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Welcome to Econ 102!

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Course Information

Instructor: Alfred Kong

Office: Iona Building 011
Office Hours: Monday 1:00 to 1:50pm
Email: alfred.kong@ubc.ca
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Tutorials
Start: Monday, 8th January 2018

TA:
Office:
Office Hours:
Email:
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Textbook
Ragan, Christopher
Macroeconomics, 15th Canadian Edition, 2017 Pearson
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MyEconLab
You must register with MyEconLab through
www.pearsonmylabs.com. This is where you will have
access to each of the quizzes.

Course ID: kong63906

There is a student registration handout on Canvas that

teaches you how to register.

Please note that you MUST have the 15th edition of the
pearson online component for this course. Any previous
edition will not allow you to register for the quiz
component.
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Course Evaluation
5 MyEconLab Quizzes 15% (3% each)
Date: 22 Jan, 5 Feb, 12 Mar, 26 Mar, 7 Apr
Format: Multiple choice, ≈15 questions
Duration: 1 hour

Midterm 35%
Coverage: Ch.19,20,21,22,23,24
Tentative Date and Time: Wed, Feb 14, 6:15-7:45pm
Depending on room availiability

Final 50%
Coverage: Cumulative
Date: TBA
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Quizzes
You are required to do online quizzes throughout the semester from
www.pearsonmylabs.com, for which you must register. You can do your
quiz at any time before the deadline. However, once you begin your
quiz, it must be finished within an hour.

Corrections to previous questions can be made within the allocated

period of time only. Once you submit your final answers, no further
correction can be made. Please note that:

You must not exit or close the quiz window during the quiz as this will
count as you submitting your quiz as is. This will also occur if your
internet cuts out so please make sure you are on a secure connection.
For these quizzes, one attempt is allowed.
To reduce risk of computing issues with these online quizzes, please run
a browser check prior to your first quiz.
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Exams
Exams will consist of multiple choice and short answer questions. The
final will cover material from the entire course. To prepare for exams,
students should review all the relevant chapters and class notes. Exam
dates in this outline are only tentative. Students will be notified of the
date of the exam at least one week in advance.

In exceptional cases, students may be excused from taking an exam at

the scheduled time. To be excused, the student must:
•Notify the instructor of an inability to take the exam prior to the
scheduled time of the exam, when possible.
•Provide proofs of inability e.g. a doctor's note.
•No makeup exams will be arranged. Student who missed an exam
with a legitimate reason would have the weight of the missed exam
moved to the rest of the exams.
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Course Website
Canvas
https://isit.arts.ubc.ca/canvas/

What you can get from the website:

-Slides
-Tutorial questions
-Sample exams
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Week Topics Reading
1 Introduction
What Macroeconomics is About Ch.19

2 What Macroeconomics is About Ch.19

The Measurement of National Income Ch.20

3 A Simple Macro Model Ch.21

A Simple Macro Model Continued Ch.22

4 A Simple Macro Model Continued Ch.22

Short Run Equilibrium Ch.23

5 Short Run Equilibrium Ch.23

6 Long Run Equilibrium Ch.24
7 Government Debt and Deficits Ch.31
Midterm
(Tentative Date: 14 February 2018, 6:15-7:45pm)

8 Spring Break
9 Money and Banking Ch.26
10 Interest Rates and Economic Activity Ch.27
11 Canadian Monetary Policy Ch.28
12 Canadian Monetary Policy Ch.28
13 International Trade and Trade Policies Ch.32 and 33

14 Exchange Rates Ch.34

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Course Objectives
You can understand what people are talking about in the
news regarding the economy

We will discuss many issues related to the economy during

the semester including:
1) How do we measure the economy performance of a
country?
2) What models can we use to analyze the impact of real
world events on the economy?
3) How do fiscal and monetary policies affect our economy?
4) How do other countries affect the Canadian economy?
and more….
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Why does the economy matter to you?

1) Chance of getting a job
2) Your wages
3) Your wealth
4) Price of laptop, computer game, clothing, etc
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http://www.rbc.com/economics/economic-reports/provincial-economic-forecasts.html
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Annual Output Growth in Canada

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Chapter 19 and 20
What Macroeconomics Is
All About
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In this chapter you will learn…

1. …the meaning and importance of the key macroeconomic
variables:
1) price level and inflation
2) interest rates
3) unemployment
4) national income (output)

2. …the meaning of long-run trends or short-run fluctuations,

and that government policy is relevant for both.

