Studies the overall or aggregate
The overall price level, not individual prices
Total production in the economy, not the production by individual firms
Adjusts to changes across the whole economy
National income = national product (output of the total economy aka GDP)
Gross Domestic Product
Total output produced is the total value of all goods and services produced
Production of output generates income
The quality of total output is measured in dollars
Nominal National Income: [measured in current dollar – equilibrium year prices]
The dollar value of total output
Macroeconomics
Unemployment
Inflation
Interest rates
Business Cycles
Exchange Rates
Economic Growth
Real GDP
Measures income at base-period prices
Nominal GDP – Inflation = Real GDP
If price level changes over time are removed, only changes in production remain
Changes in Real GDP
Measures changes in production
Potential GDP [Y*]
Potential national income (output)
What the economy could produce
If all resources were employed at their normal levels of utilization
Often called full-employment income
Output gap- The difference between potential and actual output
Denote potential output by Y* and actual by Y.
Output Gap = Y* - Y
Recessionary Gap
When actual income (output) is less than potential income
Inflationary Gap
When actual income (output) exceeds potential income
When GDP is below potential
Output and incomes are lost
Can never recover these losses
When GDP is above potential
Can generate inflation
Growth in potential GDP can increase future incomes
But...
Increase in average income doesn’t mean increase for all- Not all benefit
Employment
Number of adult workers (15 and over) who hold jobs
Unemployment
Number of individuals not employed but actively searching for a job
Labour force
Total number of people who are wither employed or unemployed
Unemployment rate
Percentage of the labour force that is unemployed
Unemployment Rate = Number of People Unemployed / Number of people in the labour force * 100
e.g.
Labour force = 100
Unemployed= 10
Unemplyment rate = 100/10*100
= 10%
Full employment [ Y=Y* ]
Some unemployment exists
Frictional
Structural
Frictional unemployment
Caused by normal turnover of labour (retirement, quits, ect.) – Hiring takes time
Structural unemployment
Occurs because of a mismatch between available workers and jobs
Full employment
Occurs when all unemployment is frictional and structural
There is no Cyclical Unemployment
At potential GDP [ Y* ]
Natural Rate of Unemployment [U*] exists at Y*
Unemployment [U] changes over the business cycle
During recessions, U rises above U*
During booms U falls below U*
Cyclical Unemployment
When U>U* which exists at Y*
Seasonal Unemployment
U may rise by 0.3 percentage points in January
Stats Canada seasonally adjusts figure to remove this
Can see trends more clearly
Effects of Unemployment
Economic Problems:
Loss of output, loss of skills, ect.
Immense human suffering
Illness, breakdowns, ect.
Social Problems
Homelessness, crime
Productivity
Productivity = Real GDP/Employment (total hours worked) o More people participating in the labour force\ o Increasing trend towards machines etc. o Rising employment
Largest cause of rising material standards
Price level
The average level of all prices in the economy
Denoted by P
Inflation
The rate at which the price level is changing
Consumer Price Index [CPI]
The most common measure of the price level
Based on the price of a typical consumer “basket” of goods and services
CPI for the base period is set to 100 [always]
CPI in later years shows prices as a ratio of the price in the base period
Problem
In the economy of Ultimate Pleasure, the typical urban household consumes the following goods and