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ECON 311 Jan 14
Ch 19 What Macroeconmoices is all about?
Key Macroeconomic Variables
- Output and Income
- The production of output generations income
- To measure total output in dollars, we add up the values of the many
different goods produced
- This gives normal national income, called gross domestic product (GDP)
- When we measure the dollar value of the goods produced in a given year
with respect to some reference year (based-period prices), we get real national
- ex: base year 2002, 50 dollars. GDP = 50 x5. Today’s price is 100. GDP =
Real GDP—real gross domestic product—is the value of the total
production of a nation from all the sources such as farms, factories,
shops, and offices, measured in the prices of a single year or base year.
Currently the base year is 2002.
Economic growth is the expansion of the economy’s production
possibilities—an outward shift of Production Possibility Boundary
We measure economic growth by the increase in real GDP. The
increase in real GDP is solely caused by the expansion in
the real GDP growth. Inflation may cause the normal price to
go up even the production hasn’t changed.
Whenever the country becomes more productive, there will be
more economic growth which depends on education ,
technology and resource.
Real GDP fluctuates around a rising trend:
the trend shows long-run economic growth
the short-run fluctuations show the business cycle-the fluctuations of
real GDP around potential GDP.
Potential output or GDP is what the economy could produce if all resources
(such as labour, capital, land, and entrepreneurial ability) were employed at
their normal levels of utilization - often called full-employment output.
The output gap measures the difference between potential output Y* and
actual output Y.
Output Gap = Y - Y*
When Y < Y* , there is a recessionary gap.
When Y > Y*, there is an inflationary gap. Page 2 of 3
potential GDP increase over time. It is real GDP. What’s the reasons behind for
increasing GDP? Resources, better technology (within sho