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Lecture 3

ECON 209 Lecture Notes - Lecture 3: Planned Economy, Gm High Feature Engine, Output Gap

Course Code
ECON 209
Paul Dickinson

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I. Scarcity: more goods needed in the world than resources available meaning a choice must
be made in what is needed
II. Types of economies:
1. traditional economy habits and behaviours are kept in tradition so there is little
change in the economy as sons do what their fathers did and daughters what their
mothers did
2. command economy: run by a central authority/government
3. Free-market economy: decisions made by private firms
4. mixed: most actual economies are a mix of all the above economies
I. Output and income: output generates income, money one way production the other. The
sum of the value of the products produced = value of output
A. this is only for domestic production and gives a nominal national income = GDP GROSS
B. to find the change in quantity of production between the years, inflation must be
adjusted: we measure this in a particular time so the base year compared to other years
to get the REAL national income
1. the textbook refers to REAL GDP not nominal
2. real economic growth means that real GDP increases,
a) real PER CAPITA econ growth means GDP PER PERSON increases: ex if the
pop increases but the output doesn’t, we are worst off as individuals
C. Real GDP fluctuates around a rising trend:
1. trend shows long run econ growth
2. short run fluctuations show business cycle
a) recession: the period of NEGATIVE econ growth (2 consecutive months)
D. Potential Output: is what the economy could produce if all resources were employed at
their normal levels of utilization. Another term for potential is full-employment output. If
the potential changes, our ability to make more or less also changes. This is Productive
capacity where the upward trend in potential output is caused by growth in the
economy’s labour force, capital stock, tech change etc). For example, after the war,
there was an increase in the labour force as women joined the workforce more and more
over the years
1. Output Gap = YY* the difference between what is actually produced and the
potential amount produced Y = GDP * = potential
a) when output is below potential (Y < Y*) then there is a recessionary gap
b) when Y > Y* there is an inflation gap
the business cycle goes around the GDP over and under the recessionary and
inflation gaps
Labour Force
I. Employment E: number of workers over 15 who are employed
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