WEEK 1
COURSE OVERVIEW
Yingnan Zhao
Department of Economic
University of Toronto Mississauga
Fall 2021
Roadmap
■ GDP and its calculation
■ Nominal vs. real GDP
■ Inflation rate: GDP deflator and consumer price index (CPI)
■ Time horizon in macroeconomics: Short run, medium run, and long run
■ Reading: Blanchard and Johnson, Chapter 2
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Gross Domestic Product (GDP)
■ Which of the following correctly defines GDP?
A. GDP is the value of the final goods and services produced in the economy
during a given period
B. GDP is the sum of value added in the economy during a given period
C. GDP is the sum of incomes in the economy during a given period
D. All of above
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Gross Domestic Product (GDP)
■ Which of the following correctly defines GDP?
A. GDP is the value of the final goods and services produced in the economy
during a given period
B. GDP is the sum of value added in the economy during a given period
C. GDP is the sum of incomes in the economy during a given period
D. All of above
■ Answer: D
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Gross Domestic Product (GDP)
■ Which of the following correctly defines GDP?
A. GDP is the value of the final goods and services produced in the economy
during a given period
B. GDP is the sum of value added in the economy during a given period
C. GDP is the sum of incomes in the economy during a given period
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Final goods vs. intermediate goods (a good
used in the production of the final goods)
Production – the value of the intermediate goods
Labour income, capital income, tax revenues
Calculation of GDP: An Example
Steel Company
Revenues from sales $100
Expenses (wages) $80
Profit $20
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Car Company
Revenues from sales $210
Expenses $170
Wages $70
Steel purchases $100
Profit $40
1. What is the value of final goods and services?
2. What is the value added of the steel company and of the car company?
3. What is the total income in the economy?
Calculation of GDP: An Example
Steel Company
Revenues from sales $100
Expenses (wages) $80
Profit $20
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Car Company
Revenues from sales $210
Expenses $170
Wages $70
Steel purchases $100
Profit $40
1. What is the value of final goods and services? $210 (revenues from car sales) = GDP
– Final goods: Cars, $210
– Intermediate goods: Steel, $100
Calculation of GDP: An Example
Steel Company
Revenues from sales $100
Expenses (wages) $80
Profit $20
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Car Company
Revenues from sales $210
Expenses $170
Wages $70
Steel purchases $100
Profit $40
2. What is the value added of the steel company and of the car company?
Calculation of GDP: An Example
Steel Company
Revenues from sales $100
Expenses (wages) $80
Profit $20
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Car Company
Revenues from sales $210
Expenses $170
Wages $70
Steel purchases $100
Profit $40
2. What is the value added of the steel company and of the car company?
– Value added of steel company: $100
– Value added of car company: $210 -$100 = $110
– The sum of the value added = $100+110 = $210 = GDP
Calculation of GDP: An Example
Steel Company
Revenues from sales $100
Expenses (wages) $80
Profit $20
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Car Company
Revenues from sales $210
Expenses $170
Wages $70
Steel purchases $100
Profit $40
3. What is the total income in the economy? $150 + $60 = $210 = GDP
– No tax
– Labour income (i.e., wages): $80 + 70 = $150
– Capital income (i.e., profits): $20 + $40 = $60
Nominal GDP vs. Real GDP
■ Nominal GDP: the sum of the quantities of final goods produced times their current
price? Also called GDP in current dollars
■ Example:
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Unit: Trillion CAD 2012 2019
Nominal GDP of Canada $1.83 $2.31
Nominal GDP vs. Real GDP
■ Nominal GDP: the sum of the quantities of final goods produced times their current
price? Also called GDP in current dollars
■ Example:
1. The level of output has increased
2. The price level has increased
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Unit: Trillion CAD 2012 2019
Nominal GDP of Canada $1.83 $2.31
Price Level in Canada
Source: Bank of Canada
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Nominal GDP vs. Real GDP
■ Real GDP: the sum of the quantities of final goods produced times constant price?
