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.
Aggregate: a whole formed by combining several elements
When aggregate output rises, the output of many commodities and the incomes of many
people rise with it. When the price level rises, many people in the economy are forced to
make adjustments. ….
Macroeconomics consider two different aspects of the economy:
- Short-run behavior of macroeconomic variables, such as output, employment, and
inflation, and about how government policy can influence these variables.
- Long-run behavior ofcyc the same variables, especially the long-run path of aggregate
National Product: measure of a nation’s overall level of economic activity is the value of
its total production of goods and services
Production of output generates income.
National product = National Income
National Income: value of total output and the value of the income claims generated by
the production of that output
To measure total output, quantities of many different goods are aggregated. To construct
such totals, we add up the values of the different products. We begin by multiplying the
number of units of each good produced by the price at which each unit is sold. This yields
a dollar value of production for each good. We then sum these values across all the
different goods produced in the economy to give us the quantity of total output measured
Value of total output gives the dollar value of national output: Nominal National
Real National Income: National income measured in constant dollars. It changes only
when quantities change.
GDP (Gross Domestic Product): commonly used measures of national income.
Business cycle: Fluctuations of national income around its trend value that follow a more
or less wavelike pattern.
National output: what the economy actually produces. Potential output: what the economy would produce if all resources were employed at
their normal levels of utilization.
Output gap: Actual national income minus potential national income 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*
Recession: A downturn in the level of economic activity. Often defined precisely as two
consecutive quarters in which real GDP falls.
Recessions are associated with unemployment and lost output.
National income is an important measure of economic performance.
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.
Unemployment rate = Number of people unemployed / Number of people in the labor
Labour force: The number of persons employed plus the number of persons unemployed
Always will be some sort of unemployment because of natural turnover in the labour
market and mismatch between jobs and workers. Unemployment caused by the normal
turnover of labour is called frictional unemployment. Unemployment caused by the
mismatch between the structure of the supplies of labour and the structure of the demands
for labour is called structural unemployment.
Full employment happens when the only unemployment is frictional and structural.
Productivity: measure of the amount of output that the economy produces per unit of
Labour productivity: The level of real GDP divided by the level of employment (or total
Inflation: A rise in the average level of all prices (the price level).
- price level: average level of all prices in the economy and is given by the symbol P
- rate of inflation: rate at which the price level ir rising. Consumer Price Index (CPI): An index of the average prices of goods and services
commonly bought by households.
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.
Purchasing power of money: The amount of goods and services that can be purchased
with a unit of money
Inflation reduces the purchasing power of money. It also reduces the real value of any
sum fixed in nominal (dol