Chapter 19 – What Macroeconomic 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
A full understanding of macroeconomics requires understanding the nature of short-run
fluctuations as well as the nature of long-run economic growth.
One of the most important ideas in economics that the production of output generates income.
Nominal National Income: total national income measured in current dollars. Also called
current-dollar national income.
Real National Income: national income measured in constant (base-period) dollars. It changes
only when quantities change.
Business Cycle: fluctuations of national income around its trend vale that follow a more or less
Potential output (Y*): the real GDP that the economy would produce if its productive resources
were employed at their normal levels of utilization.
Output Gap: actual national income minus potential national income, Y – Y*.
Potential output is the level of output produced when factors of production are employed at
their normal intensity of use. The output gap is the difference between actual and potential
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.
Employment: the number of persons 15 year 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.
Labour Force: the number of persons employed plus the number of persons unemployed.
Unemployment Rate: unemployment expressed as a percentage of the labour force, denoted U.
Even when the economy is at “full employment,” some unemployment exists because of natural
turnover in the labour market and mismatch between jobs and workers.
The unemployment rate is the percentage of the labour force not employed and actively
searching for a job. The labour force and employment have both grown steadily for the past
half-century. The unemployment rate fluctuates considerably from year to year. Unemployment
imposes serious costs in the form of economic waste and human suffering.
Labour Productivity: the level of real GDP divided by the level of employment (or total hours
Labour productivity is measured as real GDP per employed worker. It is an important
determinant of material living standards.
Inflation: a rise in the average level of all prices (the price level).