Econ 101

Lecture #15
October 28, 2021
Macro Statistics
New Material on Portal

• Reading Material #10 --- Notes on Macro

Calculation (to help with PS #5)
• Problem Session #5 (Macro
Calculations--- GDP, Real vs Nominal,
Inflation, Unemployment, Interest Rates)
• Reading Material #11--- CANADA—Macro
Statistics
How big is Canada’s economy?
• 1. Calculate the total value of
everything produced in that
economy -- Gross Domestic
Product (GDP)
• 2. Divide by the number of
people --- GDP per capita
• https://www150.statcan.gc.ca/t
1/tbl1/en/tv.action?pid=361002
2201&pickMembers%5B0%5D=1
.1&pickMembers%5B1%5D=2.2
• Last year for annual data: 2020:
$2,314,552 millions
• 2021(Q2): ($2,447,636 millions) or
$2.4 trillion
• $ 2,447,636,000,000
• $2,447,636/37.742154 =$64,852 per
year (or $5,404 per month)
• What the average person (man,
woman, baby) produces each year.
What the average person consumes
each year
How did we get that number?
• Circular flow model…..
• Count the value of goods and
service produced by the money
spent to buy those goods and
services
• Every dollar spent is a dollar
received
• Income=Expenditures
• The only way we can spend
money is if we earned it
Simple bread economy…. (3 levels of
production)

Wheat Production Flour Production Bread Production

Raw Materials 0 500 1000
Labour Inputs 400 300 200
Profits 100 200 300
Sales 500 1000 1500
Three ways to count GDP
1. Value of the final good or service --- $1500 (Bread produced)
2. Total income earned in the economy --- $900 + $600= $1500
3. Total value added at each level of production --- $500 + $500
+ $500 = $1500

Wheat Production Flour Production Bread Production Total Income

Raw Materials 0 500 1000
Labour Inputs 400 300 200 900
Profits 100 200 300 600
Sales 500 1000 1500
Value Added 500 500 500
Easiest way….Add up the total amount spent
on final goods and services
• We want to count EVERYTHING
• We want to count each thing
ONLY ONCE
• We count production by
indirectly counting expenditures,
but ONLY when the good or
service reaches its final
destination
• Y=C+I+G+X-M
• Four final destinations
• Consumption (when a consumer
pays for a good)
• Investment (when a good or
service reaches its final
destination at the business level)
• Government (when government
buys a good or service)
• Net Exports (Exports minus
imports) when someone outside
Canada pays for a good or service
Three types of expenditures that we don’t
count in GDP
• Because these three type of
expenditures would give us the
wrong idea of the total value of
what our economy has produced
• 1. Intermediate transactions (to
avoid double counting because
these goods haven’t yet reached
their final destination)
• 2. Change of ownership (nothing
new has been added to the
economy)
• 3. Transfers (Gifts or payments
that are made without receiving
a reciprocal delivery of a good or
service)
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610022201&pickMembers%5B0%5D=1.1&pickMembers%5B1%5D=2.2

2014 2015 2016 2017 2018

Household final consumption
expenditure 1,086,253 1,122,079 1,153,668 1,208,438 1,255,327

Non-profit 26,826 28,575 30,951 31,976 33,207

General governments 404,297 415,561 426,335 444,149 465,792
Gross fixed capital formation 486,542 474,732 461,262 486,760 501,247
Investment in inventories 9,603 -577 -228 17,088 11,904
Exports of goods and services 1,012,891 1,003,061 1,004,873 1,062,913 1,121,022
Less: imports of goods and
services -1,030,955 -1,052,126 -1,052,648 -1,110,291 -1,164,585
Statistical discrepancy -559 -865 1,320 72 -59
Gross domestic product at market 1,994,898 1,990,441 2,025,535 2,141,107 2,223,856
prices
Canada’s GDP (2018)

Total (Y = C+I+G+X-M) $2,223,856 100%

Consumption (C) $1,288,534 57.9%
Investment (I) $513,151 23.1%
Government (G) $465,792 20.9%
Net Exports (X-M) -$43,563 -2.0%
Consumption
• Any new good or service that a
consumer buys: Cars, clothes,
food, haircuts, rent
• The biggest category of
expenditures (≈60% of GDP)
• When the good reaches the
consumer all the value added at
each level of production gets
counted all at once
• In the pizza, the consumer pays
($20) is the flour ($1), the tomatoes
($2), the worker’s time($8), etc.,
• We don’t count all the intermediate
steps (when the farmer sell the
tomatoes to the restaurant, when
the farmer buys fertilizer, when the
restaurant hires the worker……) All
are counted at once when the
consumer pays for their pizza ($20)

