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ECON 1P92 (65)

Chapter 19

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Marilyn Cottrell

Macroeconomics • Studies the overall or aggregate economy • 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. 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 price level changes over time are removed, only changes in production remain. 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 income 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 time. When GDP is above potential • Can generate inflation • Growth in potential GDP can increase future incomes But… • 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 unemployed. Discouraged Workers – not actively seeking work, are not counted as unemployed. Part Time Workers – may be seeking full time positions. Are considered as employed. Unemployment Rate – percentage of the labour force that is unemployed: Formula: [(Number of People Unemployed)/(Number of People in the Labour Force)]x 100 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. Structural Unemployment • 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* Cyclical Unemployment • When U > U* Seasonal Unemployment – Unemployment may rise in the winter season for example. • StatsCan seasonally adjusts figures to remove this so that we can see trends more clearly. Unanticipated inflation: • 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 goes down. 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 Price Level • The average level of all 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 ‘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 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
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