ECON 203 Lecture Notes - Lecture 5: Aggregate Demand, Government Spending, Output Gap
14 Dec 2016
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Department
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Chapter 5
Trader deficit: net exports ; exports – imports → trade balance
CPI: average prices for reference basket of goods and services
• What determines development?
Economic growth is measured by change in volume of production
Labour force & quality of labour force/human capital
Quality of public goods and services
Development of technology (R&D)
Prices & value of currency → strong currency and weak currency to attract exports
Quantity and quality of natural ressources
Cause of depreciation of Canadian dollar is quality of resources (crude oil) costly to
refine so significantly less exports → less Canadian $ in circulation.
• How does government policy/fiscal policy work? (chapter 5,6,7)
- mainly related to taxes and government spending
- target of fiscal policy? Trying to achieve?
Economic stability; government job as a social planner is to respond to a problem in
the economy. Government must respond to market fluctuation/ business cycle.
Instrument of fiscal policy;
taxes; collect % on income and spending, income taxes are progressive, sales taxes
are regressive because the burden of tax is greater on lower-income levels.
Recession is an economy contraction, less production, less spending & economic
activity for at least Q1, negative output gap. The government also collect less taxes,
with no changes in the taxation system, why? Unemployment of resources meaning
lower corporate revenues and labour income. Low tax revenues = T * Y
T = tax rate & Y = income, RDG, real output.
Government spending; finances economic activity through providing public goods
and services. Goal; increase in income (GDP) should be greater than government
expenditure. In other words, the government spending should bring more value to
the economy. (Delta Y / Delta G) > 1
The increased income that results from economic activity (^G) will allow consumers
to spend more and therefore increase the demand the which the economy will
match by suppling more (increased production) → down the road economic
growth. GDP = C + I + G + NX
Accounts for 60% of the spending in an economy
The GDP formula refers to the total domestic demand → aggregate demand
= real value of production purchased by households (C), companies (I), government
(G), foreign buyers (NX).
International trade happens when the economy has a surplus of resources; when a
country specializes in a production of certain goods and services that lack in the
international economy.
What determines aggregate demand: F(income, prices, types of goods, availability,
availability of foreign goods and value of currency)
Other factors that can change aggregate demand?
government transfers
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Document Summary
Trader deficit: net exports ; exports imports trade balance. Economic growth is measured by change in volume of production. Labour force & quality of labour force/human capital. Prices & value of currency strong currency and weak currency to attract exports. Cause of depreciation of canadian dollar is quality of resources (crude oil) costly to refine so significantly less exports less canadian $ in circulation: how does government policy/fiscal policy work? (chapter 5,6,7) Mainly related to taxes and government spending. Economic stability; government job as a social planner is to respond to a problem in the economy. Government must respond to market fluctuation/ business cycle. Instrument of fiscal policy; taxes; collect % on income and spending, income taxes are progressive, sales taxes are regressive because the burden of tax is greater on lower-income levels. Recession is an economy contraction, less production, less spending & economic activity for at least q1, negative output gap.