Investment
• How can goods and services reach
their final destination at the
business level. Wouldn’t these just
be “intermediate transactions”?
• A good has reached the final
destination at the business level, if
the good is still there at the end of
the year
• Examples: A pizza store buys an
oven. At the end of the year, the
oven hasn’t been used up. So we say
it has reached its final destination
• Four categories of “investment”
• 1. Residential construction (building
a new house or apartment)
• 2. Non-residential construction
(building new stores, offices, mines,
etc.,)
• 3. Machinery and Equipment (new
computers, ovens, delivery trucks)
• 4. Change in inventory (unsold
merchandise already produced in
the economy that hasn’t yet
reached its final destination) –
change in inventory can be positive
or negative
Government
• Because government does not
charge consumers directly for the
services produced, we count
goods and services when the
government pays for them
• Example: Pizza store hires a
worker (intermediate transaction),
government hires a worker – G
because consumers don’t buy the
service directly but indirectly
through the taxes they pay
• Notice G=20% of GDP but taxes
in Canada about 42% of GDP…
where does the rest of the
money go?
• Most government expenditures
in Canada are for “transfers” –
pensions, welfare, other
payments not in exchange for
goods and services

Net exports (X-M)
• Canada is a trading country:
Exports are 50.4% of GDP and
Imports are 52.4%.
• Would GDP increase if imports
were reduced?
• NO!
• We subtract imports to make
sure we are only counting goods
and services produced in Canada
• When we count C, I and G, some
of the spending is on goods and
services that are imported
• If imports were reduced, C, I & G
would fall by the same amount
• Canada would be a much poorer
place if we had to live without
the goods and services we
import
• This is only an accounting
subtraction, to make sure we are
only counting what is produced
in our economy
Counting growth
Year GDP %∆ • To calculate %∆:
2014 • 1,994,898 xxx [(New –Old)/Old]*(100%)
2015 • 1,990,441 -0.2% • OR (New/Old -1)*100%
2016 • 2,025,535 1.8%
• (2,310,712/2,231,168)= 1.036
2017 • 2,140,642 5.7%
2018 • 2,231,168 4.2% • (1.036-1)100=3.6%
2019 • 2,310,712 3.6% • By convention, GDP statistics are
2020? • 2,204,905 -4.6% rounded off to one decimal point
But did the economy really grow by 3.6%?
• Two possibilities:
• 1. The economy produced more
goods and services
• 2. The prices for the goods and
services increased even though
we produced the same amount
of goods and services
• We have to separate these two
effects
• %∆N vs %∆R
• Nominal growth rate is the
increase in GDP using current
prices
• Real growth rate is the increase
in goods and services, so we
have to use constant prices
(base year prices)
 Fruit Economy
Apples Bananas • N= Total value of fruit
Year Price Quantity Price Quantity produced each year
2015 5 10 2 20 • N=ΣPiQi
2016 7 11 3 18 • 2015=5(10)+2(20)=90
2017 6 12 3 17
• 2016=77+54=131
2018 5 11 4 22
• 2017=72+51=123
• 2018=55+88=143
What was the growth rate?
Year N %∆N
• Calculating the nominal growth
2015 90 xxx
rate (%∆N)
2016 131 45.6%
2017 123 -6.1% • It looks like 2016 was a great
2018 143 16.3% year (lots of growth) and 2017
was a terrible year (the economy
shrank)
• But were people really worse
off?
To calculate R and %∆R
• Pick a year to be the “Base Year”
– we’ll pick 2015
• Go back and calculate the GDP
each year as if the prices were • 2015=5(10)+2(20)=90
the prices in the base year
• 2016=5(11)+2(18)=55+36=91
• R = Total value of fruit produced
each year in 2015 prices • 2017=5(12)+2(17)=60+34=94
