Macroeconomics
• studies the overall or aggregate economy
• the overall price level, not individual prices
• total production in the economy, not the production by individual firms
• adjustments to changes across the whole economy
Macroeconomics
• Unemployment
• Inflation
•Interest Rates
• Business Cycles
• Exchange Rates
• Economic Growth
Gross Domestic Product [ GDP ]
• Total output produced is the total value of all goods and services produced
• Production of output generates income
• The quantity of total output is measured in dollars
Nominal National Income: [ current dollar ]
• The dollar value of total output
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 output by Y:
Output Gap = Y* - Y
Recessionary gap
Peak
Actual GDP
Real
GDP
Potential GDP
Peak
Trough
Inflationary gap
Time
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 either employed or unemployed Discouraged Workers:
• Not actively seeking work
• Not counted as unemployed
Part-time Workers:
• May be seeking a full-time position
• Considered employed
Unemployment rate:
• percentage of the labour force that is unemployed
Unemployment
=
Rate
Number of people unemployed
Number of people in the labour force
X 100
e.g., labour force = 100
unemployed = 10
Unemployment rate = 10/100 x 100
= 0.10 x 100
= 10 percent
Full employment
[ Y = Y* ]:
• some unemployment exists
• frictional
• structural
Frictional unemployment:
• caused by normal turnover of labour (retirement, quits, etc.) - Hiring takes time
Structural unemployment:
• occurs because of a mismatch between available workers and jobs
Examples of Structural change:
8 track tapes
Vinyl records
Record players
Tube TV’s
AES – dedicated word processors
Dot matrix and Daisy wheel printers
Floppy discs
VCR’s moving to DVD’s
Cathode ray tubes for computers moving to flat screen
Fax machines from large to small – more email attachments 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 U: e.g.,
• U may rise by 0.3 percentage points in January
• StatsCan seasonally adjusts figure to remove this so can see trends more clearly
Effects of unemployment:
Economic problems:
• loss of output, loss of skills, etc.
Immense human suffering:
• illness, breakdowns, etc.
Social problems:
• homelessness, crime
Price level:
• the average level of all prices in the economy
Inflation:
