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University of Toronto Scarborough
Economics for Management Studies
Iris Au

Chapter 19 What Macroeconomics is All About Notes N macroeconomicsthe study of the determination of economic aggregates, such as total output, total employment, the price level, and the rate of economic growth, which result from activities in many different markets and from the combined behaviour of millions of different decision makers N when aggregate output rises, output of many commodities and incomes of many people rise with it N when price level rises, many people in economy are forced to make adjustments N when unemployment rate rises, many workers suffer reductions in their incomes N full understanding of macroeconomics requires understanding nature of SR fluctuations as well as nature of LR economic growth 19.1 Key Macroeconomic Variables Output and Income N one of most important ideas in economics is that production of output generates income N as a matter of convention, economists define their terms so that, for the nation as a whole, all of the value that is produced ultimately belongs to someone in the form of an income claim on that value N to measure total output, quantities of many different goods are aggregated and to construct such totals, add up values of products N nominal national incometotal national income measured in current dollars; also called current-dollar national income N real national incomenational income measured in constant (base-period) dollars; it changes only when quantities change; also called constant-dollar national income N business cyclefluctuations of national income around its trend value that follow a more or less wavelike pattern N recessiona downturn in level of economic activity; often defined precisely as 2 consecutive quarters in which real GDP falls N potential output (Y*)the real GDP that the economy would produce if its productive resources were employed at their normal levels of utilization; also called potential GDP N output gapactual national income minus potential national income, Y Y* N recessionary gapa situation in which actual output is less than potential output, Y < Y* N inflationary gapa situation in which actual output exceeds potential output, Y > Y* Employment, Unemployment, and the Labour Force N employmentthe number of persons 15 years of age and older who have jobs N unemploymentthe number of persons 15 years of age and older who are not employed and are actively searching for a job N labour forcethe number of persons employed plus the number of persons unemployed N unemployment rateunemployment expressed as a percentage of the labour force, denoted U N unemployment rate = (number of people unemployed) (number of people in the labour force) 100% N when the economy is at potential GDP, economists say there is full employment N frictional unemploymentconstant turnover of individuals in given jobs and a constant change in job opportunities; new people enter the workforce, some people quit their jobs, others are fired, meaning that it takes some time for these people to find jobs; so at any point in time, there is unemployment due to the normal turnover of labour N structural unemploymentat any moment there will always be some mismatch between characteristics of labour force and characteristics of available jobs; this is a mismatch between structure of supplies of labour and structure of demands for labour N even when the economy is said to be at full employment, some unemployment exists due to natural turnover in the labour market and to mismatch between jobs and workers N unemployment that is neither frictional nor structural is called cyclical unemployment because it changes with business cycle N social significance of unemployment is enormous because it involves economic waste and human suffering as human effort is least durable of economic commodities Productivity N productivity is a measure of the amount of output that the economy produces per unit of input N labour productivitythe level of real GDP divided by the level of employment (or total hours worked) N productivity growth is single largest cause of rising material living standards over long periods of time N over periods of a few years, changes in average real incomes may have more to do with the ebb and flow of the business cycle than with changes in productivity; increases in employment during an economic recovery and reductions in employment during recessions explain much of the short-run movements in average real incomes Inflation and the Price Level N price level (PL)the average level of all prices in the economy, expressed as an index number N inflationa rise in the average level of all prices (the price level) N Consumer Price Index (CPI)an index of the average prices of goods and services commonly bought by households N since PL is measured with index number, its value at any specific time has meaning when compared to value at some other time N purchasing power of money (PPM)the amount of goods and services that can be purchased with a unit of money N inflation reduces the purchasing power of money; it also reduces the real value of any sum fixed in nominal terms N most economists agree that anticipated inflation has a smaller effect on the economy than unanticipated inflation Interest Rates N interestthe payment for the use of borrowed money N interest rateprice paid per dollar borrowed per period of time, expressed either as proportion (0.06) or as percentage (6 %) N nominal interest ratethe price paid per dollar borrowed per period of time www.notesolution.com
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