• R=ΣP2015iQi • 2018=55+44=99
What was the best year for this economy?
Year N %∆N R %∆R
• The fluctuations in N were
2015 90 xxx 90 xxx
caused by price movements
2016 131 45.6% 91 1.1%
2017 123 -6.1% 94 3.3% • When we used base year prices,
2018 143 16.3% 99 5.3% we see that this economy was
improving year by year, each
year the real growth rate (our
increased enjoyment of fruit)
was higher than the year before
A bonus– we now have a way to measure inflation
• N- the GDP in today’s prices
(ΣPiQi ) Year N R P=(N/R)100 Inflation
Rate --%∆P
• R – the GDP in base year prices 2015 90 90 (90/90)100=100 xxx
(ΣP2015iQi ) 2016 131 91 (131/91)100=144.0 44.0%
2017 123 94 (123/94)100=130.9 -9.0%
• N/R is the translation rate 2018 143 99 (143/99)100=144.4 10.3%
between today’s prices and the
base year prices
• Index – We report this
translation rate out of 100
• P(deflator)=(N/R)100
What is the relationship between N, R & P?
• Definition of deflator= (N/R)100 • In 2016, R=91 and P=144.0, so
• If we have N, R we can find P N=91(144.0)/100=131
• If we have N, P, we can find R • In 2018, N=143 and P=144.4 so
R=(143/144.4)100=99
• N is made up of R and P (the
amount of fruit we produce and • Whenever we have two of the
the price of those fruit variables, we can find the third
What is the relationship between %∆N, %∆R and %∆P?
• In 2018, %∆N=16.3%, %∆R=5.3%
and %∆P=10.3%
• Since N is made up of R and P,
you would think that %∆P(10.3%)
≈ %∆N (16.3%) - %∆R (5.3%) [but
16.3-5.3=11.0% which is not
exactly 10.3%]
• To find %∆P, we use (P2/P1-
1)100, working backwards,
P2/P1= 1+ %∆P/100
• If %∆P =10.3%, this means
P2/P1=1.103
• Since P=(N/R)100, P2/P1 =
(N2/R2)100/(N1/R1)100
=(N2/N1)/(R2/R1) OR (1+
%∆P/100) = (1+%∆N/100)/(1+
%∆R/100)
• Check: 1.163/1.053=1.104
• %∆P ≈ %∆N - %∆R
• Exact Relationship: (1+%∆P/100)
= (1+%∆N/100)/(1+%∆R/100)
Why?
• If (1+%∆P/100) =
(1+%∆N/100)/(1+%∆R/100)
• Cross multiplying:
• [1+%∆P/100 +%∆R/100 + (%∆N)
(%∆R)/10000] = 1+%∆N/100
• Multiply all term by 100
• 100 +%∆P + %∆R + (%∆P)
(%∆R)/100) = 100 +%∆N
• Subtract 100 from both sides
and we are left with:
• %∆P+%∆R + (%∆P)(%∆R)/100)=
%∆N
• When %∆P & %∆R are small and
you divide this small number by
100, %∆P + %∆R ≈ %∆N
• But when they are large,
approximation doesn’t work
Look at 2002….
• N=1,223,100, %∆N=7.9%,
R=1,532,914, %∆R=3.5, P=80.0,
%P=4.2%
• Check: P=(N/R)100=
(1,223,100/1,532,914)100
=79.789 = 80.0
• Growth rates?
• Approximation method: %∆P≈
%∆N-%∆R=7.9%-3.5% =4.4% ≈
4.2%
• Exact method: (1+%∆P)/100) =
(1+%∆N/100)/(1+%∆R/100=
1.079/1.035=1.0425
• (1.0425-1)100=4.3%
Testing our understanding….

• If GDP in 2012$ increases by 10.4% while

the GDP in today’s prices goes from
$258.8bn to $296.3bn what is the
inflation rate?
Answer

• N2/N1=296.3/258.8=1.145 (%∆N=14.5%)
• Since %∆R=10.4%, R2/R1=1.104
• P2/P1=(N2/N1)/R2/R1)=1.145/1.104=1.037
• %∆P=(1.037-1)100=3.7%
Another one?

• If the inflation rate is 6.2% what is the

real growth rate if the GDP in today’s
prices goes from $238.6bn to $254.8bn?
Answer
• N2/N1=254.8/238.6=1.068 (%∆N=6.8%)
• Since %∆P=6.2%, P2/P1=1.062
• R2/R1=(N2/N1)/P2/P1)=1.068/1.062=1.006
• %∆R=(1.006)100=0.6%
Some economists think that there is a better way
to calculate inflation: CPI – Consumer price index
• P(deflator)=(N/R)100= • Let’s calculate V (the value of the
(ΣPiQi)/ΣP2015iQi (weights of basket of goods we produced in
prices under consideration the base year each year as the
change each year as we buy or prices of our goods fluctuate
produce different amounts of • V= ΣPiQ2015i
fruit
• The want a constant weight:
what were the amounts of fruit
we bought in the base year?

