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Econ 295 - Readings 19-22

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McGill University
Economics (Arts)
ECON 295
Christopher Ragan

CHAPTER 19 Macroeconomics study of the determination of economic aggregates such as total output total employment the price level and the rate of economic growth How the economy behaves I broad outline without dwelling on much of the detail that occurs in markets for individual productsAllows us to view the big picture A full understanding of macroeconomics requires understanding the nature of shortrun fluctuations as well as the nature of longrun economic growth Two different streams of research in macroeconomics Based explicitly on microeconomic foundations Optimizers Based implicitly on microeconomic foundations Behaviours The most comprehensive measure of nations overall level of economic activity is the value of its total production of goods and services called national product The production of output generates income National product is by definition equal to National income National Income both the 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 aggregatedAdd up the values of the different products Sum the values across all different goods produced in the economy to give us the quantity of total output measured in dollars Results inNominal National Income total national income measured in current dollars Current Dollar National IncomeCurrentDollar National IncomeChange is caused by a change in either the physical quantities or the prices on which it is based Real National Income Ynational income measured in constant baseperiod dollars It changes only when quantities changeConstantDollar National IncomeUsed to evaluate the extent of the change in quantities or pricesMeasures the value of individual outputs not at current prices but at a set of prices that prevailed in some base period Gross Domestic Product GDPone of the most common measures of national income Can be measured in either real or nominal terms Real output has increased fourfold since 1965Long Term Economic Growth Business Cycle fluctuations of national income around its trend value that follow a more or less wavelike patternContinual ebb and Flow of business activity that occurs around the LR trendCan last for several yearsSystematic enough to identify common factors National output represents what the economy actually produces Potential output Yreal GDP the economy would produce if all its productive resourcesland labour productive capacitywere employed at their normal levels of utilizationFull Employment Output Output Gap actual national income minus potential national incomeYYWhen YYgap measures market value of goods and services that are not produced because the economys resources are not fully employed o Recessionary GapWhen YYgap measures market value of production in excess of what the economy can produce on a sustained basis o Upward pressure on prices o Inflationary Gap Recession downturn in the level of economy activity Often defined precisely as two consecutive quarters in which real GDP fallsAssociated with unemployment and lost output Economic growth does not entail that every individual is better off it is a huge generalization Employment number of persons 15 who have jobs Unemployment number of persons 15 who are not employed and are actively searching for a job Labour Force number of persons employed plus number of persons unemployed Unemployment Rate unemployment expressed as a percentage of the labour force denoted UUnemployment Rate UnemployedLabour ForceIn Canada estimated by the Labour Force Survey conducted by Stats Canada When economy is at potential GDPFull Employment Frictional Unemployment caused by the normal turnover of labour Structural Unemployment caused by a mismatch in the demand and supply of labour unemployed individuals do not meet requirement of available jobs Even when the economy is at full employment some unemployment exists because of natural turnover in the labour market and mismatch between jobs and workersFull Employment is said to occur when the only unemployment is frictional and structural Cyclical Unemployment neither structural nor frictional Seasonal UnemploymentUnemployment involves economic waste and human suffering Human effort is the least durable of economic commodities Employment InsuranceSocial Assistance welfareSafety Net
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