Ch 4 What Macro Economics is all about Flashcards
Define National Product
The total market value of all final goods and services produced by a country (represents economy’s output) within a specific time period (usually a year) commonly measured by GNP or GDP
Define National Income
The total income earned by the citizens of a country from economic activites within a specific period, derived from the national product after adjusting for depreciation, indirect taxes, and subsidies
How is National Income calculated?
National Income is calculated from the National Product by distributing the total value of production among the factors of production (wages, profits, rents, and interest)
National Income = GDP or GNP − Depreciation − Indirect taxes + Subsidies
Define Aggregation and provide an example
The process of combining various individual economic units or variables into a single summary measure
E.g., adding up the value of all goods/services produced in an economy to calculate GDP
Define Nominal National Income, how it is measured, what it reflects and how to calculate it
Measures the total income or output of an economy at current market prices without adjusting for changes in price levels (inflation or deflation)
Measured in current dollars
Reflects both changes in quantity and changes in prices over time
Nominal GDP = ∑ (Quantity of goods produced × Current prices)
Define Real National Income, how it is measured, what it reflects and how to calculate it
Measures the total income or output of an economy at constant prices
Measured in constant base-period dollars
Reflects only the change in the quantity of goods and services produced
Real GDP = ∑ (Quantity of goods produced × Base year prices)
Define Real GDP
A measure of National Income which measures the total output produced by the Nation’s economy annually
What do long-run trends and short-run fluctuations represent?
Long-run trends: Economic growth
Short-run fluctuations: Business cycles
What are the 4 waves of the business cycle?
1) Trough
2) Recession
3) Recovery
4) Peak
Give another name and definition for Potential Output
Full Employment Output
The maximum amount of goods and services an economy can produce when all its resources (labor, capital, and technology) are used efficiently but not overworked
Explain Output Gap and the 2 types
Output gap is the difference between potential and actual output
1) Recessionary gap: Y < Y*
When actual output (Y) of an economy is less than potential output (Y*)
2) Inflationary gap: Y > Y*
When actual output (Y) of an economy is more than potential output (Y*)
Explain employment, unemployment, labour force, unemployment rate
Employment = Number of workers (15+) holding jobs
Unemployment = Number of individuals not employed but actively seeking work
Labour force = Employed + unemployed
Unemployment rate = Percentage of unemployed in the labour force
How do you calculate unemployment rate? Things to do
= Number of people unemployed / Number of people in the labour force x 100
→ The unemployment rate responds to the cyclical behaviour of the economy
→ Both the labour force and level of employment in Canada have doubled since 1976
→ “Booms” are associated with a low unemployment rate and slumps with a high unemployment rate
What is NAIRU?
Non-Accelerated Inflation Rate of Unemployment / Natural Rate of Employment
Estimated below 7%
What are the 3 types of unemployment?
1) Frictional unemployment
2) Structural unemployment
3) Cyclical unemployment
Define Frictional unemployment
→ Short-term unemployment
→ When people voluntarily leave their jobs to search for a better one, or when they are entering or re-entering the labour market
→ Natural turnover in the labour market
→ Exists even in a healthy economy
→ E.g., A recent college graduate looking for their first job
Define Structural unemployment
→ Longer-term unemployment compared to frictional
→ Mismatch between workers’ skills and the jobs available in the economy
→ Often results from technological advancements, globalization, or long-term shifts in the economy
→ E.g., Factory workers lose their jobs due to AI replacing their roles
Define Cyclical unemployment and Stimulus measures
→ Occurs when the economy is producing below its potential output (Y < Y*)
→ Caused by a lack of demand for goods and services during economic downturns
→ Temporary and fluctuates with the economy (increases during recessions and decreases during periods of economic growth)
→ Governments and central banks address cyclical unemployment through stimulus measures like fiscal spending or cutting interest rates to boost demand
→ E.g., A car manufacturer lays off employees as demand for cars falls during an economic slump
What are the importances that come with unemployment?
