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Macroeconomics
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- study of how the economy behaves in borad outlines w/o dewlling on much detail that occurs in markets ofr individual products
- concerned with behaviour of economic aggregates, such as total output, total investment, total exports, and priace level, how gov't policy may influence these aggregates
- These aggregates results from activities in many different markets and from combined behaviour of millions of different decision makers
- concerned with behaviour of economic aggregates, such as total output, total investment, total exports, and priace level, how gov't policy may influence these aggregates
- These aggregates results from activities in many different markets and from combined behaviour of millions of different decision makers
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Movements in economic aggregates
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Matter for most individuals because they influence the health of the industries in which they work and the prices of the goods that they purchase.
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Short-Run Behaviour
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output, employment, inflation, and how government policy can influence these variables
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Business Cycle
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The study of short-run behaviour
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Long-Run Behaviour
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Same variables as short-run, especially the long-rn path of aggregate output.
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Economic growth
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study of long-run behaviour and is concerned with explaining how investment and technological change affect our material living standards over long periods of time
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Microeconomic foundations
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Economists build models of the economy that are populated by workers, consumers, and firms all of whom are assumed to be optimizers
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Macroeconomic models
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Economists construct their models by using aggregate relationships for consumption, investment, and employment, each of which has been subjected to extensive empirical testing and is assumed to represent the behaviour of the many firms and consumers in the economy
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National Product
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Equates to national income
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National Income
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Refer to both the value of total output and the value of the income claims generated by the production of that output
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Aggregated total output
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To measure total output, quantities of many different goods are aggregated, we add up the values of the different products.
Multiply the number of units of each good produced by the price at which each unit is sold.
This yields a dollar value of production for each good.
We then sum these values across all the different goods produced in the economy to give us the quantity of total output measured in dollars.
Multiply the number of units of each good produced by the price at which each unit is sold.
This yields a dollar value of production for each good.
We then sum these values across all the different goods produced in the economy to give us the quantity of total output measured in dollars.
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Nominal National Income
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The value of total output gives the dollar value of the national output called:
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Real National Income
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To determine the etent to which any change is due to quantities or to prices, economists calculate real national income.
This measures the value of individual output, not at current prices, but at a set of prices that prevailed in some base period.
This measures the value of individual output, not at current prices, but at a set of prices that prevailed in some base period.
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Nominal national Income is often referred to
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current-dollar national income.
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Real national income is often called
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constant-dollar national income
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Real National Income
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Denoted by the symbol Y, tells us the value of current output measured at constant prices - the sum of the quantities valued at prices that prevailed in the base period.
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Since prices are held constant when computing real national income,
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changes in real national income from one year to another reflects only changes in quantities.
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Comparing real national incomes of different years
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provides a measure of the change in real output that has occurred during the intervening period.
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Gross Domestic Product (GDP)
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One of the most commonly used measures of national income
Can be measured in either real or nominal terms; we focus here on real GDP
Can be measured in either real or nominal terms; we focus here on real GDP
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Long-term economic growth
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A positive trend of Real National Income
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Short-Term fluctuations
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short-term fluctuations around an a long-term economic growth trend
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Business Cycle
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refers to this continual ebb and flow of business activity that occurs around the long-term trend.
No two business cycles are exactly the same - variations occur in duration and magnitude.
No two business cycles are exactly the same - variations occur in duration and magnitude.
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National output
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represents what the economy actually produces
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Potential output
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measures what the economy would produce if all resources - land, labour, and productive capacity- were employed at their normal levels of utilization.
This concept is usually referred to as potential output (but is sometimes called full-employment output)
Its symbol, Y*, distinguishes it from actual output, indicated by Y
Value of potential output cannot be measured as precisely as real GDP
This concept is usually referred to as potential output (but is sometimes called full-employment output)
Its symbol, Y*, distinguishes it from actual output, indicated by Y
Value of potential output cannot be measured as precisely as real GDP
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Output gap
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measures the difference between potential output and actual output, and is computed as Y-Y*
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When actual output is less than potential output (Y<Y*),
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the gap measures the market of good and services that are not yet produced because the economy's resources are not fully employed
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Recessionary gap
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An output gap when Y is less than Y*
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When Actual output exceeds potential output (Y>Y*),
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the gap measures the market value of production in excess of what the economy can produce on a sustained bases.
