Chapter 4: What Macroeconomics is all about Flashcards
(57 cards)
1
Q
Key Macroeconomic Variables
A
national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports
2
Q
income
A
production of output
3
Q
Aggregation problem
A
a summary measure, such as GDP
4
Q
Nominal National Income
A
- a method of aggregation which is measured in current dollars (CAD)
- multiply the number of units of each good produced, by the price at which each unit is sold (every bar of steel, every loaf of bread). then sum these values across all the different goods and services produced in the economy to give the quantity of total output measued in CAD
- also refered to as current dollar national income or constant-dollar national income
- Total national income measured in current dollars. Also called current-dollar national income
5
Q
Real National Income
A
- a method of aggregation which is measured in constant (base-period) dollars, reflecting quantity changes
- measures to what extent any change in national income is due to higher/lower quantities or to higher/lower prices
- national income measured in constant (base-period) dollars. it changes only when quantities change.
helps with inflation measurement. includes a base year.
6
Q
Real GDP
A
Measures the quantity of total output produced by the nation’s economy annually
7
Q
Long-Run Trend
A
economic growth
USA economy vs. Canadian economy
8
Q
Short-Run Fluctuations
A
Business cycle
lack of workers, to high unemployment
9
Q
Potential Output
A
- what the economy could produce if all
resources were employed at their normal levels of utilization - The real GDP that the economy would produce if its productive resources were fully employed. Also called potential GDP.
- notated by (Y*)
also referred to as the Full Employment Output or Potential GDP
10
Q
Output Gap
A
- Difference between potential output and actual output
- computed by Y - Y*
- when actual output is less than potential (Y<Y*) then not all resources are being utilized, this is a recessionary gap
- When actual output exceeds potential output (Y>Y*) the economy is operating in excess and will not be able to sustain that level of production. this is an inflationary gap
11
Q
Recessionary gap
A
- Y < Y∗
- happens when an economy is not operating at full potential
- this may be due to higher unemployment
12
Q
Inflationary gap
A
- *Y > Y∗
- this happens when an economy is operating in excess, and goes over their potential output
- this economy will not be able to operate sustainably
- often times this happens to workers picking up extra shifts, etc.
13
Q
why do economists look at long run trends?
A
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).
14
Q
why do economists look at short run trends?
A
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.
15
Q
Employment
A
- number of people 15 years or older holding jobs
16
Q
Unemployment
A
- Number of people 15 years or older not employed but actively seeking work
17
Q
labour force
A
employed + unemployed. does not include students or people actively looking for a job (stay at home wives)
18
Q
Unemployment Rate
A
- Percentage of unemployed in the
labour force - equal to the number of people unemployed/number of people in the labour force x 100
19
Q
NAIRU
A
non-accelerating inflation rate of unemployment. Above = recession, Below = inflation. unemployment rate when Y = Y∗
what is natural for an economy
20
Q
Why was there a spike in the labour force and production starting around the mid-1970s?
A
Women entering the work force, immigration, allowed for growth in employment and the labour force
21
Q
Frictional unemployment
A
more short term. natural turnover, people get fired, rehired, moved departments, etc. normal for an economy.
22
Q
Structural unemployment
A
- longer term. stems from too many jobs and too little workers with the experience needed, or too little jobs and too many workers
23
Q
Why does unemployment matter?
A
Loss of income, Loss of output, Associated with crime, mental illness, and social unrest.
24
Q
Productivity
A
- A measure of output per unit of input. Often measured as GDP per worker or GDP per hour worked.
- The level of real GDP divided by the level of employment (or total hours worked)
- has increased in almost every year over the past half-century in Canada
- measuring per hour work is a more accurate measurement as the average number of hours worked per employed worker changes over time, takes into account the changes in hours worked
- single largest cause of rising living standards over long periods of time
can be determinate in long-term living standards
25
Price Level
* Average level of all prices in the economy
* expressed as an index number
* notated by *P*
26
Inflation
* The rate at which the price level is changing
* a rise in the average level of all prices/the price level
27
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
28
purchasing power
* Amount of goods/services a unit of money can buy.
29
Why does inflation matter?
* it's effects reduces purchasing power and the real value of sums fixed in nominal terms
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Unanticipated inflation
inflation which occurs completely against currently models or projections which exist
| COVID, etc.
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effects of unanticipated inflation
leads to more changes in
the real value of prices and wages
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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.
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Nominal interest rate
The rate expressed in money terms
34
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
* The price paid per dollar borrowed per period of time, expressed either as a proportion (e.g., 0.06) or as a percentage (e.g., 6 percent).
35
Real interest rate
* The rate expressed in terms of purchasing power
* nomal interest rate - the rate of inflation
| The burden of borrowing depends upon this
36
prime interest rate
interest rate that banks charge
to their best business customers
37
bank rate
interest rate that the Bank of Canada
charges on short-term loans to commercial banks
38
Exchange rate
The number of Canadian dollars required to
purchase one unit of foreign currency.
| 1 Canadian dollar can buy 1.35 American Dollars
39
Depreciation
Means that this currency is worth less on the foreign-exchange market
| allows for a rise in exchange rate
40
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
41
Monetary Policy
Higher interest rates attract foreign capital
| appreciation
42
Inflation
High inflation reduces demand for the currency
| depreciation
43
Fiscal Policy toward exchange rates
Deficits may weaken the dollar; economic growth can strengthen it
44
Trade Balance toward exchange rates
Surpluses strengthen CAD; deficits weaken it
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national product
another term for *output*
| page 79 of textbook
46
national product = national income
* you can't get more money from nowhere
* if an icecream maker makes 100$ selling ice cream, that 100$ becomes the amount of money he can use to pay his workers, buy equipment and cones, as well as pay himself
* by definition equal
47
national income
* refers to both the value of the total output and the value of the income claims generated by the production of that output
* represents what the economy actually produces
* matters as a measure of economic performance
* short term performance often recieves more attention in the media and in politics, however economists agree that long-term growth are the more important of the two
48
measurement of national income
* add up the values of the many dfferent goods and services provided
49
Recession
* periods in which real GDP falls
* Fluctuations of real national income around its trend value that follow a more or less wavelike pattern.
50
business cycle
* refers to continual ebb and flow of business activity which occur around the long term trend
* a single cyclle will usually include an interval of quickly growing output, followed by an interval of slowly growing or even falling output
* an entire cycle may last years
* Fluctuations of real national income around its trend value that follow a more or less wavelike pattern.
51
full employment
* is said to occur when the only unemployment is frictional and structural, a situation that corresponds to actual GDP being equal to potential GDP
52
seasonal fluctuations to employment
* seen with industries which are inherently seasonal
* seen with fisherman being unemployed in the winter, or ski instructors in the summer
* Statistics Canada seasonally adjusts this unemployment rate to remove these fluctuations, thereby revealing more clearly the cyclical and trend movement in the data
53
price index
* multiple created by Statistics Canada
* measures averages of good and services according to how important they are
* pure number with no units
* units are eliminated as it shows the price of a basket of goods at some specific time relative to the price of the same basket of goods in some base periods
* currently this base year is 2002, which means that the price of the basket of goods is set to be 100 in 2002. this means that if the CPI is computed to be 138.2 in December 2020, the CPI would be 38.2
54
rate of inflation
* current CPI - Past CPI/ Past CPI x 100 percent
* the rate of increase in prices over a given period of time
* has been around 2% since the 1990s when new economic policy was put into place
* allows for steady adjustment
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foreign exchange
Foreign currencies that are traded on the foreign-exchange market
57
foreign exchange market
Foreign currencies that are traded on the foreign-exchange market
