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Lecture 2

ECON 295 Lecture 2: Lecture 2

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Economics (Arts)
ECON 295
Mayssun El- Attar Vilalta

1. Macroeconomics policy – Lecture 2: Chapter 19 What Macroeconomics is all about Some remarks before we start... 1. Most macroeconomic issues are about either long-run trends (economic growth) or short-run fluctuations (business cycles), and government policy is relevant for both 2. Two streams of research in macro: based explicitly on micro foundations, based only implicitly on these micro foundations 19.1: Key Macroeconomic Values Output and income - National product (output) is the most comprehensive measure of nation’s overall level of economic activity - The production of output generates income - Example: If a firm produces $100 worth of ice cream, that $100 ultimately represents income for the firm’s workers, the firm’s suppliers of material inputs, and the firm owners - National product = National income - To measure total output in dollars, we add up the values of the many different goods produced  This gives nominal national income - Nominal and real income are different  If nominal GDP increases, it doesn’t mean output increased - One of the most commonly used measures of national income is called gross domestic product (GDP)  Real GDP measures the quantity of total output produced by the nation’s economy over the period of a year  Real GDP fluctuates around a rising trend: o The trend shows long-run economic growth o The short-run fluctuations show the business cycle - Potential output: What the economy could produce if all resources were employed at their normal levels of utilization (full-employment output) - The output gap: Measures the difference between potential output and actual output - - - Why national income matters? - The long-run trend in real per capita national income is an important determinant of improvements in a society’s overall standard of living  economic growth makes people materially better off on average - In the short-run   Employment, unemployment, and the labour force - Employment: The number of workers (15+) who hold jobs - Unemployment: The number who are not employed but are actively looking for one - Labour force: The total number of employed + unemployed - Unemployment rate: The number of unemployed expressed as a percentage of the labour force Even when  called the natural rate of unemployment or NAIRU, which is around 7% in Canada o Frictional unemployment (natural turnover) o Structural unemployment (Mismatch between jobs and workers) When - Long-term trend: Employment has grown roughly in line with the growth in the labour force - Short-term fluctuations have been substantial  From 3.4% in 1966 to 12% in 1982 - Why does unemployment matter? Some unemployment is desirable, as it reflects the time required for workers and firms to “find” each other so that good matches are
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