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Week 04, Day 4 - Chapter 06 & 07 Overheads (revised)

Week 04, Day 4 - Chapter 06 & 07 Overheads...

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Chapter 6 – Macroeconomics: The Big Picture Chapter 7 – Tracking the Macroeconomy Circular-Flow Diagram Gross Domestic Product (GDP) Business Cycle Long-Run Economic Growth Measuring GDP GDP Vs Gross National Product (GNP) Real GDP Vs Nominal GDP Limitations of Real GDP Labour Statistics Unemployment Rate Misstatement of Unemployment Rate Inflation Consumer Price Index (CPI) The Open Economy Exchanges Rates Macroeconomics is concerned with aggregate behaviour. As such, the focus is on the overall economy, aggregate measures (such as aggregate output, the price level and employment), and long-run economic growth. Circular-Flow Diagram The circular-flow diagram shows the flows of money between the major groups in the economy. There are 4 major groups in the economy: households, firms, government, and rest of world. Their spending flows are: 1. consumer spending; 2. investment spending (by firms on physical capital and inventories); 3. government purchases (such as education, health care, military); and 4. exports (spending by the rest of the world on Canadian products). Gross Domestic Product (GDP) is the total value of final goods and services produced in an economy. It is a measure of an economy’s total output and total income. Q: According to the circular-flow diagram, what does GDP equal? A: GDP = consumer spending + investment spending + government purchases + exports – imports
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Financial institutions are another key group in the economy. Their role is to channel funds from lenders to borrowers. Households derive income from wages, profit, interest, rent, and government transfers (collectively known as personal income). Disposable income is personal income after deducting personal income taxes. Q: What are the 3 main uses of personal income? A: Personal income is used to pay personal income taxes, for consumer spending, and for private saving. Business Cycle Output and employment (the number of people employed) fluctuate over time growing in most periods (expansions or recoveries) and declining in others (recessions). These short-run ups and downs together make up the business cycle. A severe decline in output is a depression. The highest level of output in a business cycle is the peak. Inflation tends to be the highest during a peak.
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One macroeconomic objective is economic stability (reducing the severity of recessions and fighting inflation). The government can use fiscal policy (changes in government purchases, government transfers, and taxes) and monetary policy (changes in the money supply and interest rates) to achieve this. Long-Run Economic Growth The business cycle is a short-run phenomenon. The long-run trend is for real GDP to grow and to grow relative to population growth. Increases in real GDP per person represent increases in the standard of living, a measure of economic well-being. A second major macroeconomic goal is long-run economic growth.
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