ECO 100Y

Introduction to
Economics
Topic 12: The National Accounts
and Other Macro Concepts
Source: LR12, LR11 and LR10, Chapter 19
(exclude international economy until later in the course)
and Chapter 20. The derivation in class is not the same
as in the text, but the end results are the same!
 
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Micro vs. Macro:

A Reminder!
 Microeconomics - the study of the choice problems
faced by the 2 key economic agents: households and
firms
 Microeconomics, for instance, examines how the equilibrium
price and quantity for a particular commodity is determined
 Macroeconomics - the study of the economy as a
whole, “in the aggregate”
 Macroeconomics , for instance, examines how the general
level of prices and the total quantity produced are
determined (not the P and Q of any particular commodity)

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Recall the Circular Flow Diagram

FACTOR
Labour, land MARKETS Labour, land
& capital & capital

Wages, rent &

interest

HOUSEHOLDS
FIRMS
Expenditures
on goods &
services

Goods &
services GOODS
MARKETS Goods &
services

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Key Macroeconomic Variables

 Aggregate output (GDP)
 Rate of inflation
 Rate of unemployment
 Interest rate
 Balance of payments
 Exchange rate

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Economic Policy Levers
 Fiscal policy - changes in the level of government expenditures
on goods and services and in the level of taxes the government
collects and the transfer payments it makes
 Spending: direct influence on demand for commodities
 (Income) Taxation and Transfers: direct influence on
household incomes

 Monetary policy - changes in the stock of money

 Affects the rate of interest (in the short run)
 In turn, influences business investment and household
consumption (of expensive goods in particular)

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Building the National Accounts:

GDP and GDE
 We know the following about a single firm:
 Profits = Total Revenues – Total Costs
 Profits (assume firm is an incorporated enterprise) can be:
 Paid to shareholders: Dividends
 Paid to government: Corporate Profits Tax
 Not paid out: Retained Earnings
 Revenues are derived from sales
 To households
 To other firms
 To government

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Building the National Accounts:
GDP and GDE (Cont’d)
 Total costs relate to the inputs
 Labour: wages
 Land: rents
 Financial: interest
 Use of physical capital: depreciation
 Imposed / provided by gov’t: indirect taxes - subsidies
 Purchases from other firms:
 “Consumables” (i.e., non-capital goods or services)

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Building the National Accounts:

GDP and GDE (see class handout)
 Consider one firm’s Profit and Loss Statement
 Assume economy consists of many identical firms
 Sum all firms Profit and Loss Statements
 Get “aggregate P & L” for economy as a whole
 Delete inter-firm transactions for “consumables”
 Get “aggregate Production Statement”
 Reorganize items and rename some to get National Accounts
 Gross Domestic Product (GDP)
 Gross Domestic Expenditure (GDE)
 Other national aggregates

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The Concepts of “Value Added” and
“Final” Goods and Services
 Value added is the Sales
Revenue
Purchase
from
Value
Added
contribution of each firm to ($) other ($)
production (GDP) firms ($)

 Excludes goods and services Wheat 10 -- 10

provided by other firms
 Final goods and services Flour 25 10 15
are commodities purchased Bread 50 25 25
by households
Total 85 35 50
 Intermediate sales are firm-
to-firm transactions
 Excluded from final goods and
services

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Some Attributes of
National Income Accounting
 Current Output – GDP includes only the value of output
currently produced
 For instance, GDP includes the value of currently produced
cars but not the sales of used cars
 Market Prices – GDP values goods at market prices
 Note that the market price of a good includes indirect taxes
such as sales taxes
 (Mostly) Market Driven – In general, only the value of goods
and services exchanged in the market are included
 Except illegal transaction (e.g., drugs)
 Imputations added (e.g., the imputed rent to owners’
occupied houses)

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GDP vs. GNP
 Gross Domestic Product (GDP) measures
production within Canada using both Canadian and
non-resident factors of production
 Gross National Product (GNP) measures production
within and outside Canada using only Canadian factors
of production
 GDP is the “traditional” measure of national output
used in most countries today

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Nominal vs. Real GDP

 Nominal GDP measures the value of output in dollar terms at
the prices prevailing in the period the output is produced
 Changes in nominal GDP could be the result of higher
prices, greater physical output, or a combination of both
 Real GDP measures the output at the prices of some base year
 A change in real GDP is exclusively the result of a change in
physical output
 Determining real from nominal requires a Price Index
 Real GDP tends to follow an increasing path over time
 In the short-run, however, real GDP fluctuates up and down
during the business cycle

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Rate of Inflation and
A Price Index
 The inflation rate is the percentage rate of increase in the level
of prices during a given period “t”
 Inflation Rate = [Pt − Pt−1] / [Pt−1] x 100
 To measure the average price level, we can calculate, for
example, the Consumer Price Index (CPI)
 The CPI shows the change in the price level based on a constant
bundle of household commodities in period 0
 CPI = ∑pitqi0 /∑pi0qi0 x 100
 There are other price indices; for example, GDP Deflator
 A price index may be shown in relation to base yr =100
 100, 105, 110 … (5%, 10% …)

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Labour Force and Unemployment

 The Labour Force (LF) consists of workers who have jobs and
workers seeking employment
 LF = E + U E = Employed; U = Unemployed
 The Rate of Unemployment (U rate) is the percentage of the
Labour Force who are unemployed
 U rate = U / LF
 Full Employment is not U = 0
 Frictional Unemployment relates to job search
 Structural Unemployment relates to mismatch between
requirements of job vacancies and skills of unemployed
workers

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Macroeconomic “Gaps”
 Potential GDP is GDP at Full Employment
 The difference between GDPPotential and GDPActual is called the
GDP Gap
 GDP Gap = GDPPotential - GDPActual
 As will be seen later,
 If GDPPotential > GDPActual , there is a Recessionary Gap
 If GDPPotential < GDPActual , there is an Inflationary Gap

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Macro Balances
 Balance of Trade is the difference between Exports and
Imports
 B of T = X – M
 If X > M, a B of T Surplus
 If X < M, a B of T Deficit
 The Government Budget Balance is the difference between
government revenues and expenditures
 If Revenues > Expenditures, a Budget Surplus
 If Revenues < Expenditures, a Budget Deficit

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