- Loss of income
- Loss of output
- Associated with crime, mental illness, and social unrest
Define productivity and how its measured
A measure of output per unit of input – often measured as GDP/worker or GDP/hr worked
Increases in productivity are the largest determinant of long-run mateiral living standard
Define purchasing power
Amount of goods/services a unit of money can buy
Define inflation
Measures the annual rate of increases in the price level and alters the value of money in terms of what we can purchase with it
Effects of inflation (mention anticipation)
→ Reduces purchasing power
→ If households and firms are able to anticipate inflation over the coming year, they will be able to adjust many nominal prices and wages to maintain their real values
– Unanticipated inflation generally leads to more changes in the real value of prices and wages
– In reality, inflation is rarely fully anticipated or fully unanticipated
– As a result, some adjustments in wages and prices are made, but not all the adjustments that would be required to leave the economy’s allocation of resources unaffected
Define interest rates and flow of credit
Interest Rates = The price of “credit” / cost of borrowing
→ For borrowers, it’s the cost they pay to use someone else’s money
→ For lenders, it’s the return they earn for providing credit
→ In a modern economy, the flow of credit—through loans, mortgages, and business financing—is critical for firms and households to invest, consume, and grow
Explain the 2 types of interest rates
1) Nominal interest rate
→ The rate expressing in money terms without adjusting for inflation
→ The stated rate on loans, savings, or bonds
→ E.g., If a bank offers a 5% nominal interest rate on a loan, the borrower repays the loan amount plus 5% in monetary terms, regardless of inflation
2) Real interest rate
→ The rate expressed in terms of purchasing power
→ Nominal rate adjusted to account for inflation
→ Reflects how much the lender gains/borrower pays in terms of goods and services (purchasing power)
→ Real Interest Rate = Nominal Interest Rate − Inflation Rate
→ E.g., Nominal Interest Rate = 5%
Inflation Rate = 2%
Real Interest Rate = 5% − 2% = 3%
This means the lender’s real return is 3% in purchasing power after accounting for inflation
Explain the 2 different kinds of interest rates
1) The prime interest rate = Interest rate that banks charge to their most creditworthy business customers for loans (typically large corporations)
→ This rate serves as a benchmark for other types of loans, like personal or small business loans, which are often priced higher
2) The bank rate = Interest rate that the Bank of Canada charges on short-term loans to commercial banks
→ It influences all other interest rates in the economy, including the prime rate and is used to control inflation and stabilize the economy
Explain exchange rates
Provide example
The value of one currency compared to another
E.g., the number of Canadian dollars required to purchase one unit of foreign currency (1.30 CAD/USD)
Explain what ‘a depreciation of the Canadian dollar’ means and what are two important effects on the Canadian exchange rate
Means that it is worth less on the foreign-exchange market and will rise in the exchange rates
E.g., it takes more Canadian dollars to buy the same amount of foreign currency (1.40 CAD/USD)
1) Domestic policy
2) External events
List and explain 4 specific factors affecting Canadian exchange rates
1) Monetary Policy = Refers to the actions of the Bank of Canada to control interest rates and money supply
Higher interest rates: Attracts foreign capital, leads to appreciation
Lower interest rates: Reduces foreign investment, leads to depreciation
E.g., If the Bank of Canada raises interest rates, foreign investors buy more CAD to invest in Canadian assets, increasing demand for CAD and its value
2) Fiscal Policy = Refers to government spending and taxation decisions
Deficits: If the government spends more than it earns, it may signal economic instability, leading to depreciation (dollar weakens)
Economic Growth: Attracts foreign investment and leads to appreciation (dollar strengthens)
3) Inflation = The rate at which prices for goods and services rise
High inflation: Reduces purchasing power, less attractive to foreign investors, leads to depreciation
Low inflation: Stabilizes the currency and maintains its demand, leads to appreciation
4) Trade Balance = The difference between the value of a country’s exports and imports
Trade surpluses: When exports exceed imports, leads to CAD appreciation
Trade deficits: When imports exceed exports, demand for foreign currency rises, leads to CAD depreciation
E.g., If global oil prices rise (Canada is a major oil exporter), Canada’s trade balance improves, increasing demand for the CAD and strengthening its value