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Y can exceed Y* because
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the latter is defined for a normal rate of utilization of factors of production, and there are many ways in which these normal rates can be exceed temporarily.
Labour may work longer hours than normal or factories may operate an extra shift.
Labour may work longer hours than normal or factories may operate an extra shift.
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Inflationary Gap
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An output gap when Y exceeds Y*, there is often upward pressure on prices
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Trough
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characterized by unemployed resources and a level of output that is low in relation to the economy's capacity to produce.
There is thus a substantial amount of unused productive capacity.
Business profits are slow, firms unwilling to risk new investments, confidence in immediate future is lacking
There is thus a substantial amount of unused productive capacity.
Business profits are slow, firms unwilling to risk new investments, confidence in immediate future is lacking
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Recovery
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The process that moves the economy out of a trough
Characteristics: run-down or obsolete equipment replaced, employment, incomce, consumer spending all begin to rise
Production can be increased with relative ease merely by re-employing the existing unused capacity and unemployed labour
Characteristics: run-down or obsolete equipment replaced, employment, incomce, consumer spending all begin to rise
Production can be increased with relative ease merely by re-employing the existing unused capacity and unemployed labour
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Peak
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The top of the recovery cycle.
At peak, exisint capacity is sued to a high degree; labour shortages may develop, shorages of essential raw materials, costs begin to rise, prices rise, businesses remain profitable
At peak, exisint capacity is sued to a high degree; labour shortages may develop, shorages of essential raw materials, costs begin to rise, prices rise, businesses remain profitable
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Slowdowns
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Often follows a peak in economic activity.
Sometimes just a slowing of the rate of incrase in income.
May turn into a recession.
Sometimes just a slowing of the rate of incrase in income.
May turn into a recession.
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Recession
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downturn in economic activity.
Common usage dfines a recession as a fall in real GDP for two successive quarters.
Output falls, as well as employemtn and households' incomes
Common usage dfines a recession as a fall in real GDP for two successive quarters.
Output falls, as well as employemtn and households' incomes
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Depression
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Long lasting recession
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Slump
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The entire falling half of the cycle
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Boom
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The rising half
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Why national income matters
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It is an important measure of economic performance.
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During recessionary Gaps
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economic waste and human suffering results form the failure to use the economy's resources at their normal intensity of use
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Booms
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although associated with high employment and high output, can bring problems of their own.
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During Inflationary Gaps
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inflationary pressure usually ensues, causing concern for any government that is committed to keeping the inflation rate low.
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Long-run trend in real per capital national income
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is an important determinant of improvements in a society's overall standard of living
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The relation of Nationa income and employment
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If more is to be produced, either more workers must be usined in production, or exisitng workers must produce more
First change means rise in employment; the second means a rise in output per person employed, which is a rise in productivity.
In the short run,changes in productivity tend to be very small; most short-run changes in output are accomplished by changes in employment.
Over the long run, however, changes in both productivity and employment are significant.
First change means rise in employment; the second means a rise in output per person employed, which is a rise in productivity.
In the short run,changes in productivity tend to be very small; most short-run changes in output are accomplished by changes in employment.
Over the long run, however, changes in both productivity and employment are significant.
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Employment
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denotes the number of adult workes (defined in Canada as woekers aged 15 and over) who have jobs.
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Unemployment
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denotes the number of adult workers are are not employed but who are actively searching for a job.
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The Labour Force
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is the total number of people who are either employed or unemployed.
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The Unemployment rate
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The number of unemployed people expressed as a fraction of the labour force. Denoted by U
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Full employment
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When the economy is at potential GDP
Because for two reasons, there will still be some unemployment event even when the economy is at potential GDP: Frictional Unemployment and Structural Unemployment
Because for two reasons, there will still be some unemployment event even when the economy is at potential GDP: Frictional Unemployment and Structural Unemployment
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Frictional Unemployment
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There is a constant turnover of individual in given jobs and constant changes in job opportunities. New people enter the workforce; some quit, others fired. Always a normal turnover of labour.
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Structural Unemployment
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Economy is constantly adapting to shocks of various kinds, at any moment there will always be some mismatch between the characteristics of labour force and the characteristics of the available job.
The mismatch may occur, ffor example, because labour does not currently have the skills that are in demand or because the labour is not in the part of the country where the demand is located.
This is a mismatch between the structure of the supplies of labour and the structure of the demands for labour.
