Welcome to

Macroeconomics (ECON22358G)
Text:
Canadian Macroeconomics:
Problems and Policies (10th edition)
Brian Lyons, Pearson Prentice Hall
Text includes a Study Guide with
review questions and answers
at the end of each chapter.

Instructor: Brian Lyons

E-mail: brian.lyons@sheridanc.on.ca
SLATE e-mail

Organization of the Course

What you need to know :

Learning
Outcomes

What you need

to do:
How you learn it:
How you check
your progress:
How you are
evaluated:

A To Do list for
each chapter,
on SLATE

Classes:
Cover main points
and highlights

In the text:

1. Recall
2. Understanding
3. Application

Page-referenced to:

Textbook:
Adds details re:
the objectives

On SLATE:

Review Questions
Self-Check Questions
Critical Thinking Questions after each chapter
after each chapter
(with answers & feedback)
(with answers)

See next slide.

Macroeconomics
EVALUATION SYSTEM
Quiz/Test

Coverage

Quiz #1

Chapters 2-3

10

Test #1

Chapters 2-5

20

Quiz #2

Chapters 6-7

10

Test #2

Chapters 6-8

25

Quiz #3

Chapters 9-10

10

Test #3

Chapters 9-10; 12

25

Total

Marks

100

A typical To Do list for a chapter

To Do List for Chapter 2
Learning Activities:
1. Read the Overview of Chapter 2.
2. Read the Learning Outcomes for Chapter 2.
3. Read Chapter 2 in the text.
4. Review the PowerPoint slideshow for Chapter 2.

Practice Exercises:
1. Do the self-check questions on SLATE.
2. Do the Review Questions in the text (pages 48-49); check your
answers (page 329).
3. Do Critical Thinking questions #1-5 in the text (p.150); check your
answers (p.329).

Done

QUESTIONS?

See the Frequently Asked Questions File

in the Introduction and Orientation module
on SLATE.

Chapter 1
What Is Economics?
Same as Chapter 1 of the Microeconomics course
not covered in this course

For a quick refresher, run through the self-check

questions for Chapter 1 on SLATE.

Chapter 2
Introduction to

Macroeconomics

The Market for Computers

A Microeconomic Market
The SUPPLY SIDE

THE DEMAND SIDE

= Production of computers

= Buying of computers, by

Demand

Supply
Capital Equipment
Labour
Management
Incentive of Gain
Incentive of Competition

Ability to produce
as measured by:

Productivity
(output/worker/hour)

Capacity
(potential total output/year)

Interaction
of
Demand & Supply

Performance of
the industry,
in terms of:
Output
Employment
Prices
Etc.

Consumers
Businesses
Governments
Foreign buyers

Demand for computers

or

Total spending
on computers

The Economy on a Macroeconomic Scale

The SUPPLY SIDE

THE DEMAND SIDE

= Total production of
goods and services

= Buying of goods and

services, by

Supply

Demand

Capital Equipment
Labour
Interaction
Management
Incentive of Gain (after tax)
of
Incentive of Competition
Demand & Supply

Consumers
Businesses
Governments
Foreign buyers

Ability of the whole economy Performance of

the entire
to produce goods & services,

Grand Total Spending on

as measured by:

the entire economy, or

Productivity
(=output per worker per hour)

Capacity Output
(= potential total output/year)

economy,
in terms of:

Output
Employment
Prices

goods and services in

Aggregate Demand
for Goods and Services

When the economy is operating smoothly:

Supply side:
Strong high ability to produce goods & services,
which is growing each year
Demand side:
Aggregate demand is neither too low nor too high;
high enough to buy all the goods & services that
can be produced.
BUT not so high that prices rise rapidly, because
supply cannot keep up with demand.
RESULTS:
Output:
Employment:
Inflation rate:

High
High
Low

The MEANING of CAPACITY OUTPUT

Feeding more gas to a car will make it go faster. But a car has a
maximum sustainable speed, (eg-240 kmph), set by physical
limits such as engine size, etc.
BUT if the car is pushed beyond this limit, it will
overheat, threatening the engine with serious damage.
Similarly, higher aggregate demand will push the economy to produce
goods & services at a faster speed. But like a car, the economy has a
fastest sustainable pace (eg $1.9 trillion per year) at which it can
produce goods and services, which is also set by physical limits such as
the number of workers available (the labour force) and output per
worker (productivity).

