MGEA06 – Introduction to Macroeconomics:

A Mathematical Approach

Winter 2024

MGEA06 – Week 1 (Live Lecture) 1

Introduction

Professor: Iris Au

Class format:
Lecture:
• Pre-recorded lectures:
 These recordings, covering theories and concepts from the course, will be
made available on Thursday the preceding week.
• Weekly lectures:
 Work on additional problems related to the pre-recorded lectures.
 To fully participate in the in-person classes, you should watch these videos
before attending the weekly scheduled lectures.

Tutorials:
• All the tutorials for this course have been recorded and will be made available
on Quercus (under the module “Tutorials”) on a weekly basis.

Teaching Assistants’ office hours:

• TA Office: IC 225
• Office hours start in Week 2, January 15.
• See the course page for the schedule.

Course Coordinator: Bobbi McFarlane

Email: sam.mcfarlane@utoronto.ca

MGEA06 – Week 1 (Live Lecture) 2

 Required text:
Krugman, Wells, Au, and
Parkinson, Macroeconomics,
4th Canadian edition, Worth,
2021.

MGEA06 – Week 1 (Live Lecture) 3

Grading Scheme:
Online Achieve assignments, best 5 out of 6 20%
Midterm 35%
Final Exam 45%

• For those who have attempted the midterm, improvement will be taken
into consideration when assigning the overall course grade. If you take
the final exam and your mark on the final is higher than on the midterm, the
lower midterm mark will be replaced by the final exam mark.
• The midterm will be scheduled outside class time and is 90 minutes long.
 If you MISS the midterm, please see the section on “Policy on Missed
Assignments and/or Examinations”.
• The final exam will be two hours longs and will take place during the final
exam period.
 Do not plan to leave Toronto before the end of the exam period (personal
circumstances are not an acceptable excuse for missing the exam).
 If you MISS the final exam, please contact the Registrar’s Office.
• Both midterm and final exam are closed book exams, and crib sheet is not
allowed.
• Check Quercus for information on the dates and times of the exams.

MGEA06 – Week 1 (Live Lecture) 4

More about the Assignments:
Create an Achieve account
Go to the “Achieve Access (ebook)” module.

MGEA06 – Week 1 (Live Lecture) 5

Access to Individual Assignments
You must access the assignments directly from the course page on Quercus under
the “Achieve Assignments” module.
• There will be 6 online assignments assigned throughout the term, and you can
access the assignments directly from the course Quercus page.
• Only the best 5 out of 6 assignments will be counted for grades.
• No make-up assignment under any circumstances.
• The free-trial period ends on Monday, January 22. You should enter the
access code before the free-trial period so that you can continue to work on
the assignments.
• The assignment is, normally, due on the Saturday of the week at 11:00pm
(Toronto Time).
• If you have any technical issue about Achieve, you can contact tech support
by clicking the “Course Support” link under the “Achieve Access (ebook)”
module.

MGEA06 – Week 1 (Live Lecture) 6

Policy on Missed Assignments/Examinations:

• LATE assignments will NOT be accepted under any circumstance.

• There will be NO make-up midterm. If you miss the midterm for a
legitimate reason, please follow these steps:
➢ You MUST self-declare your absence on ACORN immediately.
➢ Email Professor Au about your absence within one week after the midterm.
In your email, include the following:
o a screenshot of your self-declaration
o your UofT registered name, your student number, and course code
➢ Upon receiving your self-declaration on ACORN, a confirmation that the
weight of the midterm will be transferred to the final exam will be sent to
you within 5 business days.
• If you miss the final exam, you must contact the Registrar’s Office.

MGEA06 – Week 1 (Live Lecture) 7

Statement on Equity, Diversity, and Inclusion (EDI)
The University of Toronto is committed to equity, human rights and respect for
diversity. All members of the learning environment in this course should strive
to create an atmosphere of mutual respect where all members of our community
can express themselves, engage with each other, and respect one another's
differences. U of T does not condone discrimination or harassment against any
persons or communities.

The University of Toronto is a richly diverse community and as such is

committed to providing an environment free of any form of harassment,
misconduct, or discrimination. In this course, I seek to foster a civil, respectful,
and open-minded climate in which we can all work together to develop a better
understanding of key questions and debates through meaningful dialogue. As
such, I expect all involved with this course to refrain from actions or behaviours
that intimidate, humiliate, or demean persons or groups or that undermine their
security or self-esteem based on traits related to race, religion, ancestry, place of
origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, gender
identity, gender expression, age, marital status, family status, disability, receipt
of public assistance or record of offences.

