ECON 295 Chapter 19: Chapter 19 notes.docx
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I) Output and Income
The production of output generates income.
National product = National income
A) 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 prices
Real (constant-dollar) national income: National income measured in constant (base-period)
It changes only when quantities change.
Denoted by the symbol
We will focus on real national income.
B) 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 wavelike pattern.
C) Potential output and the Output Gap
National output represents 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
Output gap: Actual national income minus potential national income,
Recessionary gap: A situation in which actual output is less than potential output,
Inflationary gap: A situation in which actual output exceeds potential output,
* as there are many ways in which normal rates of utilization
can be exceeded temporarily.
Labour may work longer hours or factories may operate an extra shift.
Often there is an upward pressure on prices.
D) Why National Income Matters
National income important measure of economic performance.
Long-term growth is more important.
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