The mismatch may occur, ffor example, because labour does not currently have the skills that are in demand or because the labour is not in the part of the country where the demand is located.
This is a mismatch between the structure of the supplies of labour and the structure of the demands for labour.
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Full Employment is said to occur only when
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Unemployment is Structural or Frictional
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Cyclical Unemployment
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Unemployment that is neither structural nor frictional because it changes with the ebb and flow with business cycle
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Unemployment has seasonal fluctuations
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Statistics Canada seasonally adjusts the unemployment statistics to remove these fluctuations
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Why unemployment matters
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The social significance of unemployment is enormous because it involves economic waste and human suffering
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Long-term Unemployment tends to be associated with
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crime, mental illness, and general social unrest shown in research
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Social assistance ("welfare")
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have created a safety net, particuarly when unemployment is for the short periods
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Long-run growth of GDP has had three general sources
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- The level of employment has increased significantly
-Canada's stock of physical capital - the building, factories, and machine used to produce output - has increased more or less steadily over time
- productivity in Canada has increased in almost every year since 1960
-Canada's stock of physical capital - the building, factories, and machine used to produce output - has increased more or less steadily over time
- productivity in Canada has increased in almost every year since 1960
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Productivity
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Is a measure of the amount of output that the economy produces per unit of input
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Inputs to production
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land, labour, and capital
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Labour productivity
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the amount of real GDP produced per unit of labour employed (The amount of labour employed can be measured either as the total number of employed workers or by the total number of hours worked.)
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Why productivity matters
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Productivity growth is the single largest cause of rising material living standards over long periods of time.
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Inflation
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A rise in the average level of all prices (the price level)
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hyperinflation
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very high inflation
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Price Level
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refers to the average level of all prices in the economy and is given by the symbol P
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Rate of inflation
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The rate at which th e price level is rising
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Price index according to how important they are
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averages the prices of various commodities
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Consumer Price Index
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An index of the average prices of goods and services commonly bought by households
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When we construct a price index, the units (dollars) are eliminated because
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the price index shows the price of a basket of goods at some specific time relative to the price of the same basket of the goods in some base period
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Inflation rate calculation (expressed as a percentage)
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[(CPI New - CPI OLD)/(CPI Old)] * 100
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Why inflation matters
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Money is the universal yardstick in our economy
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Purchasing power of money
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The amount of goods and services that can be purchased with a unit of money
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The purchasing power of money is negatively related to
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the price level.
For example, if the price level doubles, a dollar will buy only half as much.
For example, if the price level doubles, a dollar will buy only half as much.
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Inflation reduces the real value of anything whose price is fixed in dollar terms
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...
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Anticipated Inflation
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If household and firms fully anticipate inflation over the coming year, they will be able to adjust many nominal prices and wages so as to maintain their real values.
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Unanticipated Inflation
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generally leads to more changes in the real value of prices and wages
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Interest Rate
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the price paid per dollar borrowed per dollar borrowed per period of time expressed either as a proportion or as a percentage
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Prime Interest Rate
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the rate that banks charge to their best business customers, is noteworthy because when the prime rate changes, most other rates change in the same direction
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Bank rate
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the interest rate that the Bank of Canada (Canada's central bank) charges on short-term loans to commercial banks
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Nominal Interest Rate
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the price paid per dollar borrowed per period of time
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Real interest rate
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The nominal rate of interest adjusted for the change in the purchasing power of money. Equal to the nominal rate minus the rate of inflation
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The burden of borrowing depends on the real, not the nominal, rate of interest
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...
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Why interest rates matter
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Changes in real interest rates affect the standards of living of savers and borrowers
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Exchange rate
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The number of units of domestic currency required to purchase one unit of foreign currency
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Foreign exchange
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foreign currencies that are traded on the foreign-exchange market
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Foreign-exchange market
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The market in which different national currencies are traded.
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Depreciation
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A rise in the exchange rate - it takes more units of domestic currency to purchase one unit of foreign currency
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Appreciation
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A fall in the exchange rate - it takes fewer units of domestic currency to purchase one unit of foreign currency
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Trade weighted exchange rate
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This is a weighted-average exchange rate between the home country and its trading partners, where the weights reflect each partner's share in the hoe country's total trade
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Imports
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Buying goods and services from other countries
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Exports
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Selling goods and services to other countries
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Next Exports
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the difference between exports and imports and is often called trade balance
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