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Macroeconomic Policies API 5125 Fall 2010

Macroeconomic Policies API 5125 Fall 2010. Power Point presentation Brian VanBlarcom (Acadia University) and André Downs (PRI). Content. Some insights on economic indicators Comparing Canada , US, EC, Japan and China Agregate output, unemployment and inflation. Introduction.

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Macroeconomic Policies API 5125 Fall 2010

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  1. MacroeconomicPoliciesAPI 5125Fall 2010 Power Point presentation Brian VanBlarcom (Acadia University) and André Downs (PRI)

  2. Content • Some insights on economicindicators • Comparing Canada , US, EC, Japan and China • Agregate output, unemployment and inflation

  3. Introduction Three Measures of Macroeconomic analysis: • Output • Unemployment rate • Inflation rate

  4. Canada and The United States Question for discussion: How do they compare?

  5. Growth, Unemployment, andInflation in Canada, 1962-2009 What do we observe?

  6. The Unemployment Rate in Canada, 1950-2008 What do we observe?

  7. Canadian Government Balances as a Percent of Output What do we observe?

  8. Growth, Unemployment, andInflation in United States, 1962-2009 What do we observe?

  9. The U.S. Fiscal Policy 1998-2008 Should Canadians Worry about the US Federal Budget Deficit?

  10. The European Union The Euro Area • As of 2009, “the euro” is the common currency of sixteen countries: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal Slovakia, Slovenia , and Spain

  11. The European Union What do we observe?

  12. Growth, Unemployment, andInflation in the Euro Area, 2003-2009 What do we observe?

  13. European Unemployment • In the past decade, much focus has been on the high European unemployment rate. • Many argue that the euro area labour markets are “too rigid” (that the unemployment rate is too high/workers are unemployed too long/minimum wages too high). • Others argue that such characteristics are elements of a “just society.”

  14. Unemployment Rates inEurope and North America, 2000-2007 What do we observe?

  15. Unemployment Rates in Europe and North America • Figure 7-1 suggests the Canadian labour market falls somewhere between the euro area and that in the United States/United Kingdom.

  16. Japan and China 2004

  17. Real Output per Capita in Japan and China, 1952-2004 (in constant US$)

  18. Annual Growth Rates in Output Per Capita in China and Japan, 1953-2004

  19. Japan and China Rapid Growth in China • China’s growth took off after 1972. • Some of China’s growth has come form exports – particularly manufactured goods. • Growth in China has been rapid as it has accumulated capital, roads, factories, other infrastructure and technology.

  20. Japan and China Slow Growth in Japan • Figure 1-9 shows Japan’s slow growth 1994-2004. • Such a long period of slow growth is unprecedented on a modern economy after World War II.

  21. Looking Ahead: Other Regions • India, with a large population and increasingly productive workforce, has grown rapidly in much of the last decade. • Uneven performance of Latin American countries. Some, like Chile, appear in good shape, Argentina has experienced problems.

  22. Looking Ahead: Other Regions • Shift to market economy in Central and Eastern Europe in the 1990’s, brought sharp decline initially, and only some have grown from pre-transitional levels. • Many countries in Africa have suffered decades of economic stagnation but some are now starting to grow

  23. Chapter Topics • Aggregate Output • The Unemployment Rate and • Inflation rate

  24. Aggregate Output Aggregate Output (national income and expenditure accounts) • Gross Domestic Product (GDP) • The value of the final goods and services produced in an economy during a given period

  25. Aggregate Output Defining GDP: Three Approaches 1) Final goods and services 2) Value added 3) Income

  26. Firm 1: Steel Company Revenues from sales $100 Expenses (wages) $80 Profit $20 Firm 2: Car Company Revenues from sales $210 Expenses $170 Wages $70 Steel purchases $100 Profit $40 Aggregate Output GDP: 1) The final goods approach What is GDP? $310 or $210

  27. Aggregate Output Defining GDP • Answer: $210 • If both firms are summed ($100 + $210) the $100 in steel is counted twice • Counting only the final good (cars) includes the intermediategood (steel)

  28. Value added = value of production - value of intermediate goods Aggregate Output Defining GDP: Three Approaches 2) Value Added Approach

  29. Aggregate Output Two Firm Example • Steel • No intermediate goods • Value added = $100

  30. Aggregate Output Two Firm Example • Cars • Intermediate goods (steel) = $100 • Value added = $210 - $100 = $110

  31. Aggregate Output Two Firm Example

  32. Aggregate Output • Defining GDP

  33. Aggregate Output • Defining GDP • Approach 1 & 2 define GDP from the production side • Approach 3 defines GDP from the income side

  34. Aggregate Output Consider • Revenues after payment for intermediate goods • Some pay indirect taxes (sales taxes) • Some pay workers (labour income) • Remainder to the firm (capital income)

  35. = GDP (income) indirect taxes + labour income + income Aggregate Output Defining GDP • GDP from the income side capital

  36. Firm 1: Steel Company Revenues from sales $100 Expenses (wages) $80 Profit (capital income) $20 Firm 2: Car Company Revenues from sales $210 Expenses $170 Wages $70 Steel purchases $100 Profit (capital income) $40 Aggregate Output GDP: Income Approach

  37. Income (steel) Labour = $80 Capital = $20 $100 Income (car) Labour = $70 Capital = $40 $110 Aggregate Output Compared to:

  38. The Composition of Canadian GDP by Type of Income, 1961 and 2007

  39. Aggregate Output Defining GDP – A Summary • Output Approach = Income Approach • Final goods & value added = sum of indirect taxes + labour income + capital income

  40. Aggregate Output Nominal & Real GDP • Recall • GDP = the value of final goods and services produced • Value is the price of the final good

  41. Aggregate Output Nominal & Real GDP • Therefore, • GDP = Price x Quantity of final goods produced

  42. Aggregate Output Questions for Discussion • If price increases and quantity remains constant, what happens to the value of final output?

  43. Aggregate Output Observation • Higher prices bias the GDP measurement of production upward over time

  44. Year Quantity of Cars Price of Cars Nominal GDP 1991 10 $10,000 $100,000 1992 12 $12,000 $144,000 1993 13 $13,000 $169,000 Aggregate Output • Nominal & Real GDP (correcting for inflation) • One good economy

  45. Year Quantity of Cars Price of Cars Nominal GDP(% increase) 1991 10 $10,000 $100,000 (--) 1992 12 $12,000 $144,000 (44%) 1993 13 $13,000 $169,000 (17.4%) Aggregate Output • Nominal & Real GDP (correcting for inflation) • One good economy

  46. Did the real output of cars increase 44% from 1991 to 1992? Question Aggregate Output Nominal GDP = Pcars x Qcars

  47. Aggregate Output Calculating Real GDP • Real GDP = value of final goods in constant prices

  48. Aggregate Output Real GDP in Units • 1991 -- 10 • 1992 -- 12 (20% increase) • 1993 -- 13 (8% increase) Production of cars

  49. Aggregate Output Real GDP in 1992 $s • 1991 -- 10 x $12,000 = $120,000 • 1992 -- 12 x $12,000 = $144,000 (20% increase) • 1993 -- 13 x $12,000 = $156,000 (8% increase) Car Production x 1992 Prices Note: Nominal 1992 GDP = Real 1992 GDP

  50. Aggregate Output Calculating Real GDP in Practice • Accounting for all final goods • Weighted average of the output of final goods • Relative prices serve as weights • Must consider the change in relative prices • Canadian Real GDP is Real GDP in chained (2002) dollars

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