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ECON 209 Chapter 19.docx

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Economics (Arts)
ECON 209
Paul Dickinson

ECON 209 Chapter 19 – What Macroeconomics Is All About January 10, 2013 Macroeconomics: Study of the determination of econ aggregates (e.g. total output, total employment, the price level, rate of econ growth) – a broad perspective on how the market behaves  Results from activities in many diff markets and combined behaviour of millions of diff decision makers  Macroeconomists focus on 2 diff aspects of the econ: SHORT-RUN FLUCTUATIONS AND LONG-RUN ECON GROWTH 1. Short-run behaviour of macroecon variables and how gov’t policy can influence these variables (includes study of BUSINESS CYCLES) 2. Long-run behaviour of these variables (esp long-run path of aggregate output) – this is the study of econ growth, concerned w/ explaining how investment and tech change affect material living standards (in the long-run)  2 diff streams of research in macroecon: based EXPLICITLY on micro foundations (wages and prices are perfectly flexible) and based IMPLICITLY on micro foundations (wages and prices are slow to adjust – markets can be in diseq for longer periods of time)… WE ARE LOOKING AT THE SECOND APPROACH 19.1 Key Macroeconomic Variables Output and Income: OUTPUT GENERATES INCOME  Most comprehensive measure of nation’s overall level of econ activity is val of its total production of goods and services (nat’l product)  Nat’l product = nat’l income (val of total output = val of income claims generated by the production of that output) Aggregating total output: qtys of many diff goods are aggregated to measure total output – we add up $ vals of production of diff products to arrive at these totals… QTY OF TOTAL OUTPUT MEAUSRED IN $  Nominal nat’l income: total nat’l income measured in current dollars (a.k.a. current-dollar nat’l income) – dollar val of nat’l output  Change in this can be caused by a change in either physical qtys or prices on which it is based  To determine extent to which any change is due to qtys or prices: calculate REAL NAT’L INCOME: nat’l income measured in constant (base-period) $; changes only when qtys change (a.k.a. constant-dollar nat’l income)  Val of current output measured at constant prices – sum of qtys valued at base period prices  Comparing RNI from different yrs shows change in real output in the intervening period National income – recent history: One of the most commonly used methods of measuring nat’l income: GDP (can be measured in real or nominal terms; we focus on real)  Long-term econ growth – (+) trend (real output is increasing)  Short-term fluctuations around the trend  Business cycle: continual fluctuations of nat’l income around its long-term trend val (wave-like)  May include recessions and booms, as well as recovery periods Potential output and the output gap:  Nat’l output: what the econ actually produces  Potential output: what the econ would produce if all resources were employed at normal levels of utilization (a.k.a. full-umployment output) – Y* (actual output = Y)  Output gap: actual nat’l income – potential nat’l income (Y – Y*)  Recessionary gap: Y < Y*  Inflationary gap: Y > Y* Terminology of business cycles:  Trough: unemployed resources and a level of output that is low relative to econ’s capacity to produce – substantial amt of unused productive capacity, profits are low, econ prospects are grim (less investing)  Recovery: mvmt out of a trough – k is replaced; employment, income, consumer spending rise; expectations become more favourble  renewed investment… production can be increased w/ relative ease  Peak: recovery peaks at the top of the cycle – existing capacity used to a high degree; potential labour/raw materials shortages  costs AND prices rise so business remains profitable… followed by slowdowns in econ activity  Recessions: downturn in econ activity – output falls, so to does employment and household incomes; profits and therefore investment decrease (often defined precisely as as 2 consecutive quarters in which real GDP falls)… can turn into a DEPRESSION Why nat’l income matters: it is an important measure of econ performance  Long term growth (potential GDP is the most important)  Recessions: econ waste and human suffering  Booms: upward pressure on inflation  Long-run trend in real per capita nat’l income is an important determinant of improvements in society’s overall standard of living  Econ growth makes ppl materially better off on avg, it doesn’t necessarily make every individual better off (benefits are not shared equally) Employment, Unemployment, and the Labour Force:  Nat’l income and employment are closely related; either…  Employment must rise (most short-run changes accomplished this way)  Productivity (output/employee) must rise  Employment: # of ppl 15+ yrs of age who have jobs  Unemployment: # of ppl 15+ yrs of age who are not employed and are actively searching for a job  Unemployment rate = [# of ppl unemployed / # of ppl in the labour force] x 100 Frictional, structural, and cyclical unemployment:  Econ is at potential GDP: full employment (when unemployment is only frictional and structural)  Frictional unemployment: unemployment caused by the normal turnover of labour  Structural unemployment: unemployment due to mismatch btwn structure of the supplies of labour and structure of demands for labour  EVEN WHEN ECON IS AT “FULL EMPLOYMENT” SOME UNEMPLOYMENT EXISTS B/C OF NATURAL TURNOVER IN THE LABOUR MARKET AND MISMATCH BTWN JOBS AND WORKERS  Full employment: factors of production are being used at normal intensity, econ is at potential GDP  GDP < potential GDP = unemployment rises above its full-employment level  GDP > potential GDP = unemployment falls below its full-employment level  Cyclical unemployment: neither structural nor frictional, changes w/ fluctuations of the business cycle  Unemployment also has seasonal fluctuations (unemployment stats are seasonally adjusted) Employment and Unemployment – Recent History:  Employment has grown roughly in line w/ labour force since 1960  Short-term fluctuations have been substantial  Econ had been growing steadily in yrs up to 2008 (unemployment rate was lowest it had been in 30 yrs)  Late 2008: onset of recession; unemployment rate rose sharply  There has been a slight upward trend in the unemployment rate over the past 50 yrs Why unemployment matters: Unemployment has huge social significance  Human effort is least durable econ commodity  Loss of income associated w/ unemployment harms individuals (i.e. poverty)  Other of long-term unemployment include  Crime  Mental illness  Social unrest Productivity: Long-run growth of Canada’s econ has 3 general causes: 1. Level of employment has increased significantly 2. Stock of physical k has increased fairly steadily over time 3. Productivity in Canada has increased in almost every yr since 1960  Productivity: measure of amt of output econ produces per unit of input (we have several diff measures of productivity b/c there are many diff inputs in the econ)  Labour productivity: amt of real GDP produced per unit of labour employed (commonly used)  It is more accurate to express labour productivity in amt of real GDP/hour worked (instead of real GDP produced/employed worker) b/c avg # of hours worked per employed worker changes over time (fluctuation over the business cycle, long-term decline  There has been a significant increase in labour productivity over the past 3 decades  Real GDP/employed worker: avg annual growth rate of 1.1%  Real GDP/hour worked: avg annual rate of 1.3% Why productivity matters: single largest cause of rising material living standards over long periods of time  Short-run: changes in avg real incomes have more to do w/ fluctuations of business cycle than w/ changes in productivity  Upward trend in GDP comes in large part from rising productivity  Why is real income of the avg Canadian so much higher today than it was 50 yrs ago?  The avg Canadian worker today is way more productive than 50 yrs ago – better physical k, greater worker skills… therefore the purchasing pwr of the avg worker’s earnings are higher now Inflation and price level:
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