Ch.19 What Macroeconomics Is All About Flashcards
What does changes in current-dollar national income reflect?
Changes in both P and physical Q of output
What does changes in real national income reflect?
Changes only in physical Q of output
Define Real National Income
National income measured in constant (base-period) dollars. It changes only when quantities change.
Define National Product
Sum of G&S produced in an economy
Define National Income
Sum of everyone’s income inside an economy
Define Nominal National Income
Total national income measured in current dollars
Define Gross Domestic Product (GDP)
Total value of G&S produced within the geographical borders of an economy over a particular year (doesn’t matter WHO produces)
In what terms can GDP be measured?
In real or nominal value of national income
What kind of fluctuations can GDP show?
Long-term economic growth
Short-term fluctuations around the trend (positive and negative growth rate)
What is the formula to calculate annual growth rate?
[(Y2-Y1)/Y1]*100
Define Gross National Product (GNP)
Total value of G&S produced by the nationals of an economy.
GNP = GDP - Americans prod. in Canada ($ sent back to US) + Canadians prod. in US ($ earned abroad sent back to Canada)
What are the variables in the Business Cycle?
Recession/Recovery OR Trough/Peak
You can define a cycle by its length and depth
What is National Income also known as?
Constant-dollar national income
When does an inflationary gap occur?
When actual national income (Y) exceeds potential national income (Y*) - positive output gap
Define the output gap and what it measures
Output gap = Y - Y* - it measures the difference between potential output (can at best be estimated) and actual output.
How does the recessionary and inflationary gaps are translated in terms of PPB?
Recessionary: inside the PPB (lack of production)
Inflationary: outside the PPB (excess production)
= 0: on the PPB
When does a recessionary gap occur?
When actual national income (Y) is less than potential national income (Y*) - negative output gap
What happens in terms of gap when factors of production are employed at levels that are above normal utilization levels?
Inflationary gap - excess production
What happens in terms of gap when the unemployment rate is high?
Recessionary gap - fewer production - inside PPB
Where are we in the Business Cycle (BC) when existing capacity is used to a high degree AND labour shortages may develop?
Peak
Name 4 characteristics of an economic boom (rising half of the BC)
- Obsolete equipment is replaced
- Employment and income are expanding
- Both consumers and business expectations become more favourable
- Excess productive capacity is reduced
Name 4 characteristics of an economic slump (falling half of the BC)
- Employment and income are contracting
- Both consumers and business expectations become less favourable
- Consumers tend to save more and spend less
- Profits are falling for most firms and even turning negative for some.
How do we measure unemployment rate?
the number of unemployed people expressed as a fraction of the labour force
Name 4 types of unemployment in Canada
- Seasonal unemployment
- Cyclical unemployment
- Structural unemployment
- frictional unemployment
Which is the type of unemployment that points to a recession?
Cyclical unemployment
Which two types of unemployment exist even when Canada is at full employment?
Structural and frictional unemployment
Define Structural unemployment
Mismatch between jobs and workers
Define Frictional unemployment
Natural turnover in the labour market
Define Cyclical unemployment
When Y
Until what % of inflation can we tolerate booms?
3%
Does everyone benefit from economic growth?
No
What are 5 measures that affect GDP?
- Employment, unemployment, and labour force
- Productivity
- Inflation and price level
- Interest rates
- Exchange rates and trade flows
Define Employment
Total number of people who have a job
Define Unemployment
Total number of people who don’t have a job but are actively looking
Define Labour Force
Total number of people employed or unemployed (usually 15-65 y.o.)
What is the formula for unemployment rate?
= (# of ppl unemployed/# of ppl in labour force)*100
How can employment rise? (2)
- If the labour force increase and the fraction of unemployment vs employment stays cst, employment increase
- If the labour force stays cst, but the fraction increase, employment increase (e.g. 3/5 work now instead of 1/5 before)
Define Potential GDP in terms of employment
We calculate potential GDP at FULL employent
Define Full employment in Canada
Level where everybody who wants to find a job at current wages will do.
