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Chapter 19-26

ECO100Y1 Chapter 19-26: ECO100Y notes

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ECO100Y notes:
-Macroeconomics is the study of how the economy behaves in broad outline without dwelling on much detail
that occurs in markets for individual product.
-A basic definition is: Macro is the part of economics concerned with large-scale or general economic factors,
such as interest rates and national productivity.
-Major key of macro is the behavior of economic aggregates (total) and averages.
-For example: total output, total investment, total exports, and the price level, and with how they maybe
influenced by government policy.
-The behavior results from ; 1. Activities in many different markets 2. Combined behavior of millions of
different decision makers
-When we study aggregates and averages we look at the economy as a whole.
-Macroeconomics looks at the big picture.
-When aggregate output rise (total output), the output of many commodities and incomes of people rise with
-When unemployment rises, results in reduction of their salary.
-^^^^such movements in economic aggregate matter because they influence the health of industries. In which
they work.
-Macroeconomists consider 2 aspects of the economy: 1. Short
run behavior of Macroeconomics variables, such as output, employment, and inflation, and about how the
government policy can influence these variables. Study of business cycles
2. Long run behavior of the same variables ^^^, especially the long run path of aggregate output.
This is the study of economic growth and is concerned with explaining how investment and
technological change affects our material living standards over long periods of time.
- To understand Macroeconomics fully one has to understsnd the short run fluctiuations as well as the nature of
long run economic growth.
- There are 2 different streams of reasesrch in macroeconomics;
1. The first group of reasesrchers foucus explicitly on microeconomics foundation. They build models of the
economy that are populated by workers, consumers and firm. All assumed to be optimizers (individuals maximize their
utility and firms maximize their profit).
2. the second group of researchers build macro economics based only implicitly on these same micro
foundations. Although they often analyze the behavior of individuals and firms m, they don’t formally aggregate their
behavior to derive the aggregate relationships in their model. INSTEAD!, These economists construct their models by
using aggregate relationshios for consumption, investment , and employment, each been subjected to extensive
empirical testing and is assumed to represent collectively the behavior of the many firms and consumers in the
- Differences: first approach: assumes wages and prices are perfectly flexible and therefore adjust quickly to clear
their respective markets. Second approach sees that because of long term employment contracts, labour unions etc.
wages and price ms are slow to adjust thus markets can be in disequilibrium for longer periods of time.
19.1 key macroeconomics variables:
-The most comprehensive measure of a nations oversll level of economic activity is the value of its total
production of goods and services, often called national product, or just known as output.
-Production of goods and services generate income.
-Example: if a firm produces 100$ worth of product that 100$ beckmes the income of the workers , the firsm
supplier of material input, and the firms owner.
-National product = value of national income
-National incone in this chapter refers to both the value of total output and the value of the income claims
generated by the production of that output.
National income: Aggregation!
-to measure national income we add up the values if the many different good and services that are produced.
Using dollar value and not material or good wise! We begin by multiplying the # of units of each good
produced by the price/unit. Yielding a total $ value for each good. Do the same for all goods produced in the
economy giving us the quantity of total output, or national income. Usually know as nominal national income
-N.N.I can change from a change in physical quantities or the prices on which its based
-Real national Income: national income measured in constant (base-period) dollars. It changes only when
quantities change.
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-R.N.I measures the value of individual output, not at current prices, but at a set of prices that prevailed in
some base period.
-N.N.I is referred to as current-dollar national income.
-R.N.I is referred to as constant-dollar national income.
-Changes in R.N.I From one year to snother only reflects changes in quantites. Therefore comparing RNI of
different years shows us a measure of the change in real output that has occurred during the intervening
National Income: Recent History!
-The most used measure of national income is called gross domestic product (GDP).
-GDP can be measure in either real or nominal terms!
-Recession: a fall in the read GDP. Often defined precisely as 2 consecutive quarters in which real GDP falls.
-A positive trend that increases real output – long term economic growth
-A second feature of the real GDP series is Short term fluctuation around the trend. Fluctuations are hardly
visible. (recession is part of it)
-Business cycle: fluctuations of national income around its trend value that follow a more or less wavelike
pattern. Occurs more around the long term trend. Example; a skngle cycle will usually include an interval of
quickly growing output, followed by an interval of slowly growing or even falling output. The entire cycle
may last for several years.
-No 2 business cycles are the exact same.
Potential Output and the Output Gap!
-National output represents what the economy ACTUALLY produces.
-An important related concept is the level of output the economy would produce if all resources ( land, labour,
and capital) were fully employed. This is known as potential output.
-Estimation bring up many arguments among reasesrchers regarding the level of potential output, owing to
their different estimation approaches in terms of notation, Y = actusl output, Y* = potential output
-Output gap measure the difference between actual output and potential output.
-When actual output < potential output the gap measures the market value of goods and services that sre not
produced because the economys resources are not fully employed. This is called a rescessionary gap.
-When actual output > potential output the gap measures the market value of production in excess of what the
economy can produce on a sustained basis. This may happen because workers may work longer hours than
normal , often causes an upward pressure on prices thid is know as inflationary gap.
Why national Income Matters??
-measures economic performance!!
-Short run movments in the business cycle recive most attention in politics and press, however economists
agree that long term growth is more important (as reflected by potential GDP).
-Recessions are associated with unemployment and lost output. Y<Y*
-The long run trend is an important determination of improvements ina societys overall standard of living.
When income per person grows each generation can expect on average to be better off than preceding ones.
-Economic growth doesn’t benefit evey single individual, for example shifting away from agriculture and
increasing manufacturing !
Employment, Unemployment, and the labor Force
-if more output is to be produced then more workers are to be hired (rise in employment) or current workers
need to produce more ( productivity).
-In the short run changes in productivity are small; short run changes are based on changes in employment.
-In the long run both productivity and employment changes are significant.
-Employment: people who have jobs (15 and over)
-Unemployment: don’t have jobs but are searching for one.
-Labour force: total number of people who are employed of unemployed.
-Unemployment rate= # of pple unemployed/ # of people in the labour force X 100%
-When the economy is at potential GDP, economists say there is full employment. But there will still be some
kind of unemployment. 2 reasons!
-1. New people enter the worforce some people wuit their jobs others are fire. It may take sometime for these
people to find jobs m, such unemployment is called frictional employment,
-2. Because the economh is adapting to shocks constantly of various kinds, Structural Unemployment: Not
working for long periods of time due to no demand for skills, may be retraining for a new job. Have little
hope of finding a job (assembly line employees who jobs are now done by robots)
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