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ECON 295 (70)

19 - What macroeconomics is all about

5 Pages

Economics (Arts)
Course Code
ECON 295
Kenneth Ragan

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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. 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 output. 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 in dollars.  Value of total output gives the dollar value of national output: Nominal National Income  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 force *100 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 input. Labour productivity: The level of real GDP divided by the level of employment (or total hours worked). Inflation: A rise in the average level of all prices (the price level). Two concepts: - 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
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