3. …the expenditure approach to measuring national income.

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19.1 Key Macroeconomic Variables

Inflation and the Price Level
Price level: the average level of all prices in the economy at a
point in time.
Two typical (but not perfect) ways to measure price
level.

Inflation: the rate at which the price level is changing over

time.

Price level2014 = 102.5

Price level2015 = 105.2
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Inflation and the Price Level

Two typical ways to measure price level:

1) GDP deflator – based on the price of all output produced in
the country.
2) Consumer price index (CPI) – based on the price of a
basket of goods that typical households consume.

Source: https://www.economics.utoronto.ca/jfloyd/modules/infl.html
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Consumer Price Index (CPI)

The CPI basket in 2011 (Canada):

Statistics Canada surveys 16758 Canadian households on

their spending habits.
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Calculating the CPI

CPI t =
∑ PQt 0
× 100
∑PQ 0 0

The CPI at time T equals the ratio of the dollar amount

necessary to buy the typical basket of goods at time T divided
by the dollar amount necessary to buy the SAME typical
basket of goods in the base year, multiplied by 100.
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Calculating the CPI

CPI t =
∑ PQ
t 0
× 100
∑PQ
0 0
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Calculating the CPI

Inflation between 2002 and 2015 =
Inflation between 2014 and 2015 =
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Application of the CPI

By using the CPI, we can calculate what $20,000 in 1986 was

equivalent to in terms of 2013 purchasing power.

Suppose
CPI1986 = 64.4
CPI2013 = 121.9
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GDP Deflator

GDP deflator – based on the price of all output produced in

the country.

GDPDeflatort =
∑ PQ t t
x100 =
NominalGDP
x100
∑PQ 0 t RealGDP
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US Annual Inflation Rate

Canada Annual Inflation Rate

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Why Inflation Matters?

The purchasing power of money is negative related to the

price level.

Suppose you put $1000 in the bank at time t and a typical

basket of goods costs $1 at time t, and the bank will pay you
10% interests at time t+1.
What is the real return (in terms of purchasing power) of your
savings between t and t+1
1) if inflation rate is 8% between t and t+1?
2) if inflation rate is 10% between t and t+1?
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Interest Rates

Nominal interest rate: the rate expressed in money terms.

Real interest rate: the rate expressed in terms of purchasing
power.

Nominal interest rate = 10%

Inflation rate = 1%
Real interest rate =

Lenders want to lend?

Borrowers want to borrow?
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Employment, Unemployment, and the Labour Force

Employment: the number of workers (15+) who hold jobs.

Unemployment: the number who are not employed and are

looking for a job.

Labour force: the total number of employed + unemployed.

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Some unemployment is normal:

1) Frictional unemployment – Short-term unemployment that
arises from the process of matching workers with jobs.
2) Structural unemployment – Unemployment that arises
from a permanent mismatch between the skills of workers
and the requirements of jobs.
http://money.cnn.com/2017/09/15/technology/jobs-robots/index.html

Some unemployment could be minimized by appropriate

government and/or central bank policies:
Cyclical unemployment – Unemployment caused by
business cycles.
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• In July 2011, Canada Post cut 200 call-centre positions

in Manitoba, Ontario, New Brunswick, and Nova
Scotia, and outsourced the call centre services. How
should we categorize the unemployment of laid-off
Canada Post employees?

• If Canada Post’s layoffs were in response to

businesses cutting back on advertising during a
recession, the laid-off workers would be classified as
_____.
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• In July 2011, Canada Post cut 200 call-centre positions

in Manitoba, Ontario, New Brunswick, and Nova
Scotia, and outsourced the call centre services. How
should we categorize the unemployment of laid-off
Canada Post employees?

• If the laid-off workers are able to find work at one of

these other call-centre companies (Royal Bank, etc)
fairly quickly, they would be classified as _____.
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• In July 2011, Canada Post cut 200 call-centre positions

in Manitoba, Ontario, New Brunswick, and Nova
Scotia, and outsourced the call centre services. How
should we categorize the unemployment of laid-off
Canada Post employees?

• If the laid-off workers are unable to find work at

another call centre (other call centres in Canada are
closing as well) and must learn new skills to find other
work, they would be classified as _____.
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The unemployment rate when the economy is producing the

full employment output (or potential output) is called:
- the natural rate of unemployment (NRU)

How much is the NRU?

