Macroeconomics Test 1: National Accounts, Intro to Economics

Scarcity

The permanent human condition in which wants, needs, and desires, always and forever exceed our means to satisfy them→Constrained maximization

Economic Costs

-all opportunity costs

-not necessarily represented by a dollar amount

Accounting profit

revenue-expenses= profit

Economic profit

revenue-implicit costs-explicit costs= profit

Money Illusion

ex. 5% wage increase, but, expenses increase 10-15% or more, means you’re poorer. inflation is the main proponent

Futurity

people make decisions based on the future whilst they are still in the present. people live in the future

marginal utility

the additional satisfaction of one more unit in consumption

marginal product

the additional output of one more unit of input

marginal cost

the addition cost of one more unit output

marginal revenue

the additional revenue from the sale of one more unit

marginal propensity to consume

the part of an additional dollar in income spent on consumption

marginal propensity to save

the part of an additional dollar in income spent on imported goods and services

marginal propensity to import

the part of an additional dollar in income spent on imported goods and services

marginal tax rate

the part of an additional dollar in income taken in taxes

The consumption function

U=f(x, y)

U→ dependent variable, satisfaction derived from consuming commodity combinations of x and y (independent variables)

f→the taste and preferences of the consumer

Production Function of a Firm

Q=g(K, L, N)

Q→ Output (dependent variable)

K→ Capital plant and equipment

N→ natural resources

g→ technology or ‘know-how’

Change in Demand vs. Change in quantity demanded

-One of the constants in changed, such as preference, price of other goods and services or income changes

-Price changes will result in movements up and down the curve with all else constant

Markets

exist anywhere, where buyers and sellers transact business. equilibrium is matched between the two at the market clearing price. The invisible hand tends to keep the market at equilibrium.

Efficiency

-to measure, must be able to quantify both inputs and outputs.

Economic→ cost per unit is as low as possible

Technological→ occurs when it is not possible to increase the output without increasing inputs

Effectiveness

when outputs and inputs cannot be directly measured, cost effectiveness is utilized.

needs a “second order” solution. look for indicators of output and input where efficiency cannot be calculated.

ex. The criminal justice system. How are its inputs and outputs supposed to be measured to determine success rate?

Elasticity

-measures 1 variable to a 1% change of another variable.

employment

all factors of production are included, can be over, under, fully, or not employed

85% capacity utilization

full employment of capital allowing for downtime and maintenance

Labour Force

-all persons between 15-65

Participation rate

-percentage of the labour force that has or is actively seeking employment

Frictional unemployment

exists when there is a job available for every worker, who wants one, but some will always be between jobs

Seasonal Unemployment

characterizes industries such as farming, fishing, forestry, and skiing

Cyclical Unemployment

follows the business cycle up and down

Structural Unemployment

reflects, among other things, the impact of technological change making existing skills redundant. skill sets of workers do not match needs of employers.

natural rate of unemployment

accounts for frictional, seasonal, structural, and cyclical unemployment. natural rate varies from place to place due to structural and policy factors

Endogenous

- pursuits of profit within the system

-research and development involves tinkering with the existing capital plant and products called ‘development’

Exogenous

-pursuit of knowledge outside of the system

-’knowledge for knowledge sake’

-ex. pure research usually conducted in universities

Stable Equilibrium

-forces such as the invisible hand ensure it is maintained. market forces tend to keep equilibrium and quantity output.

Equilibrium supply exceeds demand

Surplus

Equilibrium demand exceeds supply

Shortage

Unstable Equalibrium

-condition that once achieved does not self-adjust to maintain equilibrium state

Equity

-values play a critical role in economics

-not about wrong/right, but about fairness

ethics/moral sentiments

-economic decisions are often driven by emotion (i.e gut feelings)

Excludability

-public vs. private

-owning and driving a car is private and can easily not include others by usage of lock and key, vs. services that cannot be easily prevented from public access

Externalities

-recognizes that there are costs not represented by market price.

Deductive vs. inductive

1. Reasoning from general to particular, theory comes first.

2. Reasoning from a particular observation to a general theory, theory comes second.

System of National Accounting

-is all based on market prices

3 major economic sectors

1. Primary

2. Secondary

3. Tertiary

Primary economic Sector

-extractive sector.

