What are the two approaches to measuring GDP?
Expenditure and Income Approach
What are the four main sectors of the economy?
Consumption
Gross Investment
Government Spending
International Sector
What is included in consumption?
Durable Goods
Non-durable goods
Services
What is included in gross investment?
- Final purchase of equipment, machinery and such
- All construction
- Changes in inventory (included in GDP of year they are produced)
What is included in government spending?
- Federal, provincial, and municipal.
- Final goods, investments, direct purchase of resources and labour
What is included in international sector?
- Exports
- Imports
- Net Exports = Ex-Im
What does GDP not measure?
-The distribution of income. The importance of leisure. Meaningful friendships. Negative externalities. (economic bads) The effectiveness of social programs. Hidden economy. Intelligence or wisdom. State of the environment
What does GDP not include?
Used goods
Intermediate goods
Purely financial transactions
Nominal vs Real GDP?
- Nom: Actual amount times actual price
- Real: Actual amount times base year price
What are fluctuations of real GDP?
1) Peak
2) Recessionary phase
3) Trough
4) Expansionary or Recovery phase
What are some of the causes of inflation?
- Demand Pull
- Cost Push
- Government printing too much money
What are some of the limitations of the consumer price index?
1) Assumes that households (consumers) do not change their consumption behaviour when prices change. This is known as the substitution bias.
2) The typical basket may not represent many consumers.
3) Many new products (iPhone, iPad, blackberry’s etc.) are either not included or under-weighted in the index.
4) Quality improvements are not taken into consideration
What is Core CPI?
Includes all 650 items of regular CPI but excludes:
- food
- indirect taxes (GST & PST)
- Energy
How do you calculate real GDP from Nominal?
Real GDP = (Nom/CPI)*100
Who is considered unemployed?
People seeking for work but who are not working
Who is part of the labour force?
Employed and officially unemployed
What is Gresham’s Law
Bad money drives out the good
What is bracket creep?
movement into a higher tax bracket as taxable income increases.
What is included in M1?
Money easily converted into cash:
- currency
- chequing accounts
- current accounts
What are the differences b/w real GDP (Y) and potential real GDP (Y*)?
Inflationary gap = Y > Y*
Recessionary gap = Y < Y*
Positive vs normative statement?
Positive statement is one that can be checked empirically
Normative is an opinion, what “should” happen
What is the role of the Bank of Canada?
- Protect the external value of the Canadian
dollar. - Keep inflation between 1 and 3 percent with
a 2 percent target. - Promote economic growth and employment.
What is bank rate kept within?
50 basis points (0.5%)
What is the upper limit of the band?
Rate in which chartered banks and other primary
dealers borrow one-day funds from the Bank of Canada.
