• Studies the overall or aggregate economy
• The overall price level, not individual prices
• Total production in the economy, not the production by individual
• Adjusts to changes across the whole economy.
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
• Measures income at base period prices
Nominal GDP – Inflation = Real GDP
If price level changes over time are removed, only changes in production
Changes in Real GDP
• Measures changes in production
Potential GDP denoted as Y*
Same as the 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
Output Gap Formula: Y – Y* Recessionary Gap – When actual income (output) is less than potential
Inflationary Gap – When actual income (output) exceeds potential income
When GDP is below potential
• Output and income are lost forever
• Can never recover these losses. They are gone with the passage of
When GDP is above potential
• Can generate inflation
• Growth in potential GDP can increase future incomes
• Increase in average income doesn’t mean an increase for all
o Not everyone benefits
Employment – the number of adult workers (15 and over) who hold jobs
Unemployment – the number of individuals not employed but are actively
searching for a job.
Labour Force – the total number of people who are either employed or
Discouraged Workers – not actively seeking work, are not counted as
Part Time Workers – may be seeking full time positions. Are considered as
Unemployment Rate – percentage of the labour force that is unemployed: Formula: [(Number of People Unemployed)/(Number of People in the Labour
Full Employment – When Y = Y*, we have full employment. Some
unemployment still exists however.
• Occurs when all unemployment is either frictional and structural.
• There is no cyclical unemployment
• All potential GDP (Y*)
• Natural Rate of Unemployment [U*] exists at Y*
Frictional Unemployment – caused by normal turnover of labour (retirement,
quits, fired, switching jobs, etc.)
• Hiring takes time.
• Occurs because of a mismatch between workers and jobs.
• Skills differ.
Unemployment [U] changes over the business cycle.
• During recession: U rises above U*
• During Booms: U falls below U*
• When U > U*
Seasonal Unemployment – Unemployment may rise in the winter season for
• StatsCan seasonally adjusts figures to remove this so that we can
see trends more clearly.
• Benefits those with an oblication to pay money (borrowers)
• Harms those who are entitled to receive money (lenders) • Eg. A house mortgage during unanticipated inflation
• Benefits the buyer
• Harms the lender
• Inflation is hard to forecast accurately
• Adds to the uncertainties of economic life.
Note: You can still have the overall price level go up, while the inflation rate
Effects of Unemployment:
• Economic Problems
o Loss of output, loss of skills, etc.
• Immense human suffering
o Illness, breakdowns, etc.
• Social Problems
o Homelessness, crime
• The average level of all prices in the economy.
• 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 ‘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:
In the economy of Ultimate Pleasure, the typical urban household consumes
the following goods and services: Base Year Current Year
Goods QTY Price Expenditures Price Expenditures
Chocolates 100 $10 $1000 $15 $1500
Ice Wines 50 $50 $2500 $60 $3000
Back Rubs 70 $30 $2100 $30 $2100
Total Expenditures: $5600 $6600
A.What is the value of expenditures in the base year, and the current year?
• Base Year: $5600
• Current Year: $6600
CPI in the base year is equal to 100.
B. Fnd the value of the CPI in the current period.
CPI Current = Curre