-includes farming, fishing, forestry and mining, accounting for 5% of Canadian GDP

Secondary economic sector

-manufacturing sector

-accounts for 25% of Canadian GDP

Tertiary Sector

-also called service sector

-accounts for 70% of Canadian GDP

-involves intangibles including financial transactions (i.e fees for wealth management)

Financialization of Western Economies

-GDP increases as fees on trading contribute to intangible goods.

-growth from financial transactions, but secondary manufacturers are necessary to produce what can be bought with the money.

-primary and secondary infrastructure is necessary for tangible outputs from increases caused by the tertiary sector

GDP-Gross Domestic Product

-aggregate total of all final goods and services produced within a country, measured in dollars and cents per unit of time. Considered the best available measure of productive capacity of a Nation-State

-per person, or per capita, is commonly accepted as a primary measure of the overall well-being of a nation-states citizens.

Accounts for FINAL user, example:

Consumer purchases display screen, shows up in numbers

University buys display screen as an input for education, does not show up in numbers (but output of education system does get put toward them)

GDP Standard model Assumptions

1st→ all factors of production are ultimately owned by households including share ownership of all firms

2nd→ only FINAL goods and services are included to avoid double counting. i.e it excludes goods and services firms buy from one-another to use as ‘intermediate’ inputs in their own production processes.

3rd→ assume that the government produces nothing and buys everything from the private sector. everything is privatized.

4th→ ___ must equal Gross domestic Income (GDI): the aggregate earnings of domestic factors of production such as capital, labour, and natural resources. GDP=GDI is an accounting identity.

Gross National Product (GNP)

-aggregate total of all final goods and services consumed within a country measured in dollars and cents.

-essential difference from GDP is imports

Stocks and Flows

-Quantity that exists at a moment in time

-____ is a quantity added to or subtracted from a ____

1. Capital and Investment

2. Wealth and Income

3. Consumption and saving

Capital

K

-refers to the stock of plant, equipment, buildings, inventories of raw material, semi-finished goods, and housing stock.

-investment→ flow, to maintain productive capacity

Depreciation

D

-refers to the decrease in the capital stock resulting from wear and tear

Investment

I

-refers to the flow of new capital where gross investment is the total flow of new capital and net is the flow of new capital less depreciation

=Gross Domestic Product (GDP) - Consumption (C) - Government Spending (G) - Net Exports (NX).

-expenditures by firms for depreciation, new plant and equipment, buildings, and additions to inventories paid out of savings and foreign investment.

Wealth

refers to the stock of all property→ moveable and immovable, tangible and intangible, including financial assets: income if sold off

Income

Y

-refers to the flow of money earned by supplying factors of production

-part will be saved to contribute to wealth

Disposable Income

Yd

-refers to gross income less net taxes

=total taxes - transfers from government to households

Consumption

C

-refers to disposable income spent on final goods and services

-with respect to GDE relevant to households

Savings

S

-refers to disposable income - consumption = addition of wealth

-deferred consumption

-refers to Yd-C used by firms to finance investment

Equality of Gross national income (GNI) and Expenditure (GNE)

-measured in dollars and cents per unit of time

-GDP=GNI=GNE

Open Economy Standard model 4 actors

1. Households

2. Firms

3. Government

4. Rest of the world

Households: GDI

Yi

-refers to total earnings of households for supplying factors of production to firms and other countries including profits and dividends.

Households: Disposable Income

Yd

-refers to Y- Net Taxes (NT= taxes- transfers from government to households)

-gross income-net taxes=

Firms: Revenue

With respect to GDI refers to earnings of firms from sale of goods and services and financial transactions to households, government, and other countries

Net taxes

NT

-with respect to GDI

=Total taxes - Transfer from government to households

Government Expenditures

G

-refers to goods and services purchased from firms, foreign and domestic.

Government expenditures-Balance

NT - G = 0

Government expenditures-Surplus

NT-G > 0

-finances new programs, debt and/or deficit reduction

Government expenditures-Deficit

NT - G < 0

-financed by borrowing

Government- Debt

accumulated deficits - surpluses

Exports

X

-refers to sales of goods and services and financial transactions to other countries.