Calculating V= ΣPiQ2015i
• Go back and calculate the value
of the same goods produced in
the base year (2015) each year
as the prices fluctuate
• 2015=5(10)+2(20)=90
• 2016=7(10)+3(20)=70+60=130
• 2017=6(10)+3(20)=60+60=120
• 2018=50+80=130
• Let’s turn this information into a
price index: CPIj=Vj/VBY)100=
ΣPiQ2015i/ ΣP2015Q2015i)100 (We
are comparing the prices in each
year to the prices in the base
year weighted by the goods
produced in the base year
CPI
• CPI =(Vj/VBY)100 = Year
ΣPiQ2015i/
V CPI %∆P
2015 90 (90/90)100=100 xxx
ΣP2015iQ2015i)100 2016 130 (130/90)100=144.4 44.4%
2017 120 120/90)100=133.3 -7.7%
2018 130 (130/90)100=144.4 8.3%
Comparing the deflator to the CPI
• Deflator=(N/R)100=(ΣPiQi/
ΣP2015iQi)100 comparing prices Year P(deflator) %∆P CPI %∆P
today with the prices in the BY 2015 100 xxx 100 xxx
weighted by Qi 2016 144.0 44.0% 144.4 44.4%
2017 130.9 -9.1% 133.3 -7.7%
• CPI=(Vj/VBY)100= ΣPiQ2015i/
2018 144.4 10.3% 144.4 8.3%
ΣP2015iQ2015i)100 comparing the
prices today with prices in the BY
weighted by Q2015i
CPI vs Deflator (Weighting differences)
Deflator vs CPI
5.0

4.0

3.0

2.0

1.0

0.0
YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

-1.0

-2.0

Deflator CPI
Deflator vs CPI
• Deflator=(N/R)100=(ΣPiQi/
ΣP2015iQi)100 comparing prices today • CPI=(Vj/VBY)100= ΣPiQ2015i/
with the prices in the base year
weighted by Qi (what we buy each
ΣP2015iQ2015i)100 comparing the
year) prices today with prices in the
base year weighted by Q2015i (what
• If we buy more X this year than last
we bought in the base year)
year, then the change in the price of
X will become more important when • Every year the importance of the
calculating average prices change in the price of X in
• Every year, the weights change in calculating the average prices
calculating average prices depending doesn’t change. It is set by the
on how much of each good we importance of X in the base year
bought or produced
REVIEW: 3 calculations
• N – Nominal GDP – GDP in
current prices or in today’s prices
• R – Real GDP – GDP in constant
prices or in base year prices
• V- Value of a consumer basket–
Today’s prices for the same
basket of goods that was • In 2016:
purchased in the base year • N=7(11)+3(18)=77+54=131
• N=ΣPiQi
• R=5(11)+2(18)=55+36=91
• R=ΣP2015iQi
• V=7(10)+3(20)=70+60=130
• V= ΣPiQ2015i
Nominal vs Real GDP 2000-2019
Nominal vs Real
2,500,000

