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Ch 19 - What Macroeconomics Is All About.docx

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University of British Columbia
ECON 102
Lanny Zrill

What Macroeconomics Is All About Chapter 19 Macroeconomics – study of the determination of economic aggregates such as total output, total employment, the price level and the rate of economic growth Two different aspects of the economy:  Short-run behavior or macroeconomic variables – output, employment, inflation, government policy o Study of business cycles  Long-run behavior of some variables – aggregate output o Study of economic growth o how investment and technological change affect our material living standards Two different group of research/ers:  Based explicitly on microeconomic foundations o Build models on optimizers o Assumption: wages and prices are perfectly flexible and can adjust quickly  Based implicitly on microeconomic foundations o Construct their models by using aggregate relationships for consumption, investment and employment o Assumption: nature of institutions  wages and prices slow to adjust  disequilibrium for longer 19.1 – Key macroeconomic Variables OUTPUT AND INCOME  National Product – nation’s overall level of economic activity – value of its total production of goods and services  Production of output generates income.  National product = National income Aggregating Total Output  Quantity of total output measured in dollars – Add up the dollar values of the different products  Nominal national income – total national income measured in current dollars o Current-dollar national income o Change in nominal national income can mean a change in output quantities or prices  Real national income – value of individual outputs at a set of prices that prevailed in some base period o Only changes when quantities change o Symbol Y o Constant-dollar national income National Income: Recent History  Gross Domestic Product (GDP) – real GDP vs. nominal GDP  Our focus: Real GDP graph o Long-term economic growth – Positive trend that increased real output  Positive trend that increased real output by four times o Short-term fluctuations – hardly visible  Business cycle – continual ebb and flow of business activity that occurs around the long-term trend o Interval of quickly growing output  interval of slowly growing or even falling output Potential Output and the Output Gap  National/actual output (Y) – what the economy actually produces  Potential output (Y*) – what the economy would produce if all resources (land, labour, capital) were employed at their normal levels of utilization o Aka full employment output  Output gap – measures the difference between potential output and actual output (Y-Y*) o Y< Y* - actual less than potential – resources not fully employed – recessionary gap o Y > Y* - actual greater than potential – production in excess, not sustainable – inflationary gap  Upward pressure on prices  Ex. labour workers working extra hours, factory operating another shift  Upward trend in potential GDP on a graph = growth in productive capacity of Canada o Increases in capital stock, labour force & level of technological knowledge The Terminology of Business Cycles  Real GDP fluctuates around a steadily rising level of potential GDP  Trough – unemployed resources – output is low in relation to the economy’s capacity to produce o Moving out of the trough: Recovery – run-down or obsolete equipment is replaced (employment, income, consumer spending rise) o More investment activity – firms are more optimistic about business prospects o Production can be increased by re-employing the existing unused capacity and unemployed labour  Peak – existing capacity is used to a high degree o Labour shortages, shortages of raw materials o Shortages  costs rise  prices rise o Followed by slowdowns – slowing of the rate of increase in income  Slowdown  Recession (sometimes) – fall in GDP for 2 consecutive quarters o Depression – deep and long lasting recession  Slump – falling half of the cycle  Boom – rising half Why National Income Matters  Long term growth (potential GDP) is more important than short run movements highlighted in the present  Recessions – characterized by unemployment and lost output  Actual GDP < Potential GDP  failure to use the economy’s resources at their normal intensity  economic waste & human suffering  Actual GDP > Potential GDP  inflationary pressure on prices  Long run trend in real per capita national income – determinant of improvements in a society’s overall standard of living  Economic growth – makes people materially better off on average, but doesn’t make every individual better off o Benefits of growth are not equally shared o Ex. shift away from agricultural industry and towards manufacturing EMPLOYMENT, UNEMPLOYMENT AND THE LABOUR FORCE  Increase in production = either rise in employment or rise in output per person employed (rise in productivity)  Employment – persons older than 15 years old that have jobs  Unemployment – older than 15 who are not employed but are searching for jobs  Labour force = employed + unemployed  Unemployment rate = unemployed/labour force x 100% Frictional, Structural and Cyclical Unemployment  At potential GDP, there is full employment, but there will still be some unemployment at this point…  Frictional unemployment – unemployment caused by the normal turnover of labour (change in job opportunities) o Takes some time for people who were fired to find a new job  Structural unemployment – due to a mismatch between jobs and workers o Mismatch between the characteristics of the labour force and the characteristics of available jobs o Labour does not currently have the skills that are in demand or not in the part of the country where demand is located o Structure of supplies of labour vs. Structure of the demands for labour  Full employment is when the only kind of unemployment there is are frictional and structural.  GDP < Potential GDP :: un
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