Also called GDP in constant (or a specific year) dollars
■ Example:
■ Is X larger/smaller/equal to $1.83?
■ Is Y larger/smaller/equal to $2.31?
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Unit: Trillion CAD 2012 2019
Nominal GDP of Canada $1.83 $2.31
Real GDP of Canada X Y
Nominal GDP vs. Real GDP
■ Real GDP: the sum of the quantities of final goods produced times constant price?
Also called GDP in constant (or a specific year) dollars
■ Example:
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Unit: Trillion CAD 2012 2019
Nominal GDP of Canada $1.83 $2.31
Real GDP of Canada $1.83 $2.12
Nominal and Real GDP in Canada
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Technical Details When Calculating Real GDP
■ The relative price of goods change over time
– When using the price levels in a constant year to calculate real GDP, the weight
of goods and services is the relative price
– When relative prices change, the weight changes ? Choice of year matters
– To overcome this issue, use chained price
1. Calculate the average price of two consecutive years
2. Compute the growth rates of real GDP calculated with the average price
3. Reconstruct the real GDP by setting one year as the base year
■ The quality of goods change over time
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Inflation Rate
■ Inflation rate: The growth rate of price levels
■ Price level measured by price indexes:
– GDP deflator: Nominal GDP/Real GDP, reflects the average price of final goods
and services produced in the economy
– Consumer price index (CPI): reflects the average price of the consumption
basket of a typical urban consumer
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Real GDP per capita (2010 US$, 1998-2020)
Data Source: The World Bank
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Growth Rate of Real GDP per capita (1998-2019)
Data Source: The World Bank
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Real GDP per capita (2010 US$, 1998-2020)
Data Source: The World Bank
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Time Horizon in Macroeconomics
Short run
0-5 years
Medium run
6-20 years
Long run
20+ years
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■ Short run: Year-to-year movements in output (i.e., fluctuations, business cycles with
expansions and recessions) are driven by changes in demand
■ Medium run: Economy tends to return to the level of output determined by supply factors
(e.g., technology, labour force, and capital stock)
■ Long run: Supply factors evolve over time (e.g., technological progress, growth of labour, etc.)
Short and Medium Run
■ Key markets: Goods, financial, and labour markets
■ Model frameworks: IS-LM (short run, Week 1-7, Fall 2021) and AS-AD (medium run,
Week 8-13, Fall 2021) in a closed and an open economy (Week 1-8, Winter 2022)
– Study factors that affect economic output in the short and medium run (e.g.,
changes in consumer and firm confidence, minimum wage, etc.)
– Study how macroeconomic policy affects economic output
■ Monetary policy: Controlled by the Bank of Canada, a change of money
supply or interest rates
■ Fiscal policy: Controlled by the Department of Finance (referred to as
“government”), taxation and government spending
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Long Run
■ What are the driving forces for long-term economic growth? Why some countries grow
faster than the others? Why some countries are richer than the others? Will the growth
trajectories of different countries converge in the long run?
■ Consensus so far: Growth in labour force, (physical and human) capital accumulation, and
technological progress (i.e., productivity growth) are the key factors
■ Model frameworks: Solow growth model (Week 9-13, Winter 2022)
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Summary
■ GDP: The production of final goods and services, the sum of value added, total income
■ Nominal GDP: Quantities of output multiplied by current prices
■ Real GDP: Quantities of output multiplied by constant prices in a certain year
– Change in relative prices
– Change in the quality of goods
■ Inflation rate:
– GDP deflator: Average price of goods and services produced
– Consumer price index (CPI): Average price of a consumption basket
■ Time horizon in macroeconomics: Short run (fluctuations in aggregate demand),
medium run (return to level of output determined by supply factors), and long run
(evolution of technology, labour force and capital stock)
Department of Economics, University of Toronto Mississauga, Yingnan Zhao 26