Output and Income
The production of output generates income.
National product = National income
Aggregating Total Output
Nominal (current-dollar) national income: Total national income measured in current dollars
A change in this measure can be caused by a change in physical quantities or a change in
Real (constant-dollar) national income: National income measured in constant (base-period) dollars.
It changes only when quantities change.
Denoted by the symbol
We will focus on real national income.
National Income: Recent History
One of the most common measures of national income Gross domestic product = GDP
Business cycle: Fluctuations of national income around its trend value that follow a more or less
Potential output and the Output Gap
National output represent what the economy actually produces.
Potential output ( *): The real GDP that the economy would produce if its productive resources –land,
labour and productive capacity- were employed at their normal levels of utilization.
Output gap: Actual national income minus potential national income*
Recessionary gap: A situation in which actual output is less than potential o*tput,
Inflationary gap: A situation in which actual output exceeds potential ou*put,
can exceed * as there are many ways in which normal rates of utilization can be
Labour may work longer hours or factories may operate an extra shift.
Often there is an upward pressure on prices.
Why National Income Matters
National income important measure of economic performance.
Long-term growth is more important. Recession: A downturn in the level of economic activity. Often defined precisely as two consecutive
quarters in which real GDP falls.
Associated with unemployment and lost output.
Actual GDP is below potential GDP
When actual GDP exceeds potential GDP (it’s a boom), inflationary pressure usually ensues.
Long term growth makes people materially better off on average.
Employment, Unemployment and the Labour Force
An increase in national income means either a rise in employment or a rise in productivity.
Employment: The number of persons 15 years of age or older who have jobs.
Unemployment: The number of persons 15 years of age and 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 a percentage of the labour force, denoted .
Unemployment imposes serious costs in the form of economic waste and human suffering.
Frictional, Structural and Cyclical Unemployment
Economy is at potential GDP = full employment
But there will be still some unemployment for 2 re