Chapter 19 What Macroeconomics is All About.docx

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ECON 209 Jan. 11 & 16
Chapter 19 What Macroeconomics is All About
Some remarks…
Most macroeconomic issues are about either long run trends (economic growth) or short run
fluctuations (business cycles) and government policy is relevant for both
Two streams of research in macro: based explicitly on micro foundations, based only implicitly
on these micro foundations
19.1 Key Macroeconomic Variables
Output and Income
National product is most comprehensive measure of nation’s overall level of economic activity
Production of output generates income
Eg. If a firm produces $100 worth of ice cream, that $100 ultimately represents income for firm’s
workers, the firm’s suppliers of material inputs, and the firm owners
National product is by definition equal to national income
Product = Output = Income
To measure total output in dollars, we add up values of the many different goods produced. This
gives nominal national income
With base-period prices, we get real national income
o Read national income will be denoted by Y
One of most commonly used measures of national income is called gross domestic product (GDP)
Read GDP measures quantity of total output produced by nation’s economy over period of a
year
Real GDP fluctuates around a rising trend
o Trend shows long run economic growth
o Short run fluctuations show business cycle
Potential output is what the economy could produce if all resources were employed at their
normal levels of utilization
o Often called full-employment output
Output gap measures difference between potential output and actual output
o Output gap = Y Y*
o Want gap to be as small as possible
When Y < Y*, there is recessionary gap
When Y > Y*, there is an inflationary gap
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ECON 209 Jan. 11 & 16
Why National Income Matters?
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:
o When Y < Y*, there is recessionary gap unemployment and suffering and lost output
and economic waste
o When Y > Y*, there is an inflationary gap risk of high inflation rates
o In short run, we want to avoid both of the above situation
Employment, Unemployment, and labour force
Employment: number of workers (15+) who hold jobs
Unemployment: number who are not employed but are actively looking for one
Labour force: total number of employed + unemployed
Unemployment rate: number of unemployed expressed as a percentage of labour force
Unemployment rate = (Number of people unemployed/number of people in labour force) X 100
Even when Y = Y*, some unemployment exists
o Frictional unemployment: natural turnover in labour market (people changing jobs)
o Structural unemployment: mismatch between jobs and workers
Unemployment rate when Y = Y* is called natural rate of unemployment (NAIRU)
o Some estimates suggest that NAIRU is now below 7%
Difference between labour force and employment is unemployment
Discussion Questions 2
Explain why during booms it is possible for the unemployment rate to increase even while total
employment is rising
o What to expect after recession
Increase in employment: new hiring by firms to produce more output
Increase in labour force: more workers begin searching for jobs so we see that
unemployment rate also increases
Discussion Question 3
Evaluate following statements about unemployment
o Unemployment is a personal tragedy and national waste
National waste because they aren’t contributing to GDP
o No one needs to be unemployment these days; just look at help wanted ads in
newspapers and signs in stores
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