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Midterm

EC 140 Midterm: Midterm Notes


Department
Economics
Course Code
EC140
Professor
Ken Jackson
Study Guide
Midterm

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Chapter19WhatMacroeconomicsIsAllAbout
Macroeconomics:thestudyofthedeterminationofeconomicaggregates,suchastotaloutput,
totalemployment,thepricelevel,andtherateofeconomicgrowth.
KeyMacroeconomicVariables
OutputandIncome
● Theproductionofgoodsandservicesgeneratesincome
● Output=nationalproduct=valueoftotalproductionofgoodsandservices
NominalNationalIncome:totalnationalincomemeasuredincurrentdollars(currentdollar
nationalincome).
RealNationalIncomenationalincomemeasuredinconstant(baseperiod)dollars.Itchanges
onlywhenquantitieschange(constantdollarnationalincome).
NationalIncome
● GDPisthemostcommonlyusedmeasureofnationalincome
● Longtermeconomicgrowth=majormovements(showgrowth)
● Shorttermfluctuations=hardlyvisible(showthebusinesscycle)
Recession:afallinthelevelofrealGDP.Oftendefinedpreciselyastwoconsecutivequarters
inwhichrealGDPfalls.
BusinessCycle:fluctuationsofnationalincomearounditstrendvaluethatfollowamoreor
lesswavelikepattern.
PotentialOutputandtheOutputGap
● Nationaloutput(orincome)representswhattheeconomyactuallyproduces.
● Animportantrelatedconceptisthelevelofoutputtheeconomywouldproduceifall
resourcesland,labour,andcapitalwerefullyemployed
PotentialOutput(Y*):therealGDPthattheeconomywouldproduceifitsproductiveresources
werefullyemployed(potentialGDP).
OutputGap:actualoutputminuspotentialoutput,YY*.
RecessionaryGap:asituationinwhichactualoutputislessthanpotentialoutput,Y<Y*.
InflationaryGap:asituationinwhichactualoutputexceedspotentialoutput,Y>Y*.
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Employment,Unemployment,andtheLabourForce
● Nationalincomeandemploymentarecloselyrelated
● Ifmoreoutputistobeproduced,eithermoreworkersmustbeusedinproductionor
existingworkersmustproducemore
● Shortrunchangesinproductivitytendtobeverysmallmostshortrunchangesinvolve
employment
● Longrunchangesinbothproductivityandemploymentaresignificant
Employment:thenumberofpersons15yearsofageorolderwhohavejobs.
Unemployment:thenumberofpersons15yearsofageorolderwhoarenotemployedandare
activelysearchingforajob.
LabourForce:thenumberofpersonsemployedplusthenumberofpersonsunemployed.
UnemploymentRate:unemploymentexpressedasapercentageofthelabourforce.
● UnemploymentRate= x100%
Numberofpeopleunemployed
Numberofpeopleinthelabourforce
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Frictional,Structural,andCyclicalUnemployment
● EvenwhenY=Y*,someunemploymentexists
○ Frictionalunemployment(naturalturnover)
○ Structuralunemployment(mismatchbetweenjobsandworkers)
● Cyclicalunemploymentrisesandfallswiththeebbandflowofthebusinesscyclewhen
Y<Y*,thereiscyclicalunemployment
Productivity
● Ameasureoftheamountofoutputthattheeconomyproducesperunitofinput.
● OftenmeasuredasGDPperworkerorGDPperhourofwork
● Increasesinproductivityareprobablythesinglelargestdeterminantoflongrun
increasesinmateriallivingstandards
LabourProductivity:thelevelofrealGDPdividedbythelevelofemployment(ortotalhours
worked).
InflationandthePriceLevel
Inflationmeansthatpricesofgoodsandservicesaregoingup,onaverage.
● Hyperinflationveryhighinflation
● Deflationdecreasinginflation
PriceLevel:theaveragelevelofallpricesintheeconomyexpressedasanindexnumber.
Inflation:ariseintheaveragelevelofallprices(thepricelevel).
● Anticipated=smallereffectontheeconomy
● Unanticipated=largereffectontheeconomy
ConsumerPriceIndex(CPI):anindexoftheaveragepricesofgoodsandservicescommonly
boughtbyhouseholds.
1. Calculatethecostofthegoodsandservicespurchasedinthebaseyear
2. Calculatethesamebundleofgoodsinotheryears(
3. Dividecurrentyearbythebaseyearandmultiplyby100.
CalculatingInflation
● Sincethepricelevelismeasuredwithanindexnumber,itsvalueatanyspecifictime
hasmeaningonlywhenitiscomparedwithitsvalueatsomeothertime.
● Byallowingustocomparethegeneralpricelevelatdifferenttimes,apriceindex,such
astheCPI,allowsustomeasuretherateofinflation.
● Rateofinflation= CPI1
CPI −CPI
2
PurchasingPowerofMoney:theamountofgoodsandservicesthatcanbepurchasedwitha
unitofmoney(negativelyrelatedtothepricelevel).
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