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Chapter 19.docx

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Brock University
Professor Cottrel

ECON 1P92 September 5 , 10 and 12 2013 th Chapter 19 What Macroeconomics Is All About  Studies the overall or aggregate of the economy  The overall price level, not individual prices  Total production in the economy, not the production by individual firms  Adjustments to changes across the whole economy Topics covered: - Unemployment - Inflation - Interest Rates - Business Cycles - Exchange Rates - Economic Growth Gross Domestic Product (GDP): - Total output produced is the total value of all goods and services produced - Production of output generates income - The quantity of total output is measured in dollars Nominal National Income: [current dollar] - The dollar value of total output Real GDP: - Measures income at base period prices - {Nominal GDP – Inflation = Real GDP} - If the price level changes over time and 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 the 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 output by Y. - Output gap = Y* - Y Recessionary Gap: - When actual income (output) is less than potential income Inflationary Gap: - When actual income (output) is greater than potential income When GDP is below potential: - Output and input are lost - Can never recover from this loss When GDP is above potential: - Can generate inflation - - Growth in potential GDP can increase future incomes BUT… - Increase in average income doesn’t mean for all (not everyone benefits) Employment: - Number of adult workers (15 and over) who hold jobs Unemployment: - Numbers of individuals not employed but actively searching for a job Labour Force: - Total number of people who are either employed or unemployed Discouraged Workers: - Not actively searching for work - Not counted as unemployed Part-Time Workers: - May be searching for full time position - Considered employed Unemployment Rate: - Percentage of the labour force that is unemployed - Unemployment Rate = # of people unemployed X 100 # of people in the labour force Full Employment: [Y=Y*] - Some employment exists - Frictional and Structural Frictional Unemployment: - Caused by normal turnover of labour (retirements, quits, etc.) – 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* Effects of Unemployment - Economic Problems:  Loss of output, loss of skills, etc.. - Immense human suffering  Illness, breakdowns, etc.. - Social Problems  Homelessness, crime, etc.. Price Level: - The average level of all the prices in the economy 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. Goods QTY Price Expenditures Price Expenditures Chocolate 100 $10 $1,000 $15 $1,500 Ice Wine 50 $50 $2,500 $60 $3,000 Back Rubs 70 $30 $2,100 $30 $2,100 Total Expenditures $5,600 $6,600 A) What is the value of expenditures in the base year and in the current year? Base Yea
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