If you have questions or concerns on issues related to EDI, please contact the
Equity, Diversity and Inclusion Office: https://www.utsc.utoronto.ca/edio/

MGEA06 – Week 1 (Live Lecture) 8

Tentative Schedule:

Week Week of Topics – Chapter(s) Assignment

1 Jan 8 Introduction & Measurement of GDP–
Chapters 6 & 7
2 Jan 15 Unemployment & Inflation – 1
Chapter 8 (Ch 6 & 7)
3 Jan 22 Long-run Economic Growth –
Chapter 9 (exclude pages 269 – 278)
4 Jan 29 Savings, Investment Spending, and the 2
Financial System – Chapter 10 (Ch 8 & 9)
(excluded pages 302 – 317)
5 Feb 5 Income and Expenditure –
Chapter 11 & Appendix
6 Feb 11 AD and AS – 3
Chapter 12 (Ch 10 & 11)
Reading Week: February 17 – 23
7 Feb 26 AD and AS –
Chapter 12
8 Mar 4 Fiscal Policy – 4
Chapter 13 & Appendix (Ch 12)
9 Mar 11 Money, Banking, and the Central
Banking System – Chapter 14
10 Mar 18 Monetary Policy – 5
Chapter 15 (Ch 13 & 14)
11 Mar 25 Open-Economy Macroeconomics –
Chapter 18
12 Apr 1 Open-Economy Macroeconomics – 6
Chapter 18 (Ch 15 & Ch18
part 1)

MGEA06 – Week 1 (Live Lecture) 9

Brief Summary of Week 1 Pre-recorded Lectures
What is macroeconomics?
• Macroeconomics is about the big picture, i.e., it studies the behaviour of the
economy as a whole.
• It looks at interactions of different sectors in an economy instead of what
happens in a specific market (i.e., it is not simply a matter of adding things
up).
• Macroeconomics also has a strong policy focus.

Gross Domestic Product

• Gross domestic product (GDP) is the total value of all final goods and services
produced in the economy during a given year.
• There are three approaches to GDP, and they are:
1) The value-added approach
Value added = Value of the sales – Value of the purchases of
intermediate goods and services
2) The expenditure approach
GDP = C + I + G + X – IM = C + I + G + NX
3) The income approach
GDP = Factor income + non-factor payment

MGEA06 – Week 1 (Live Lecture) 10

Problems
Question 1: In the context of the expenditure approach, sort the following
transactions in the appropriate category.
Choices: Consumption, Investment, Government spending, Exports, Imports,
Not included in GDP
Category Transaction
A financial advisor purchases a new laptop for their home
office.
Wheels used to produce a skateboard that will be sold
new.

MGEA06 – Week 1 (Live Lecture) 11

Question 2: An economy consists of only two firms, A and B. There is no
government and no foreign sector. Firm A produces $3000 worth of output,
while firm B produces $4000 worth of output. Firm A sells $1500 worth of
output to consumers, $900 worth of output to firm B for immediate use in
production, and another $600 worth of output to firm B to be used as investment
goods. Firm B sells $2000 worth of output to consumers, $700 worth of output
to firm A for immediate use in production, and another $1200 worth of output to
firm B to be used as investment goods. Firm B has $100 worth of output which
it cannot sell, and which is added to its inventories.
a) Use the value-added approach to find the GDP of this economy.
b) Redo part (a) using the expenditure approach.

MGEA06 – Week 1 (Live Lecture) 12

Nominal GDP vs. Real GDP
Nominal GDPt (NGDPt) = P1,tQ1,t + P2,tQ2,t …+ Pn,tQn,t = ∑𝑛𝑖=1 𝑃𝑖,𝑡 𝑄𝑖,𝑡
Real GDPt (RGDPt) = P1,Base yearQ1,t + P2,Base yearQ2,t …+ Pn, Base yearQn,t
= ∑𝑛𝑖=1 𝑃𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑄𝑖,𝑡
Price Indexes
• The consumer price index (CPI):
Cost of (fixed) market basket in year t
CPI in year t = × 100
Cost of (fixed) market basket in base year

where COBt = ∑𝑛𝑖=1 𝑃𝑖,𝑡 𝑄𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟

∑𝑛𝑖=1 𝑃𝑖,𝑡 𝑄𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟
CPI in year t = × 100
∑𝑛𝑖=1 𝑃𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑄𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟

• The GDP deflator:

Nominal GDP in year t
GDP deflator in year t = × 100
Real GDP in year t
∑𝑛𝑖=1 𝑃𝑖,𝑡 𝑄𝑖,𝑡
GDP deflator in year t = × 100
∑𝑛𝑖=1 𝑃𝑖,𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑄𝑖,𝑡

MGEA06 – Week 1 (Live Lecture) 13

Problems
Question 1: A closed economy produces and consumes only three goods. The
following table summarizes the prices and production of these goods in 2019 and
2020. The government chooses 2020 as the base year and the index is set to 100
in the base year.
2019 2020
Goods Price Quantity Price Quantity
produced produced
1 $4 30 $5 20
2 $6 12 $7 12
3 $10 20 $8 25
Additional information:
• The consumption of Good 1 is equally split between households and firms.
• Households purchase all Good 2.
• Households purchase 60% of Good 3, firms purchase 25% of Good 3, and the
government purchases the remaining 15%.
Note: Show your work and keep your answers to 2 decimal places.

a) Find the GDP deflator in 2019.

b) Find the consumer price index in 2019.

MGEA06 – Week 1 (Live Lecture) 14