lOMoARcPSD|63 53920
ECON 203 - Lecture notes 4,5,6,7
Introduction to Macroeconomics
(Concordia University)
, lOMoAR cPSD| 6353920
CHAPTER 4
● Try to capture the complex linkages and feedback effect that determine
o The economy’s total output of goods and services
o Expenditures on current output
o Employment & incomes
o Money and financial markets
o Prices and inflation
o Macroeconomic performance
o Monetary and fiscal policies
● Macroeconomic performance: three key indicators of performance
o The rate of growth of real national income
→ (GDP) measured in constant base year prices : quantity of final goods and
services produced by the economy in a specified time period.
Ex. First of the year, 300 billion at the end its 400 billion, we must have constant
base prices.
→ RATE: RealGDPyear2 - RealGDPyear1 / RealGDPyear1 (x100)
Rate of economic growth is the annual percentage change in real GDP
→ Economic growth is defined by an increase in real GDP
o The rate of inflation
→ Inflation is defined as a persistent increase in the general price level.
▪ Price level: Weighted average price of a basket of goods and services
▪ Consumer Price index (CPI) : a measure of the cost of living in any one
year compared to the cost of living in a base year.
→ RATE: annual % change in the price level
= CPI(y2)-CPI(Y1) / CPI(y1)
→ With a very good management fiscal policies, we have a target of 2% more or so.
It does not vary massively.
o The rate of unemployment
→ Employment: number of adults employed full time and part time and self
employed. (15 years old and older)
■ RATE: employment / population (x100)
→ Unemployment: number of adults (15 years old and older) and not working but
actively seeking work.
■ labour force – employment
■ RATE: unemployment / labour force (x100)
■ Unemployment rates vary inversely to GDP growth rates.
■ Recessions cause high unemployment rates.
→ Labour force: Adults employed plus those not employed but actively looking for
work.
→ Participation rate: labour force / population (x100)
4.3 NATIONAL ACCOUNTS
, lOMoAR cPSD| 6353920
● National Accounts: national accounts provide
o Definitions and concepts for measuring GDP
o it involves all households, businesses, and governments that make decisions about
employment, output and expenditures.
o The circular flow diagram : shows the flows of money payments, real resources, and
goods and services between households and businesses.
money payments $$
money receipts $$
money incomes $ $
production costs $ $
4.4 MEASURING GDP
● Measuring GDP: Three measures of nominal GDP
o Nominal GDP is measured using market prices and a specific time period. It is the market
value at current prices of all final goods and services.
o Output-based GDP = sum of value added by all industries.
o Income-based GDP = sum of payments to factors production
o Expenditure-based GDP = sum of expenditures on finals goods and services.
● Output based GDP:
o The sum of all net outputs by industries as measured by value added.
o Value added is the difference between the market value of the output of the business
and the cost of inputs purchases from other businesses.
o Intermediate inputs are inputs purchased from other businesses.
o Net outputs by industry describe the industrial structure of the economy.
2
ECON 203 - Lecture notes 4,5,6,7
Introduction to Macroeconomics
(Concordia University)
, lOMoAR cPSD| 6353920
CHAPTER 4
● Try to capture the complex linkages and feedback effect that determine
o The economy’s total output of goods and services
o Expenditures on current output
o Employment & incomes
o Money and financial markets
o Prices and inflation
o Macroeconomic performance
o Monetary and fiscal policies
● Macroeconomic performance: three key indicators of performance
o The rate of growth of real national income
→ (GDP) measured in constant base year prices : quantity of final goods and
services produced by the economy in a specified time period.
Ex. First of the year, 300 billion at the end its 400 billion, we must have constant
base prices.
→ RATE: RealGDPyear2 - RealGDPyear1 / RealGDPyear1 (x100)
Rate of economic growth is the annual percentage change in real GDP
→ Economic growth is defined by an increase in real GDP
o The rate of inflation
→ Inflation is defined as a persistent increase in the general price level.
▪ Price level: Weighted average price of a basket of goods and services
▪ Consumer Price index (CPI) : a measure of the cost of living in any one
year compared to the cost of living in a base year.
→ RATE: annual % change in the price level
= CPI(y2)-CPI(Y1) / CPI(y1)
→ With a very good management fiscal policies, we have a target of 2% more or so.
It does not vary massively.
o The rate of unemployment
→ Employment: number of adults employed full time and part time and self
employed. (15 years old and older)
■ RATE: employment / population (x100)
→ Unemployment: number of adults (15 years old and older) and not working but
actively seeking work.
■ labour force – employment
■ RATE: unemployment / labour force (x100)
■ Unemployment rates vary inversely to GDP growth rates.
■ Recessions cause high unemployment rates.
→ Labour force: Adults employed plus those not employed but actively looking for
work.
→ Participation rate: labour force / population (x100)
4.3 NATIONAL ACCOUNTS
, lOMoAR cPSD| 6353920
● National Accounts: national accounts provide
o Definitions and concepts for measuring GDP
o it involves all households, businesses, and governments that make decisions about
employment, output and expenditures.
o The circular flow diagram : shows the flows of money payments, real resources, and
goods and services between households and businesses.
money payments $$
money receipts $$
money incomes $ $
production costs $ $
4.4 MEASURING GDP
● Measuring GDP: Three measures of nominal GDP
o Nominal GDP is measured using market prices and a specific time period. It is the market
value at current prices of all final goods and services.
o Output-based GDP = sum of value added by all industries.
o Income-based GDP = sum of payments to factors production
o Expenditure-based GDP = sum of expenditures on finals goods and services.
● Output based GDP:
o The sum of all net outputs by industries as measured by value added.
o Value added is the difference between the market value of the output of the business
and the cost of inputs purchases from other businesses.
o Intermediate inputs are inputs purchased from other businesses.
o Net outputs by industry describe the industrial structure of the economy.
2
