MacroeconomicsThe study of the aggregate economy

Measuring Aggregate Demand

Keep in mind:

Aggregate means whole or total

Therefore Aggregate Demand = total demand for all goods and services from all sectors

of the economy.

Or put another way:

AD = C + I + G + (X - M)

C = Consumption• Affected by such things as:

★Income and wealth

★Interest rates

★Expectations of the Future

I = Investment

• Affected by such things as:

★interest rates

★Government policies

★Expectations of the Future

•includes purchases of machines, new buildings, additions to inventories

★Technology, depreciation levels

G = Government spending

• Affected by such things as:

★ Debt servicing costs

★Social service needs and transfer payment requirements

★Requirements for new spending on capital works (i.e. infrastructure)

x - m = The trade balance• Affected by such things as:

★Currency rates

★Barriers to trade

★Trade blocs and agreements

The Circular Flow Model of the

Economy

Product Market (finished goods and services)

Households Businesses

Resource Market(land, labour, capital)

Businesses

purchase resources

Labour Resources come from

households

Households

purchase goods and services

consumption of goods and services puts money back

into businesses

This represents the C + I

portion of the Aggregate Demand equation

Product Market (finished goods and services)

Households Businesses

Resource Market(land, labour, capital)

Now to factor in the “G”

Product Market (finished goods and services)

Households Businesses

Resource Market(land, labour, capital)

GOVERNMENT

Gov’t Spending on Social Serivces

Gov’t Spending on Corporations

Taxes

Taxes

Product Market (finished goods and services)

Households Businesses

Resource Market(land, labour, capital)

Also, the Trade

Balance(X - M)

Product Market (finished goods and services)

Households Businesses

Resource Market(land, labour, capital)

GOVERNMENT

Gov’t Spending on Social Serivces

Gov’t Spending on Corporations

Taxes

Taxes

Imports

(money going out of the country)

Exports(money coming

into the country)

Product Market (finished goods and services)

Households Businesses

Resource Market(land, labour, capital)

GOVERNMENT

Gov’t Spending on Social Serivces

Gov’t Spending on Corporations

Taxes

Taxes

Imports

(money going out of the country)

Exports(money coming

into the country)

Finally - the Banking Sector Finally - the Banking Sector must be factored in as a must be factored in as a

means on deferring spendingmeans on deferring spending

Product Market (finished goods and services)

Households Businesses

Resource Market(land, labour, capital)

GOVERNMENT

Gov’t Spending on Social Serivces

Gov’t Spending on Corporations

Taxes

Taxes

Imports

(money going out of the country)

Exports(money coming

into the country)

Savings

Savings

As you can see - some factors contribute to the economy and some

take from it.

Leakages Injections

•Savings

•Taxes

•Imports

•Spending

•Gov’t. Spending

•Exports

This is referred to as leakages and injections

•Stable economy

•Rising Economy

•Falling Economy

Leakages = Injections

Leakages < Injections

Leakages > Injections

and thus...Measurement and evaluation of economic activity.

Production• Most commonly measured as Gross Domestic Product (GDP)

The value at market prices of all final goods and services produced

in Canada by both Canadian and foreign

owned businesses.

•Sometimes (especially when speaking of other countries) measured as Gross National Product (GNP)

All final goods and services produced in Canada and abroad by Canadian-owned businesses minus goods and

services produced in Canada by foreign owned businesses.

•The most valuable measure of production is Real GDPThis is a measure of the GDP expressed

in base-year prices thus allowing for inflation

For example: Canadian GDP for 2010 was $1.58 trillion. If the GDP for 2011 is $1.68 trillion is it safe to say there was growth in Canada?Answer: No. Maybe more goods were made or maybe the prices of those goods went up and as a result it appears that more goods

were made.To solve this problem all prices would be converted to base-year prices (i.e. 2008) and

therefore would be comparable.

• ALL economic statistics have their drawbacks or shortcomings.

drawbacks

GDP Does GDP Does Not

Include:✦Hiring a painter

to paint your house.

Include:✦The time & effort of you painting your own house.

✦Domestic services (i.e. maid, cook)

✦Housework✦The underground economy - illegal activities including work that is paid “under-the-table

GDP Does GDP Does Not

Measure: Measure✦Production and Growth in the Economy

✦Quality of life. (i.e. production could be high for all the wrong reasons)