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Chapter 24

ECON 209 Chapter Notes - Chapter 24: Demand Shock, Structural Unemployment, Full Employment

Course Code
ECON 209
Paul Dickinson

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Chapter 19: What is macroeconomics all about?
10/01/2013 18:55:00
Macroeconomics is the study of how the economy behaves as a
It is concerned with the determination of economic aggregates
oE.g. total exports, total price investment, etc.
Output and Income
National product is by definition equal to national income:
To measure the total output, quantities of different goods are
oValue is given to the different units of materials by
multiplying the unit value by units produced
oThe values are then summed across all of the different goods
This is called the nominal national income (measured
in current dollars)
Real national income is measured in constant (base-
period) dollars; it only changes when quantities of
goods produced change
Real national income is used to measure the
changes between economies year after year
Business cycle: fluctuations of national income (usually measured as
GDP) around its trend value that follow a more or less wavelike pattern
Potential/full-employment output (Y*): the real GDP that an
economy would produce if its productive resources were employed at their
normal levels of utilization (also called potential GDP)
Output gap (Y-Y*): measures the difference between the actual and
potential outputs

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Recessionary Gap (Y<Y*): a situation in which actual output is less
than potential output
Inflationary Gap (Y>Y*): a situation in which output exceeds
potential output
Recession: a downturn in the level of economic activity. Often
defined as precisely two consecutive quarters in which real GDP falls.
Employment & the Labor Force
Employment: denotes the number of adult workers (15 and over in
Canada) who have jobs
Unemployment: denotes the number of adult workers who are not
employed but are actively searching for a job
Unemployment rate (U) = (number of people employed / number
of people in labor force) x 100 percent
Labor force: the total number of people who are either employed or
Types of Unemployment
Full employment: when the economy is at potential GDP
This does not mean that everyone in the labor force is employed
Frictional unemployment: unemployment caused by the normal
turnover in labor

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People entering & exiting labor force; people quitting jobs & getting
Structural unemployment: a mismatch between the structure of the
supplies of labor and the demands for labor
i.e. tech bubble burst: high demand for computer specialists
disappears; specialists must retrain before finding new jobs
Cyclical unemployment: unemployment that changes with the ebb
and flow of the business cycle
Labor productivity: the amount of real GDP produced per unit of
labor employed (either total # of workers or number of hours worked)
Canada’s productivity has increased almost every year since 1960
Canada’s GPD Increase:
Rising employment — larger labor force but also higher proportion
of participating population
Steady increase in physical capital — buildings, factories, and
machines used to produce output
Increased productivity over time
Productivity is the single largest cause of rising material living
standards over long periods of time
Short term changes in average real incomes are more due to the
ebb and flow of the business cycle
Inflation and the Price Level
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