ECO100Y1 Lecture Notes - Lecture 15: Potential Output, Output Gap, Fiscal Policy

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3 Feb 2016
School
Department
Course
Professor
Macroeconomics:
National Income: value of total output and income generated by the production
of that output. It represents what the economy actually produces.
Nominal national Income: national income measured in current dollars.
Real National Income: measure in constant (base-period) dollars, only changes
based on quantity change.
Growth Rate=
[
GDP
(
t
)
GDP
(
t1
)
GDP
(
t1
)
]
100
Output gap measures the di"erence between actual and potential (what the
economy would produce if its productive resources were full employed) output.
Output Gap=ActualOutputPotential Output
If actual output is less than potential output, a recessionary gap exists.
If actual output is more than potential output, an in$ationary gap exists.
Unemployment Rate=unemployed
totalof people employedunemployed 100
More output= more employment and higher productivity.
Natural Rate of Unemployment: unemployment rate at the level of full
employment.
At Actual Output=Potential Output:
Frictional Unemployment: new people entering the labour force + others looking
for a better job.
Structural Unemployment: mismatch between jobs and workers. (The
characteristics of labour supply and labour demand.
Cyclical Unemployment occurs at the di"erence between the actual level of
unemployment and the natural level of unemployment. (when actual=potential
output)
Labour Productivity:
Real GDP
level of employment
usually measured as GDP/worker or GDP/hour of work.
Price level: average level of all prices in the economy, as an index number.
In$ation: rate at which the price level is changing.
Consumer Price Index (CPI): measure the average price of goods and services
bought by a typical Canadian household.
CPI=value of basket measuredcurrent prices
value of basket base year 100
≥≥≥≥
CPI=
[
(
p1, y2q1, y1
)
+
(
p2y2q2y1
)
]
[
(
p1y1q1y1
)
+
(
p2y1q2y1
)
]100
Rate of In$ation:
π=CPI
(
t
)
C PI
(
t1
)
CPI (t1)100
Nominal Interest Rate: rate expressed in money terms.
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