Chapter 19 Flashcards
def. national product (output)
most comprehensive measure of a nation’s overall level of economic activity.
what is national income equal to?
national product
the production of output generates ________
income
how do you measure total output in dollars?
we add up the values of many different goods produced
what does adding up the values of many different goods give you?
nominal national income
to get real national income what kind of prices do you need?
base-period prices
what is one of the most commonly used measures of national income?
Gross Domestic Product (GDP)
what does real GDP measure?
the quantity of total output produced by the nation’s economy over the period of a year
What does real GDP fluctuate around? What does it show
Real GDP fluctuates around a rising trend:
- the trend shows long-run economic growth
- the short-run fluctuations show the business cycle
def. potential output
what the economy could produce if all resources were employed at their normal levels of utilization
what is another name for potential output?
full-employment output
what does the output gap measure?
the difference between potential output and actual output
Output Gap formula
Output Gap = Y – Y*
- When Y < Y*, there is a recessionary gap.
- When Y > Y*, there is an inflationary gap.
Why does national income matter?
The long-run trend in real per capita national income is an important determinant of improvements in a society’s overall standard of living
what does economic growth mean
economic growth makes people materially better off on average.
In the short-run:
-When Y < Y*, what happens?
there is a recessionary gap. –> unemployment and suffering and lost output and economic waste.
In the short run:
-When Y > Y*, what happens?
there is an inflationary gap –> risk of high inflation rates
def. employment
the number of workers (15+) who hold jobs
def. unemployment
the number who are not employed but are actively looking for one
def. labour force
the total number of employed + unemployed.
def. unemployment rate
the number of unemployed expressed as a percentage of the labour force
T or F: unemployment doesn’t exist when Y= Y*
false
what kind of unemployment exists when Y = Y*
- frictional unemployment (natural turnover)
* structural unemployment (mismatch between jobs and workers)
what kind of unemployment exists when Y< Y*
cyclical unemployment
what is the natural unemployment rate (NAIRU)
it is the unemployment rate when Y=Y*
def. productivity
a measure of output per unit of input
-often measured as GDP per worker or GDP per hour of work
What are probably the single largest determinant(s) of long-run increases in material living standards?
increases in productivity
def. price level
the average level of all prices in the economy
def. inflation
the rate at which the price level is changing
Consumer Price Index (CPI)
an index of the average prices of goods and services commonly bought by households
**only useful when you are comparing it with another time period
why does inflation matter
- the purchasing power of money is negatively related to the price level
- adds to the uncertainties of economic life (because it is hard to forecast accurately)
- hyperinflation can ruin economies
def. interest rate
the price of “credit,” and the flow of credit is crucial to firms and households in a modern economy.
def. nominal interest rate
the rate expressed in money terms
def. real interest rate
the rate expressed in terms of purchasing power
what does the burden of borrowing depend on?
the real interest rate
prime interest rate
interest rate that banks charge to their best business customers
def. bank rate
the interest rate that the Bank of Canada charges on short term loans to commercial banks
def. exchange rate
the number of Canadian dollars required to purchase one unit of foreign currency
def. depreciation
depreciation of the Canadian dollar means that it is worth less on the foreign exchange market
–a rise in the exchange rate
is long-term growth or short-term fluctuations more important for a society’s living standards from decade to decade?
long-term growth
Gov role in inflation
maintaining inflation low and stable will contribute to the economy’s growth
gov role with budget surpluses
reduce need for borrowing, drives down interest rates, stimulates private investment
what are short-term fluctuations often called?
business cycles
describe the effectiveness of monetary and fiscal policy on short term fluctuations
- economists debate effectiveness in influencing them
- some economist argue that despite the “power” of policy to affect the economy, governments should not attempt to “fine-tune” the economy by making frequent changes in spending and taxing