2,000,000

1,500,000

1,000,000

500,000

0
YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Nominal GDP Real GDP

Growth Rates over time
• N(2000)=1,132,880 million
• N(2019)=2,337,684 million
• This economy grew
((2,337,684/1,132,880)-1))100
=106.3% in 19 years
• Average annual Nominal growth
rate = ((2,337,684/1,132,880)1/19-
1)100 =3.9%
• R(2000)=1,460,962 million
• R(2019)=2,100,493 million
• In constant dollars, this economy
grew ((2,100,493/1,460,962)-
1)100=43.8% in 19 years
• Average annual Real growth rate
= ((2,100,493/1,460,962)1/19-
1)100=1.9%
How to calculate the unemployment rate….
• The number of people unemployed in Canada in2018: 1,143,000.
• The 2018 population of Canada: 37.5 million.
• 1.143/37.5 = 3.0%
• But the unemployment rate for 2018: 5.6%
• ????
• Unable to work: 1. Too young
(less than 15) 2. Institutionalized
(locked up) 3. Military
• Non-Participants: 1.Retired 2.
Homemakers 3.Students
• Unemployed: Must have spent
time actively looking for work
• “Data from the Labour Force Survey
(LFS) are based on phone interviews
with 56,000 households and more
than 100,000 individuals every
month” (
https://www150.statcan.gc.ca/n1/daily-quotidien/
200409/dq200409a-eng.htm
)
• Unemployment rate=
#unemployed/labour force =
1,143/20,268 = 5.6%
• Participation rate = labour
force/civilian, non-institutional
population = 20,268/30,943 =
65.5%
• How do we know if someone
who is not working is a non-
participant or an unemployed
person?
https://tradingeconomics.com/canada/unemployment-rate
https://tradingeconomics.com/canada/labor-force-participation-rate
Do unemployment statistics underestimate or
overestimate labour misery?
• Underestimated
• “Discouraged” workers – those
who want to work but think that
looking right now will not get them
a job (counted as retired)
• “Underemployed” workers – those
working part-time who want full
time work or those who accept a
lesser job for which they are over-
qualified while waiting for a better
opportunity (PhD’s driving taxis)
• Overestimated
• Employment insurance pays 55% of your
average insurable weekly earnings, up to
a maximum amount of $573 per week
• Adjustments to EI benefits have made EI
less generous which seems to have
reduced the number unemployed (no
longer available for quitting voluntarily
or being fired with cause) Also regional
differences in benefits seems to have
encouraged regional differences in
unemployment rates
Testing our understanding…
• If the unemployment rate is 8.9% and the number employed is
14.8million, how large is the labour force?
Answer
• U/LF=8.9% so E/LF=91.1%
• E=14.8m so 14.8/LF=.911, LF=14.8/.911=16.25m

• Check If LF=16.25, U=16.25-14.8=1.45m

• 1.45/16.25=8.9%
What is an interest rate?
• People want to trade over time
• They want to buy certain products
(houses, cars, furniture) NOW and
pay for them with future earnings
• They want to save for future
retirement
• Usually, people expect a reward
for delaying consumption and
expect to pay a premium for
consuming future income today
• Would you prefer PV (an
immediate payment) of $1000 or
FV (a payment one year from
today) of $1000?
• If given a choice between a PV and
an FV, FV would have to be larger
to make a chooser indifferent
• (FV/PV-1)100 is the premium you
would require to make you
indifferent
• Would you prefer PV=1000 or FV=1001
(a $1 gain by waiting one year)?
r=0.1%
• Would you prefer PV=1000 or FV=1500
(a $500 gain by waiting one year)?
r=50%
• Ants/ grasshoppers --- we all have
different degrees of impatience
• r – the market interest rate
determined by the demand and supply • (FV/PV-1)100=r (to estimate the premium
of credit required to wait)
• As r (the premium you must pay to • FV=PV(1+r/100)n (to estimate the FV of money
borrow) rises, you want to borrow less deposited in a bank account) (n is years before
you collect --- it compounds exponentially)
• As r (the reward you get for waiting)
rises, you are willing to lend more • PV=FV/(1+r/100)n (to estimate the value of bonds
– promised future payments (n is years in the
future that you have to wait – discounts
exponentially)
• Would you prefer to pay $1000
today for a TV or $1500 in 5
years time?
• Compare PV of 1000 today to PV
or $1500 in 5 years time
• If r=5%, PV of $1500 in 5 years is
1500/1.055=$1,175.29
• If r=10% PV of $1500 in 5 years is
1500/1.15= $931.38
• Insurance, pensions, bonds--- all
are trading complicated
contracts about trading over
time
• Another complication….
• Interest rates usually calculated
in money (nominal) and the
value of money can change over
time
• Approximate relationship:
r (real interest rate) ≈ i (nominal
interest rate) - %∆P
• Exact relationship: (1+r/100)=
(1+i/100)/(1+ %∆P /100)
• Example if i=13% and %∆P =3%,
r=[(1.13/1.03-1)100]=9.7%
Summing up….

• Compounding: FV=PV(1+r)n
• Discounting: PV=FV/(1+r)n

• Discounting a stream of future income:

PV=FV1/(1+r)+FV2/(1+r)2+FV3/(1+r)3…..FVn/(1+r)n
Upcoming
• Problem Session #5 Please turn your cameras on for the problem
session
• Quiz #3 - Class after that Thursday, Nov 4?