BUT if excessive demand pushes the economy past this limit, what
will happen?

The supply side will not be able to keep up with demand, and the
economy will overheat in the form of more rapid inflation.
When inflation reaches an unacceptably high rate, capacity output
has been reached, just as a cars maximum sustainable speed has
been reached when its engine overheats.

Conclusion:
Capacity output = the speed limit for the economy:
maximum speed (output per year) at which it can produce
goods & services without demand being so high as to
generate unacceptably rapid inflation (overheating).
More on the dangers of inflation (overheating) in
chapters 6 & 8.

3 things that can go wrong on a macroeconomic scale

1. Weakness on the supply side
low productivity
economy fails to produce enough for people to
have a good standard of living
Eg the former Soviet Union; much of Africa
2. Problems on the demand side

(a) Too little aggregate demand:

Demand too far below capacity
RECESSION; high unemployment (eg 1930s)
(b) Too much aggregate demand:
Demand higher than capacity
INFLATION; rapidly rising prices (eg 1970s)

What is your impression of how the Canadian

economy has been performing recently?

How did you obtain that impression?

From media reports concerning various
economic statistics, which are reported
monthly by Statistics Canada.

Where to find the economic statistics on

output
prices/inflation
employment/unemployment
that we use to measure the
economys performance:
Statistics Canadas home page:

http://www.statcan.gc.ca

1. Measuring Output
Gross Domestic Product (GDP)
= the market value (in $) of the total output of final
goods and services produced in the nation in that year
In short, the sum of the price tags of everything
produced an estimate of the grand total output
of the economy for the year.

2013, Canadas GDP was $1.88 trillion ($1,881,200,000,000).

Was this GDP good or not?

Need to compare it to:
last years GDP ( how fast is it growing?)
the economys capacity output ( how close are we
to our potential?)

Subdivisions of Gross Domestic Product (by purchaser)

% GDP
56%

1. CONSUMPTION (C)
purchased by households
all consumer goods and services

20%

2. INVESTMENT (I)
purchased by producers (mainly businesses)
capital goods (plant, machinery, equipment)

26%

3. GOVERNMENT (G)
purchased by governments
mostly services of govt employees (health care, education, etc.)
4. NET EXPORTS (X-M)

30%
32%

Add
EXPORTS (X) = output produced in Canada but purchased abroad
Deduct IMPORTS (M) = output bought in Canada but produced abroad

GDP = C + I + G + (X-M) = $1.88 trillion in 2013

GDP is measured in dollars -- how could this affect its accuracy?

Money Income and Real Income

If your income has
increased by 5%, you
may feel 5% better off.

Your MONEY INCOME

is up by 5%.

BUT if the prices of what you buy

have increased by 3%,
then your real gain the
increase in your purchasing
power would be only 2%.

Your REAL INCOME

is up by only 2%.

To see what has really happened, you need to remove

the effects of price increases from figures expressed
in dollars.

Money GDP measures the dollar value of output,

which is increased by inflation, so can be misleading.
Real GDP excludes inflation, and thus measures the
physical volume of output (how much was really produced).

Note how clearly the statistics show the major recessions.

(Quarterly data would provide a more detailed picture.)

If the economys production of goods and services did

not increase, but the general level of prices of goods
and services went up,
(a) real GDP would increase, but money GDP would
not increase.
(b) money GDP would increase, but real GDP would
not increase.
(c) neither money GDP nor real GDP would increase.
(d) both money GDP and real GDP would increase.
This brings us to the question of prices, and how
we measure the level of prices in general.