Imports

M

-from all other countries including goods and services and financial transactions

Net exports

NE = X-M

NE > 0 = Trade surplus

NE < 0= trade deficit

Accounting identity→ GNE (Gross national expenditures) (Ye)

=C + I + G +NE

Consumption + investments + Government expenditures + Net exports

Accounting identity→ GDI (gross domestic income) (Yi)

-household earnings from supplying factors of production to firms including profits and dividends spent on C + S + T

Identity = C+ S+T=Ye=C+I+G+NE

consumption + savings + tax =GNE= Consumption +investment +government expenditures +net exports

GDI identity→ Injections and leakages

I + G + X = S + T + M

Injections

I + G + X

Investment + government expenditures + exports

-expenditure by firms, government and exports

Leakage

S + T + M

Savings + Tax + Imports

-income not spent on domestically produced goods and services including savings, taxes, and imports.

3 ways to measure GDP

1. Expenditure

2. Factor income

3. Value added

GDP Measurement- Expenditure

-Personal→ on consumer goods and services (not including new residential housing part of investment.

-Business→ plant and equipment including new residential, inventories of raw material, semi-finished product, unsold final product.

-Government→ on goods and services excluding transfer payments. includes exports and imports of goods and services. exclusions include intermediate goods and services (to avoid double counting goods & services firms buy from each other as 'intermediate' inputs to their production process), used goods (already counted when new) and financial products.

GDP measurement-Factor Income

-example-revenue Canada

-includes wages, salaries, and supplementary labour income including take-home pay, taxes withheld plus fringe benefits.

-corporate profits including dividends paid and retained or undistributed profits

-Interest and misc. investment income including net interest payments by households, land rent, and imputed rent for owner-occupied housing.

-Farmers’ income and income from non-farm unincorporated businesses

GDP calculation-Value added

-certain expenditures are excluded from GDP

-includes among others intermediate or ‘producer’ goods and services, used or second-hand goods, and financial products

-in the case of intermediate inputs this is done to avoid double counting when firms buy inputs from each other for their production process.

-summing up ____ _____ by each agent that excludes the cost of inputs.

-in the case of used goods, no input is employed, therefore no _____ is _____, no factor income is generated. Their sale is a transfer of ownership not the result of productions,

-Financial products like stocks and bonds are not included because they are Savings (S)

Net Domestic Product

Gross domestic product - depreciation of capital goods

Gross Domestic Product

NDP + depreciation of capital consumption

Why both expenditure and income GDP?

-GDP and GDI are calculated using separate sources

-stats canada collects expenditure using the census and surveys

-income is collected by revenue canada using tax data

-can be checked against one-another

Price Level and Inflation

-dollars and cents are the most useful measure of economic activity

-problems arise with inflation and deflation

ex. if price of a chocolate goes up, you still only get one at the new price. for purposed of GDP, measured in dollars and cents, there has been an increase but there is no corresponding increase in the number of chocolate bars.

-makes seeing if the economy is shrinking, growing or stagnating difficult

Nominal GDP

an assessment of economic production in an economy that includes current prices in its calculation. In other words, it doesn't strip out inflation or the pace of rising prices, which can inflate the growth figure.

Consumer Price Index (CPI)

Measures average level of prices of goods and services purchased by the the typical Canadian Family. It uses a base year to calculate the cost of a ‘typical’ basket of goods and services, and then calculates the cost of the same basket in subsequent years to determine change in price level where:

=current cost of basic/base period cost x 100

-used for cost of living adjustments showing change sin purchasing power of money and allowing measurement of how much income must increase in nominal terms to purchase the same basket of goods in subsequent years.

-technical biases→ substitution, new goods not reflected in base basket, and quality change in goods and services.

Real GDP

to calculate the aggregate price level is calculated.

-this is the average for the prices of all goods and services included→ done using a price index, either CPI or GDP Deflator

GDP Deflator

-measures the average level of prices of all goods and services, and it has advantage over CPI→ changes in consumer patterns or introduction of new goods and services are automatically reflected.

Nominal/Real GDP x 100

-used to measure real growth of the overall economy. nominal grows, and this tool is used to reduce the numbers back down to measure the real increase in the output of an economy.

Measuring of Nation Well-being/Happiness

-how much you are willing to pay is equal to the amount of happiness you believe you will receive from it.

ex. spend 10$ on a DVD, expected to get 10$ worth of utility and happiness from it

Purchasing Power Parity

theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate between two countries should equal the ratio of the two countries’ price level of a fixed basket of goods and services. When a country’s domestic price level in increasing (i.e a country experiences inflation) that country’s exchange rate must be depreciated in order to return to PPP

Problems with GDP Calculation

-intangible things are more difficult to count→ but virtualization is causing substantial growth

-knowledge based/digital economy

-Big data causes growth in numbers although there is technically no currency exchange.