 73 Actual net exports (NX a ) is the difference between exports and imports: NX a = (X a - IM a ) Exports are purchases of Canadian-produced goods and services by foreigners. We subtract imports because they are not produced in Canada. Since total domestic output must equal total expenditure on domestic output, we have: GDP = C a + I a + G a + NX a 58

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60. of 73 Question Goods that are not used as inputs by other firms are known as ________. 1A) exports 2B) intermediate goods 3C) final goods 4D) value-added goods 60

61. of 73 Question In calculating GDP from the expenditure side, inventories are part of ________. 1A) consumption 2B) investment 3C) imports 4D) exports 61

62. of 73 GDP from the Income Side GDP is also the sum of factor incomes and other claims on the value of output. Factor incomes include: - wages - rent, interest, and profits Non-factor payments include: - indirect taxes (net of subsidies) - depreciation of existing physical capital net domestic income 62

63. of 73 GDP from the income side is therefore equal to: GDP = Net domestic income + Indirect taxes (less subsidies) + Depreciation 63

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65. of 73 Question The largest component of income-based GDP is ________. 1A) wages and salaries 2B) business income 3C) indirect taxes 4D) depreciation 65

66. of 7366 A measure of national output closely related to GDP is Gross National Product (GNP). The difference between GDP and GNP is the difference between income produced and income received. GDP and GNP 20.3 National Income Accounting: Some Further Issues

67. of 7367 GDP is superior as a measure of domestic economic activity. GNP is superior as a measure of living standards of residents. A more “refined” measure is disposable personal income: It equals GNP minus: - any part not actually paid to households - personal income taxes - plus transfer payments received by households

68. of 7368 2011 Nominal GDP 15,075,675 7,298,147 5,866,540 3,607,364 2,778,085 2,431,310 2,198,732 2,492,907 1,826,811 1,738,954

69. of 7369 GDP per Capita

70. of 73 Question Gross national product (GNP) is ________. 1A) the value of output produced in Canada 2B) the value of total incomes received by domestic residents 3C) exports less imports 4D) exports plus imports 70

71. of 7371 Omissions from GDP National income accountants cannot measure economic activity that takes place outside of regular, legal markets: illegal activities leisure the underground economy home production economic “bads”

72. of 73 Question The fact that illegal activities, the underground economy, non- market activities, and economic “bads” are omitted from GDP makes it an incomplete measure of overall _______. 1A) factor incomes in organized markets 2B) final goods and services in organized markets 3C) economic activity in organized markets 4D) well-being 72

73. of 73 Question Given what GDP does not include, as a single overall economic indicator of a country’s performance, it is _______. 1A) of little use 2B) the most useful 3C) not relevant 4D) the only choice 73