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Chapter 19

Chapter 19- What Macroeconomics is all About.docx

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University of Toronto Mississauga
Kalina Staub

Chapter 19- What Macroeconomics 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 19.1 Key Macroeconomic Variables Output and Income  National Product/Output- value of nation’s total production of g/s  One of the most important ideas in economics is that the production of g/s generates income  All the economic value that is produced belongs to someone in the form of an income claim on that value; value of national product = value of national income  National Income: Aggregation  Nominal National Income/ Current Dollar National Income- Total national income measured in current dollars  Real National Income/Constant Dollar National Income- National income measured in constant (base period) dollars and changes only when quantities change o Used to determine the extent to which any change is due to quantities or prices o Measures the value of individual outputs, not at current prices, but at a set of prices that prevailed in some base period  National Income: Recent History  Gross Domestic Product can be measured in either real or nominal terms (shows both long term growth and short term fluctuations)  Recession- A fall in the level of real GDP often defined precisely as two consecutive quarters in which real GDP falls  Business Cycle- Fluctuations of national income around its trend value that follow a more or less wavelike pattern  Potential Output and the Output Gap  Potential Output/GDP- The real GDP that the economy would produce if its productive resources were fully employed (has to be estimated using statistical techniques)  Output Gap- Actual output minus potential output o Recessionary Gap- Actual output < Potential Output (economies resources were not fully employed) o Inflationary Gap- Actual output > potential output (workers may work longer hours or factories may operate extra shift, etc)  Why National Income Matters  Important measure of economic performance  Long term growth, reflected by the growth of potential GDP is more important than short run movements in the business cycle  Economic growth makes people better off on average but not necessarily make every individual better off; benefits of growth are never shared equally by all members of the population Employment, Unemployment, and the Labour Force  Employment- The number of persons 15 years 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 person unemployed  Unemployment rate- Unemployment expressed as a percentage of the labour force  Unemployment rate= # of people unemployed/ # of people in labour force x 100  Frictional, Structural, and Cyclical Unemployment  There will still be unemployment when economy is at potential GDP (full employment) for two reasons: 1. There is constant turnover of individuals in given jobs and a constant change in job opportunities (frictional unemployment) 2. Mismatch between the characteristics of the labour force and the characteristics of the available jobs which may occur if labour does not have the skills that are in demand or if the labour is not in the part of the country where the demand is located (structural unemployment = mismatch between the structure of the supplies of labour and the structure of the demand of labour)  Cyclical unemployment is when actual GDP does not equal potential GDP and which rises/falls with ebb and flow of business cycle  Seasonal fluctuations due to the time of the season and is seasonally adjusted to remove the fluctuations, thus revealing more clearly the cyclical and trend movements in the data  Employment and Unemployment: Recent History  The labour force and employment have growth with only a few interruptions  Why Unemployment Matters  Involves economic waste and human suffering  Loss of income associated with unemployment leads to poverty, crime, mental illness, and general social unrest Productivity  Steady long run growth has had three general sources: 1. Level of employment has increased significantly 2. Canada’s stock of physical capital has increased more or less steadily 3. Productivity in Canada has increased in almost ever year since 1960  Productivity- The measure of the amount of output that the economy produces per unit of input  Labour Productivity- The level of real GDP divided by the level of employment (or total hours worked)  Productivity: Recent History  Real GDP per worker and Real GDP per hour worked (more accurate because the average number of hours worked per employed worker changes over time)  Increase in labour productivity over the past three decades  Why Productivity Matters  Productivity growth is cause of rising material living standards over long periods of time  Worker is more productive than was his/her counterpart in the distant past  Greater productivity comes from the better physical capital with which Canadians now work and partly from their greater
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