Macroeconomics: Study The Overall Or Aggregate Economy

Submitted By mamdouhaa
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Pages: 6

Chapter 19


• 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

• 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

Actual GDP


Potential GDP

Inflationary gap

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

• number of adult workers (15 and over) who hold jobs

• 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


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

• the rate at