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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