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Chapter 19 Economy.docx

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Marilyn Cottrell

Chapter 19 Economy  Studies the overall or aggregate  The overall price level, not individual prices  Total production in the economy, not the production by individual firms  Adjusts to changes across the whole economy  National income = national product (output of the total economy aka GDP) Gross Domestic Product  Total output produced is the total value of all goods and services produced  Production of output generates income  The quality of total output is measured in dollars  Nominal National Income: [measured in current dollar – equilibrium year prices]  The dollar value of total output Macroeconomics  Unemployment  Inflation  Interest rates  Business Cycles  Exchange Rates  Economic Growth Real GDP  Measures income at base-period prices  Nominal GDP – Inflation = Real GDP  If price level changes over time are removed, only changes in production remain  Changes in Real GDP  Measures changes in production Potential GDP [Y*]  Potential national income (output)  What the economy could produce  If all resources were employed at their normal levels of utilization  Often called full-employment income  Output gap- The difference between potential and actual output  Denote potential output by Y* and actual by Y.  Output Gap = Y* - Y Recessionary Gap  When actual income (output) is less than potential income Inflationary Gap  When actual income (output) exceeds potential income When GDP is below potential  Output and incomes are lost  Can never recover these losses When GDP is above potential  Can generate inflation  Growth in potential GDP can increase future incomes  But...  Increase in average income doesn’t mean increase for all- Not all benefit Employment  Number of adult workers (15 and over) who hold jobs Unemployment  Number of individuals not employed but actively searching for a job Labour force  Total number of people who are wither employed or unemployed Unemployment rate  Percentage of the labour force that is unemployed Unemployment Rate = Number of People Unemployed / Number of people in the labour force * 100 e.g. Labour force = 100 Unemployed= 10 Unemplyment rate = 100/10*100 = 10% Full employment [ Y=Y* ]  Some unemployment exists  Frictional  Structural Frictional unemployment  Caused by normal turnover of labour (retirement, quits, ect.) – Hiring takes time Structural unemployment  Occurs because of a mismatch between available workers and jobs Full employment  Occurs when all unemployment is frictional and structural  There is no Cyclical Unemployment  At potential GDP [ Y* ]  Natural Rate of Unemployment [U*] exists at Y* Unemployment [U] changes over the business cycle During recessions, U rises above U* During booms U falls below U* Cyclical Unemployment  When U>U* which exists at Y* Seasonal Unemployment  U may rise by 0.3 percentage points in January  Stats Canada seasonally adjusts figure to remove this  Can see trends more clearly Effects of Unemployment  Economic Problems:  Loss of output, loss of skills, ect.  Immense human suffering  Illness, breakdowns, ect.  Social Problems  Homelessness, crime Productivity  Productivity = Real GDP/Employment (total hours worked) o More people participating in the labour force\ o Increasing trend towards machines etc. o Rising employment  Largest cause of rising material standards Price level  The average level of all prices in the economy  Denoted by P Inflation  The rate at which the price level is changing Consumer Price Index [CPI]  The most common measure of the price level  Based on the price of a typical consumer “basket” of goods and services  CPI for the base period is set to 100 [always]  CPI in later years shows prices as a ratio of the price in the base period Problem In the economy of Ultimate Pleasure, the typical urban household consumes the following goods and services. Base Year Current Year Goods Qty Price Expenditure Price Expenditure Chocolates 100 $10.00 $1,000.00 $15.00 $1,500.00 Ice wine 50 $50.00 $2,500.00 $60.00 $3,000.00 Back rubs 70 $30.00 $2,100.00 $30.00 $2,100.00 Total $5,600.00
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