Name 2 ways of increasing outputs
- more employment (improve in employment)
2. more output/person (improve in productivity)
Why would people don’t want to work in the current labour market? (2)
- Natural turnover, time in between two jobs (frictional unemployment)
- Mismatch between available profile and jobs requirements (structural unemployment)
These two are already taken into consideration in GDP (up to 3%). We stay at full employment even when they are present
Why do we worry so much about unemployment?
If an Economy has long-term unemployment, has a bigger burden on it = less income, loss of output. Associated with higher crime, mental illness, and general social unrest.
Define productivity
Measure of the amount of output that the economy produces per unit of input
What does an increase in Y* indicate in the L-R?
Economic growth
S-R: Y
L-R: Y*
Want to have Y reach Y* - close the gap. BUT Y* can at best be estimated
What is the formula for Labour Productivity
Level of real GDP/number of workers (or total hours worked)
What is the single largest cause of rising material living standards over long period of time?
Productivity growth
Name 3 ways to increase productivity.
- Increase in ppl employed
- increase in capital employed
- increase in productivity
What happens when there is a constant rise in price (L-R inflation)?
Demand curve shifts right
Define Price level
The average of all prices in the economy expressed as an index number
Define CPI (Consumer Price Index)
Average price of basket of commodities consumed by the average consumer
What is the formula to calculate the Rate of Inflation?
Use CPI data
[(Year 2 - Year 1)/Year 1]*100
How do you calculate an Index number?
(Cost of market basket in a given year/Cost of market basket at base)*100
Why does inflation matter?
- Reduce purchasing power
2. Reduce the real value of any sum fixed in nominal (dollar) terms
What are the 2 categories of inflation
fully anticipated and unanticipated
What happens if inflation is underestimated?
Purchasing power and standard of living decrease
Define Interest Rate
The price paid per dollar borrowed per period of time, expressed either as a proportion (e.g., 0.06) or a percentage (e.g., 6%)
Define Overnight (or discounted) Rate
I.R. of one bank borrowing to another bank to meet daily payment.
If overestimated: lend surplus to other at overnight I.R.
Fluctuates depending on demand
Compare Nominal interest rate and Real interest rate
Nominal: I.R. in % e.g. borrowed a 100$ at 10% I.R. = pay 110$
Real I.R.: real number of commodity I can buy if I can anticipate the I.R. Charge nominal I.R. such that real I.R. stays constant.
How to calculate exchange rate in this class
domestic/foreign (e.g., 1 USD buys 1.3 CAD)
How does the exchange rate ratio change with appreciation and depreciation?
Appreciation of domestic currency: fall in the ratio (e.g., 1 USD buys (less) CAD) = Imports increase, export decrease
Depreciation of domestic currency: raise in the ratio (e.g., 1 USD buy (more) CAD) = Imports decrease, exports increase
Define Net exports
Exports - Imports = trade balance
What is a reason for Canada’s increase in export and import over the past 45 years?
Trade agreement (NAFTA) - takes out tariffs, so total volume of exchange increases)
Which of the following indicates an increase in labour productivity?
a) Inc in real GDP and pop
b) inc in real GDP and labour forme
c) a more rapide inc. in R-GDP than in pop
d) a more rapide inc. in R-GDP than in labour force
e) a more rapide inc. in R-GDP than in level of employment
What does the real interest rate measure?
The burden of borrowing and also the real return on an asset in terms of its purchasing power
Define deficit
when imports is higher than exports
What are two reasons that might help to explain Canada’s negative trade balance from 2009 to 2012?
- Appreciation of CAD (imp inc and exp dec.)
2. A decrease in income in Canada’s main trading partners
What is another way of putting L-R vs S-R fluctuations
L-R in linked to economic growth
S-R is linked to fluctuation in the business cycle (peak and trough/ recession and recovery
An upward trend in real national income is also called
economic growth
How do you calculate real and nominal interest rate?
Real interest rate = Nominal interest rate - inflation rate
A price Index changes from 120 to 114 over a particular period of time. The % change in the price level was?
-5% (114/120=0.95) - indicates a fall of 0.05 in the price level
