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Chapter 19

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ECON 110
Ian James Cromb

Chapter 19: What Macroeconomics is all About  Macroeconomics is the study of the determination of economic aggregates such as total output, total employment, the price level, and the rate of economic growth  Studying macroeconomic allows us to view the big picture  A full understanding of macroeconomics requires understanding the nature of short-run fluctuations as well as the nature of long-run economic growth Key Macroeconomic Variables Output and Income  One of the most imp ideas in economics is that the production of output generates income  For the nation as a whole, all of the economic value that is produced ultimately belongs to someone in the form of an income claim on that value o National product is by definition equal to national income Aggregating Total Output  To measure total output, quantities of many diff goods are aggregated o To get these totals, we add up the values of the diff products – in dollar terms  Nominal National Income is the total national income measured in current dollars o Also called current-dollar national income o A change in this quantity can be caused by price changes or in the quantity  Real National Income is the national income measured in constant dollars & tells us the value of the current output at a base period price - Changes when quantities change National Income: Recent History  One commonly used measures of national income is GDP measured in nominal or real  The annual percentage change shows two kinds of movement o Long-term economic growth – long-term positive trend in GDP growth o Short-term fluctuations around the trend  The business cycle refers to the fluctuations of national income around its trend value that follow a more or less wavelike pattern Potential Output and the Output Gap  National output measures what is actually produced, potential output is what could have been produced if all of the country’s resources were employed at their normal levels o Output Gap = Actual – potential  Recessionary Gap: A situation in which actual output is less than potential output  Inflationary Gap: A situation in which actual output exceeds potential output Why National Income Matters  It is an important measure of economic performance – helps determine standard of living  Recessions are associated with unemployment/lost output – when actual GDP is below potential, economic waste and human suffering results  Booms are associated with high employment/output – when actual GDP exceeds the potential  inflationary pressure  concerns gov’t if they want a low inflation rate Employment, Unemployment, and the Labour Force  If more/less needs to be produced, more/less labour is needed – rise/fall in employment  In the short-run, changes in productivity tend to be very small –changes in output are accomplished by changes in employment  in LR, both productivity and employment do  Employment denotes the number of adult workers who have jobs  Unemployment denotes the number of adult workers who are not employed but who are also actively searching for a job  The Labour Force is the total number of employed and unemployed people  The Unemployment Rate is the number of unemployed people expressed as a fraction of the current labour force: Unemployment Rate = Fictional, Structural, and Cynical Employment  When an economy is at its potential GDP, economists say there is full employment  However, there will still be unemployment for two reasons o There is a constant turnover of employees and a constant change in job opps – new people enter the workforce, some people quit, some are fired  This is called fictional unemployment o At any moment there will always be some mismatch between the characteristics of the labour force and those of the available jobs  This is a mismatch between the structure of supplies of labour and the structure of the demands for labour – structural unemployment  When unemployment above/below potential GDP level, it’s called cynical unemployment Why does Unemployment Matter?  The social significance of unemployment is enormous because it involves economic waste and human suffering – the loss of income is also harmful to an individual o if 2 million ppl are unemployed, their potential output for the year is lost forever Productivity  This is a measure of the amount of output that the economy produces per unit of input  One commonly used measure is labour productivity which is the amount of real GDP produced per unit of labour employed o Measuring based on hours worked is more accurate because the average number of hours worked per employed worker changes over time Why Productivity Matters  Productivity growth is the single largest cause of rising material living standards over long periods of time – in shorter periods it has more to do with the business cycle  Over the years, the real GDP has risen – the trend mostly caused by productivity o One reason is that Canadian workers are more productive than 50 years ago because of the advancements in tech and greater skills Inflation and t
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