Midterm 2 Review

Gross Domestic Products: measures the market value of all final goods and services produced
during a year by resources located in Canada regardless of who owns the resources
Expenditure Approach: adds up spending on all final goods and services produced during the
year
Income Approach: adds up earnings during the year by those who produce all that output

Sort Aggregated Expenditure into Components:

Consumption- personal spending on consumer goods and services
 Largest spending category
 Averaging 60% of Canadian GDP
 Services, durable goods, non-durable goods, semi durable goods
Investments- consists of spending on new capital goods and on net additions to inventories
Government Purchases- include government spending for goods and services
Net Exports- Value of Canadian Exports – Value of Canadian Imports

Aggregate Expenditure = GDP = C + I + G + (X – IM) = Aggregate Income

Value Added- Firm’s selling price – payments for inputs from other firms

Circular Flow:
1) Aggregate Output = Aggregate Income
2) Government collects taxes
3) By subtracting taxes and adding transfers, we transform aggregate income into
Disposable Income, DI
4) DI flows to households
 This half is the income half because it focuses on the income arising from production
 Net Taxes = Taxes – Transfer Payments
GDP = Aggregate Income = DI + NT
5) Disposable Income splits
DI = C + S
6) Investment enters the circular flow
7) Government spending enter the spending stream
8) Imports leak from circular flow
9) Exports enter circular flow
Aggregate Expenditure = GDP = C + I + G + (X – IM) or
C + I + G + (X – IM) = DI + NT or
I + G + X = S + NT +IM

Injections- I, G, X Injections into circular flow = Leakage from circular flow

Leakages- S, NT, IM

Underground Economy- describes market activity that goes unreported because either it’s
illegal or because people want to evade taxes on otherwise legal activity
Depreciation- measures the value of the capital stock that is used up or becomes obsolete in
the production process
New Domestic Product = GDP – Depreciation

Nominal GDP- GDP based on prices prevailing at the time of production

Base Year- the year with which other years are compared when constructing an index… index
equals 100 in base year
Price Index- a number that shows the average price of products, changes in a price index over
time show changes in the economy’s average price level
GDP Price Index- a comprehensive inflation measure of all goods and services included in the
GDP

GDP Price Index = (Nominal GDP X 100)/ Real GDP

Chain-Weighted System- an inflation measure that adjusts the weights from year to year in
calculating a price index

Chapter 7: Unemployment
Labour force: consists of the people in the adult population who are either working or looking
for work
Unemployed: people actively looking for work but can’t find one
Unemployment Rate: measures percentage of those in the labour force who are unemployed
 # of unemployed / # in the labour force
Discouraged Worker- quit searching for job because no progress… given up in frustration
 dropped out of the labour force so they are not counted as unemployed
Full time job- 30 or more hours of paid labour per week
Labour Force Participation Rate- the labour force as a percentage of the adult population
 # in the labour force/ adult population

Frictional Unemployment- unemployment due to people changing jobs and moving from one
job to another… the time required to bring together employers and job seekers
Seasonal Unemployment- Unemployment caused by seasonal changes in labour demand during
the year
Structural Unemployment- Unemployment arising from a mismatch of skills or geographic
locations
Cyclical Unemployment- increases during recessions and decreases during expansions

Long-term unemployment- those out of work for a year or more

 Economy is viewed as operating at full employment if there is no cyclical
unemployment

Unemployment Benefits- cash transfers to those who have lost their jobs and are actively
seeking employment (EI… Employment Insurance)
Underemployment- workers are overqualified for their jobs or work fewer hours than they
would prefer
Inflation- sustained increase in the economy’s average price level (typically measure on an
annual basis)
Annual Inflation Rate- % increase in the average price level from one year to the next
Hyperinflation- a very high rate of inflation
Deflation- a sustained decrease in the price level
Disinflation- a reduction in the rate of inflation

Demand-Pull Inflation:
 Inflation resulting from increases in aggregate demand
 To generate continuous demand-pull inflation, the aggregate demand curve would
have to keep shifting out along a given aggregate supply curve
 Sustained rise in the price level caused by a rightward shift of the aggregate demand
curve

Cost-Push Inflation:
 A sustained rise in the price level caused by a leftward shift of the aggregate supply
curve
 Suggests that increases in the cost of production push up the price levels

Stagflation- Price increase and real GDP decreases

Interest- the dollar amount paid by borrowers to leaders
Interest rate- amount paid per year as a percentage of the amount borrowed
Nominal Interest Rate- interest rate expressed in dollars of current value as a percentage of the
amount loaned, the interest rate specified on the loan agreement
Real Interest Rate- interest rate expressed in dollars of constant purchasing power as a
percentage of the amount loaned… nominal interest rate – inflation rate