ECON 209 Lecture Notes - Workforce Productivity, Real Interest Rate, Potential Output

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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
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
19.1 Key Macroeconomic Variables
Output and 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…
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:
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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
Productivity (output/employee) must rise
Employment: # of ppl 15+ yrs of age who have jobs
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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
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
Structural unemployment: unemployment due to mismatch btwn structure
of the supplies of labour and structure of demands for labour
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
GDP > potential GDP = unemployment falls below its full-employment
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
Mental illness
Social unrest
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
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