Chapter 4: What Macroeconomics is all about Flashcards
Key Macroeconomic Variables
national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports
income
production of output
Aggregation problem
a summary measure, such as GDP
Nominal National Income
a method of aggregation which is measured in current dollars (CAD)
Real National Income
a method of aggregation which is measured in constant (base-period) dollars, reflecting quantity changes
helps with inflation measurement. includes a base year.
Real GDP
Measures the total output produced by the nation’s economy
annually
Long-Run Trend
economic growth
USA economy vs. Canadian economy
Short-Run Fluctuations
Business cycle
lack of workers, to high unemployment
Potential Output
what the economy could produce if all
resources were employed at their normal levels of utilization
also referred to as the Full Employment Output
Output Gap
Difference between potential output and actual
output
Recessionary gap notated
Y < Y∗
Inflationary gap notated
Y > Y∗
why do economists look at long run trends?
The long-run trend in real per capita national income is an important determinant of improvements in a society s overall standard of living (economic growth makes people materially better off on average).
why do economists look at short run trends?
This allows economists to make predictions. if there is recessionary gap, there is higher unemployment and suffering, lost output and economic waste. when there is an inflationary gap, there is risk of high inflation, causing goods to be expensive and money to be worth less.
Employment
number of workers holding jobs
Unemployment
Number not employed but actively seeking work
labour force
employed + unemployed. does not include students or people actively looking for a job (stay at home wives)
Unemployment Rate
Percentage of unemployed in the
labour force. equal to the number of people unemployed/number of people in the labour force x 100
NAIRU
non-accelerating inflation rate of unemployment. Above = recession, Below = inflation. unemployment rate when Y = Y∗
what is natural for an economy
Why was there a spike in the labour force and production starting around the mid-1970s?
Women entering the work force, immigration, allowed for growth in employment and the labour force
Frictional unemployment
more short term. natural turnover, people get fired, rehired, moved departments, etc. normal for an economy.
Structural unemployment
longer term. stems from too many jobs and too little workers, or too little jobs and too many workers
Why does unemployment matter?
Loss of income, Loss of output, Associated with crime, mental illness, and social unrest.
Productivity
A measure of output per unit of input. Often measured as GDP per worker or GDP per hour worked.
can be determinate in long-term living standards
Price Level
Average level of all prices in the economy
Inflation
The rate at which the price level is changing
Consumer Price Index (CPI)
An index of prices used to measure the change in the cost of basic goods and services in comparison with a fixed base period
Based on price of a typical “consumption basket” relative to a base year
purchasing power
Amount of goods/services a unit of money
can buy.
Why does inflation matter?
it’s effects reduces purchasing power and the real value of sums fixed in nominal terms
Unanticipated inflation
inflation which occurs completely against currently models or projections which exist
COVID, etc.
effects of unanticipated inflation
leads to more changes in
the real value of prices and wages
steady inflation level
keeping inflation around 2% allows for fluctuation and stability. wages and salaries have time to catch up with rising prices, incentivizing spending.
Nominal interest rate
The rate expressed in money terms
interest rate
the price of “credit”, and the flow of credit is
crucial to firms and households in a modern economy as it allows for stimulation and the flow of money
Real interest rate
The rate expressed in terms of purchasing power
The burden of borrowing depends upon this
prime interest rate
interest rate that banks charge
to their best business customers
bank rate
interest rate that the Bank of Canada
charges on short-term loans to commercial banks
Exchange rate
The number of Canadian dollars required to
purchase one unit of foreign currency.
1 Canadian dollar can buy 1.35 American Dollars
Depreciation
Means that this currency is worth less on the foreign-exchange market
allows for a rise in exchange rate
Appreciation
means that this currency is worth more on the foreign-exchange market
people want to buy more Canadian products, forcing them to buy CAD
Monetary Policy
Higher interest rates attract foreign capital
appreciation
Inflation
High inflation reduces demand for the currency
depreciation
Fiscal Policy toward exchange rates
Deficits may weaken the dollar; economic growth can strengthen it
Trade Balance toward exchange rates
Surpluses strengthen CAD; deficits weaken it