2. Measuring Prices and Inflation

The CONSUMER PRICE INDEX (CPI)
is a measure of the cost of a basket of about 600 goods & services
bought by a typical urban household, weighted as follows:

Consumer Price Index

(2002=100)

26.6%
11.1
19.9
17.0
12.2
5.4
4.7
3.1
100.0

CPI (2002 = 100)

Shelter
Household operations
& furnishings
Transportation
Food
Recreation, reading
& education
Clothing & footwear
Health & personal care
Tobacco & alcohol

140
120
100
80
60
40
20
0

Because the items in the CPI reflect what typical consumers buy,
changes in the CPI are considered to reflect changes in consumer
prices in general .

The Consumer Price Index and the Rate of Inflation

STATISTICS
CANADA
monitors each
month the
prices
of the approx.
600 goods and
services
included in the
CPI

From these, calculates

a weighted average
number that is
representative of the
cost of the CPI basket,
based on the 2002
cost = 100.0.

Then - calculates the % increase

in the CPI from one year earlier:

= the CONSUMER
PRICE INDEX (CPI)
Eg Average CPI for
2013 was 122.8

Eg 2013 CPI = 122.8

2012 CPI = 121.7
Increase in CPI = 1.1 points
% increase = 1.1/121.7 = 0.9%

the RATE of INFLATION

from 2012 to 2013
was 0.9%.

Calculate your own inflation rates at:

http://www.bankofcanada.ca/rates/related/inflation-calculator/

The Consumer Price Index and the Rate of Inflation

The Consumer Price Index:
Shows how high consumer
prices are.
So what does the Rate
of Inflation tell us?

How fast prices were rising

over the past 12 months.

This is the statistic that

is reported in the media
each month.
Note again how the recessions stand out (lower inflation rates).

3. MEASURING EMPLOYMENT and UNEMPLOYMENT

STATISTICS
CANADAS
monthly
LABOUR
FORCE
SURVEY

# of Canadians
of working age
(WAP)

# who do not want to work

(not in the labour force)
(9,593,800)
# who do want to work
=the LABOUR FORCE

(28,673,200)

(19,079,400) (66.5% of WAP)

(2013 data)

# Employed

# Unemployed

(17,731,200)

(1,348,200)

The
UNEMPLOYMENT
RATE

Part-time (3,351,000)

Full-time (14,380,200)

(% of the labour force

that is unemployed)

# unemployed
# in labour force

1,348,200 =
19,079,400

7.1%

Unemployment Rate
14.0
12.0

Percent

10.0
8.0
6.0

4.0
2.0
0.0

Note again how the recessions stand out.

Chapter 2

Conclusion

Three of our basic economic goals are:

High rates of output of goods and services

High employment/low unemployment
Low rates of inflation
Each month, Statistics Canada takes the pulse of Canadas
economy by collecting economic statistics such as those in
this chapter:
Output (GDP and Real GDP)
the CPI and the Rate of Inflation
Employment, Unemployment and the Unemployment Rate
From these statistics, we can:
estimate where the economy is
determine the reasons for its present condition, and
make forecasts of its probable future direction

Benchmarks for our statistics

what is considered good?
Real GDP a growth rate of 3% per year.
Consumer prices a rate of inflation
of 1 to 3% per year
Jobs an unemployment rate of
~ 7% of the labour force

Where is the Canadian economy now?

After a bad downturn
in 2008-09, real GDP
recovered.
But after late 2009,
the recovery slowed
down and failed to gain
momentum.

As a result,
employment has
been improving only
slowly, and the
unemployment rate
remains quite high.

For the most recent statistics, visit http://www.statcan.gc.ca/

Do the Self-Check questions on SLATE.

Do the Review Questions and Critical
Thinking questions at the end of Chapter
2, and check your answers in the
appendix to the text.
Next week: Chapter 3:
The Supply Side of the Economy