- below 7% in Canada
- around 5% in US

If the actual output of the economy is equal to the full

employment (potential) output,
unemployment = _____ + _____ + seasonal
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Output and Income

Nominal gross domestic product (same as nominal national

income) at time t – The total dollar value of all final goods
and services produced in country in a year using prices at
time t.
Nominal GDPt = ∑ PQ
t t

Output and Income – Final Goods

In 2015, Canada produces 2 apples:

Value of apples = $2
Which is used to produce 1 apple pie:
Value of the apple pie = $5
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Output and Income

Nominal gross domestic product (same as nominal national

income) at time t – The total dollar value of all final goods
and services produced in country in a year using prices at
time t.
Nominal GDPt = ∑ PQ t t

Real GDP or real national income – The total dollar value of

all final goods and services produced in a country in a year
using base year prices.
Real GDPt = ∑PQ 0 t
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Output and Income

Quantity of output ↑ ≈ Living standard ↑
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http://www.statcan.gc.ca/tables-tableaux/sum-
som/l01/cst01/dsbbcan-eng.htm
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Measuring Output and Income in the Real World

Statistics Canada collects output data in Canada. Output

figures are only estimates in the real world.

Two methods for measuring national income (output):

•total expenditures on final output
•total income generated by final production
Both methods should give the same value of output.

Suppose you spend $1.05 to buy a donut at Tim Hortons on

campus.
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GDP from the Expenditure Side

GDP = Ca + Ia + Ga + NXa

Adding up the expenditures needed to purchase the final

output produced in any given year in a country.

There are four broad expenditure categories:

- consumption (C)
- investment (I)
- government purchases (G)
- net exports (NX)
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Actual consumption expenditure (Ca) includes expenditure

on all final goods during the year.

Actual investment expenditure (Ia) is expenditure on the

production of goods not for present consumption, including:
1) Inventories
2) Plant and equipment
3) Residential housing

Actual government purchases (Ga) is the purchase of

currently produced goods and services by government
- excluding transfer payments (e.g. EI, CPP).

Actual net exports (NXa) is the difference between exports (Xa)

and imports (IMa)
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What counts as 2016 GDP in Canada?

All final output produced in 2016 in Canada.

Indicate what components of Canadian GDP (if any) each

of the following transaction would affect. Check all that
apply.
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Real GDP Recessionary Gap

Peak
Actual GDP

Potential GDP
Peak
Trough

Inflationary Gap

Time
Potential output (full employment output)
What the economy could produce at a point in time if all
resources were employed at their normal levels of
utilization.
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Long-Term Growth
Potential output increases over time.
What the economy could produce at a point in time if all
resources were employed at their normal levels of
utilization.

Factors that determine potential output:

1. Growth in the labour force.
2. Growth in human capital.
3. Growth in physical capital.
4. Technological improvement.
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Real GDP (real output) fluctuates around a rising trend

(potential output):
- the trend shows long term economic growth
- the short-run fluctuations show the business cycles
Real GDP, Billions of 2002 Dollars
1,600.00

1,400.00

1,200.00

1,000.00

800.00

600.00

400.00

200.00

0.00
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Long-Term Growth and Short-Term Fluctuations

There is considerable debate regarding the ability of
government to influence the economy’s long-run growth rate.
Real GDP

Actual GDP

Potential GDP

Time
Economists debate the effectiveness of fiscal and monetary
policy in influencing these short-run fluctuations.
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Omissions from GDP

Real GDP per capita ≠ Average living standards

Statistics Canada cannot measure economic activities that

takes place outside of regular, legal markets:
• illegal activities
• the underground economy
• home production
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Omissions from GDP

GDP does not measure “economic bads”
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Omissions from GDP

GDP does not measure leisure.
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GDP per Capita

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Question
What is the best level of
1) real GDP?
2) annual real GDP growth?
3) annual inflation rate?
4) unemployment rate?
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What Lies Ahead?

To organize our thinking about macroeconomics, we must

develop some tools. These will include:
• building a simple model of the economy (Ch.21)
• modifying the model to make it more realistic (Ch.22)
• improving the model further by adding an extra
component (Ch.23 and 24)
• using our basic model to analyze some relevant
economic issues