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ECON 295 (44)

Econ 295 Class Notes

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McGill University
Economics (Arts)
ECON 295
Christopher Ragan

Class Notes 1 4272012 15400 PM LECTURE 1120112CHAPTER 19 WHAT MACROECONOMICS IS ALL ABOUTOutput and IncomeProduction of output generates income To measure total output in dollars we add up the values of the many different goods producedYou produce Hockey sticks Hot dogs and Halter tops You cant just add up these items to find your output But you can add up the dollarworth of all these productsAggregate level of incomeResults in the nominal national income o Sum of all production in one yearGDP o Canadian GDP16 Trillion o Quadrupled in the last 40 yearsIn a typical year the GDP value goes up on average 5 per year Q goes up more than P 3 and 2 respectively Were concerned with the level of activity QHow productivity is increasing How many people were hiring etc With baseperiod prices we get real national incomeWhen the P goes up you know the productivity is going up in real terms Recession defined as a period where GDP actually falls negative growth Eg 3 in 2009Macroeconomists analyzeLongterm growthShortrun fluctuations LECTURE 2170112Real GDP fluctuates around a rising trendThe trend shows long run economic growthThe short run fluctuations show the business cyclePotential output is what the economy could produce if all resources were employed at their normal levels of utilizationFull Employment Output The output gap measures the difference between potential output and actual outputOutput GapYY Y is Potential Output Y is Actual Output o When YYthere is a recessionary gap o When Y Y there is an inflationary gapOnly way to produce more GDP than potential is to produce over capacity over timedrives up wages Estimates of Potential tend to be debatable because they are based on modelsAverage annual rate of Canadian real GDP growth over the past 4 decades has been about 3 A very deep recession has an annual growth of about 3Employment number of workers 15 who hold jobs Unemployment number who are not employed but are actively looking for work Labor Forceemployed unemployedUnemployment RateNumber of People Unemployed Number of People in the Labour Force Even when YY some unemployment exists Gap between Labour Force and Employment is UnemploymentRather volatileUnemployment Rate when YY is called the natural rate of unemployment NAIRUNAIRU unemployment existing at potential outputEstimated at below 7 nowSome unemployment is desirable as it reflects the time required for workers and firms to find each other so that good matches are made Some unemployment is however associated with human hardship especially for those individuals with skills that are not in high demand by firmsProductivity Productivity measure of output per unit of inputGDP per workerGDP per hour of work Increases in productivity are probably the single largest determinant of LR increases in material living standards GDP per person average incomeReal GDP per worker is measured in thousands of dollarsInflation and the Price Level Price Level average level of all prices in the economyConsumer Price Indexo Based on the price of a typical consumption basket relative to the price in some base year o Rate of change represents rate of Inflation o Alone is not meaningful You need two points in time and a difference for it to be representative of Inflation o CPISum of PtQ0 Sum of P0Q1 Inflation rate at which the price level is changingRate of change of pricesIn Canada today 3 o Bank of Canada aims for 2People on fixed income are slowly losing purchasing power because inflation increases but salary doesntInflation generates a lot of uncertainty for the economyInterest Rates The interest rate is the price of credit and the flow of credit is crucial to firms and households in a modern economy Nominal Interest Rate rate expressed in money terms Real Interest Rate rate expressed in terms of purchasing powerBurden of borrowing depends on the real interest rateInternational EconomyWhy do we trade Because we want stuff we cant produceImports are the things we want In order to get stuff we need to sell stuff Exports are the things we do so that we can afford imports Foreign Exchange foreign currencies or claims on foreign currencies Exchange Rate number of Canadian dollars required to purchase one unit of foreign currencyNumber of Canadian dollars it takes to buy one American dollar A depreciation of the Canadian dollar means that it is worth less on the foreignexchange marketa Rise in the exchange rateToday 101 CAD for 1 USDWhen CAD is low in value takes many to buy USD less purchases in USBalance of Payments accounts that record all payments made in international transactionsgoods services assetsTrade balanceCurrent accounts balanceCapital account balance For Canada exports and imports are both very largeroughly 35 of GDPbut the trade balance is usually smallLECTURE 319012012National Output and Value Added
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