Economics 102 - Final Exam Review

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Published on 13 Apr 2013
ECON 102
Economics 102: Principles of Macroeconomics Final Exam Review
Final Exam Review: Chapter 19-31, 33-35
Chapter 19
Macroeconomics: study of the economy without details of markets for individual products
o Concerned with the behaviour of economic aggregates
Total output, total investment, total export and price level
o Account for economic activity in different markets and consumer behaviour
A full understanding of macroeconomics requires understanding the nature of short-run
fluctuations as well as the nature of long-run economic growth
There are two different streams of research in macroeconomics
o Explicitly: build models and populate with coefficients to find values for aggregates
o Implicitly: use aggregate relationships for consumption, investment and employment
to represent the behaviour of many firms and consumers in the economy
Explicit economists assume wages and prices are perfectly flexible and therefore shift
Implicit economics assume wages and prices are fixed, thus are in disequilibrium longer
o This textbook will follow this approach to macroeconomic analysis
19.1 Key Macroeconomic Variables
Output and Income:
National product: value of a nation's total production of goods/services (national income)
o The production of output generates income
o All of the economic value that is produced belongs to someone in the form of income
Employees, suppliers, owners etc.
National income: value of the total output and the value of income created by production
Aggregating Total Output:
To measure total output, quantities of many different goods are aggregated
o Add up the values of the different products (monetary value)
Nominal national income (Y): the value of total output (monetary value of national output)
o Tells us the value of current output measured at constant prices
o Change in Y can be caused by a change in quantity or price of products
o Referred to as current-dollar national income
Real income: value of individual outputs at a set of prices in some base period
o Changes year to year are reflect changes in quantities as prices are held constant
o Referred to as constant-dollar national income
National Income - Recent History:
Gross domestic product (GDP): most commonly used measures of national income
o Can be measured in either real or nominal terms (textbook focuses on real GDP)
Business cycle: fluctuations of national income around its trend value
o Continual ebb and flow of business activity that occur in the long-term trend
o Fluctuations are systematically enough to identify common factors
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Economics 102: Principles of Macroeconomics Final Exam Review
Potential Output and the Output Gap:
National output represents what the economy actually produces
Potential output (Y*): production level that employs all resources and productive capacity
o Cannot be measured as precisely as GDP (estimated using statistical techniques)
o Y < Y*: market value of goods/services not produced (resources not fully employed)
Recessionary gap: national nominal income is less than potential output
o Y > Y*: value of production exceeds what the economy can sustainably produce
Normal rates (Y*) can be exceeded temporarily (longer hours, extra shifts etc.)
Inflationary gap: output gap that causes an upward pressure on prices
Why National Income Matters:
National income is an important measure of economic performance
Most economists believe that long-term growth is more important than the short-term
Recessions are associated with unemployment and lost output
o An economy’s resources aren’t at normal intensity if GDP is below potential GDP
Booms are associated with high employment and high output
o When GDP exceeds potential GDP, inflationary pressures usually occur
Causes concerns for governments trying to stabilize or lower the inflation rate
The long-run trend in real per capital national income shows improved living standards
o When income per person grows, the next generation will be better off than the last
o The benefits of growth are not usually evenly distributed throughout the population
Employment, Unemployment and the Labour Force:
National income and employment levels are closely related
o More production, the more workers needed to fulfill production levels
Productivity: the amount of output per person employed
o Productivity has very little change in the short run
o Most short-run changes in output result from changes in employment
o In the long-run changes in productivity and employment can be significant
Employment: number of adult workers (workers over the age of 15 in Canada)
Unemployment: number of adult workers not employed but are actively searching for a job
Labour force: total number of people who are either employed or unemployed
Unemployment rate: number of unemployed people, a fraction of the labour force
o    
 
o Recorded each month by Statistics Canada (Labour Force Survey)
Frictional, Structural, and Cyclical Unemployment:
Full employment: when the economy is at potential GDP (unemployment still exists)
There are constant turnovers of workers and changes in job opportunities
o New people enter the workforce, some quit, others are fired
o Frictional unemployment: unemployment caused by the normal turnover of labour
There are mismatches between characteristics of the labour force and available jobs
o Labour doesn’t have required skills that are in demand or not geographically available
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Economics 102: Principles of Macroeconomics Final Exam Review
o Structural unemployment: mismatch between the structure of supplies of labour and
structure of the demands of labour
Natural turn over and mismatch between jobs occurs even when there is full employment
Full employment occurs when there is only frictional and structural unemployment
o Factors of production are at normal intensity, and the economy is at potential GDP
o When GDP is below potential GDP, there is a rise in unemployment
o When GDP is above potential GDP, unemployment falls below full-employment
Cyclical unemployment: unemployment that is neither frictional or structural
o Changes with ebb and flow of the business cycle
Unemployment also has seasonal fluctuations (fishing season, ski season etc.)
o Statistics seasonally adjust unemployment numbers to remove these fluctuations
Removing fluctuations shows cyclical and trend movements more clearly
Seasonally adjusted numbers show relative change rather than month to month
Employment and Unemployment - Recent History:
Over the past 40 years, employment levels are in line with the growth of the labour force
o In the long-run the trend is generally stable
o In the short-run there are large fluctuations in unemployment levels
Why Unemployment Matters:
The social significance of unemployment relates to economic waste and human suffering
o Human effort is the least durable economic commodities (time cannot be recovered)
Long-term unemployment creates poverty, increases crime, mental illness and social unrest
o In the past personal savings, charity or other help prevented starvation
o Currently employment insurance and social assistance (welfare) creates a safety net
o Short-term unemployment is feasible for many, but benefits do not last long-term
Canada's GDP has increased relatively steadily for many years, shows steady growth
o Employment has increased significantly,
Results from a rise in population and more participation
o Canada's physical capital (buildings, factories, machines) have evolved
o Productivity has increased in almost every year since 1960
Productivity: measure of the amount of output that the economy produces per unit of input
o Inputs (factors of production): land, labour and capital
Labour productivity: amount of real GDP produced per unit of labour employed
o Labour employed is measured by number of workers or number of hours worked
Productivity - Recent History:
Labour productivity is measured by real GDP per employed worker and per hour worked
o Per hour worked is more accurate as the number of working hours per worker change
Takes into account the changes in hours worked
Significant increases in labour productivity and GDP per employed worker (1976 to 2008)
Why Productivity Matters:
Productivity is the largest factor of increased material living standards over time
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