ECON203_CHAPTER_IV Flashcards
What is macroeconomics?
Macroeconomics is the study of the behaviour and performance of the economy as a whole (aggregate output/economy aggregate)–BASE IS ABOUT SCARCITY
A full understanding of macroeconomics requires understanding the nature of short-run fluctuations as well as the nature of long-run economic growth.
π in macroeconomics represents inflation
Production in a particular industry is microeconomics
National Product/Output
National Product/Output is the value of its total production of goods and services/the value of total output and the value of income claims generated by the production of that output. The value of national product is by definition equal to the value of national income.
For example: if a firm produces ice cream that sells for $100, that $100 becomes income for the firm’s workers, the firm’s suppliers of material inputs, and the firm’s owners.
Nominal national income (current-dollar national income)–same period of time
Nominal national income (current-dollar national income): Multiplying the number of units of each good produced by the price at which each unit is sold, then sum these values across all the different goods and services produced in the economy to have the quantity of total output or national income measured in dollars.
A change in nominal national income can be caused by a change in either the physical quantities or the prices which they are sold (professor indicated that the quantity has more power than the price though)
Real national income (constant-dollar national income)–can be compared overtime
Real national income (constant-dollar national income is the value of individual outputs, not at current prices, but at a set of prices that prevailed in some base period.
A change reflects only changes in quantities.
GROWTH RATE
Growth rate = ( New - Previous ) / Previous x 100
REAL GROWTH RATE
Real growth rate = ( New - Previous ) / Previous x 100 (if no data for previous year, no real growth rate)
National Income Recession
National Income Recession is a period where real GDP actually falls–if we are not producing as much, we are paid less, the economy earns less money (it is characterized by at least 2 consecutive years)
National Income Business Cycle
National Income Business Cycle is the fluctuations of real national income around its trend value that follow a more or less wavelike pattern around the long-term trend.
Potential output (a constant)
Potential output is the level of output the economy would produce if all resources–land, labour, and capital–were fully employed. This method is estimated by using statistical techniques (lots of disagreement among researchers because of different approaches.)
The potential output and the output gap (P.O. is never the same as actual output), we use Y to denote the economy’s actual output and Y* to denote potential output.
Business Cycle: a Trough
A trough is characterized by unemployed resources and a level of output that is low in relation to the economy’s capacity to produce (unused productive capacity). Business profits are low/negative, and firms are unwilling to make new investments
Business Cycle: Recovery
Recovery moves the business out of a trough.
It can occur when run-down/obsolete equipment is replaced; employment, income and consumer spending all begin to rise; and expectations become more favourable. Firms are more willing to invest in future prospects. Production increases with re-employing the unemployed
Business Cycle: Peak
Peak is where existing capacity is used at a high degree. Labour/raw material shortages may develop. So costs begin to rise, but because prices rise also, business remains profitable.
Peaks are eventually followed by slowdowns in economic activity–like slowing of the increase in income/standard of living–but can also lead to recession
Business Cycle: Recession
A recession or a contraction is a turndown in economic activity for at least two consecutive quarters.
As output falls, so do employment and household incomes. Profits and investments drop. Capital income wears out because unused capacity is increasing steadily
Business Cycle: Slump
A slump is the entire falling half of the business cycle
Business Cycle: Boom
A boom is the entire rising half of a business cycle
Business Cycle: Output Gap
The output gap measures the difference between potential output and actual actual output, and is computed as Y-Y*
Y < Y* Recessionary gap: goods and services are not being produced because the resources are not fully employed
Y > Y* Inflationary gap: the market value of production in excess of what the economy can produce on a sustained basis, workers may work longer hours/extra–often pressure on wages and prices
Why National Income Matters
National income matters because it is a measure of economic performance.
Short-run movements attract more attention, but economists argue that long-term growth is more impactful.
The long-run growth in real per capita national income is an important measure of improvements in a society’s overall standard of living
Increase is not necessarily beneficial for everyone.
Employment, Unemployment, and the Labour Force
Rise in employment means more workers must be used in production. A rise in output per person employed means workers must produce.
In the short run, changes in production tend to be very small, but more accomplished by changes in employment.
Over the long run, both productivity and employment are significant.
Employment
Employment denotes the number of adults (In Canada must be aged 15 and over) who have jobs–self employed included.
Natural rate of employment, frictional and structural unemployment
did u have water
have some water ok
Unemployment
Unemployment denotes the number of adults who are not employed, but actively searching for a job.
Labour force
Labour force is the total number of people who are either employed or unemployed
UNEMPLOYMENT RATE
Unemployment rate = (Number of people unemployed / Number of people in the labour force) x 100
In Canada it is estimated from the Labour Force Survey conducted each month by Statistics Canada
Frictional unemployment
Frictional unemployment is when new people enter the workforce, some quit their jobs, some are looking for jobs after graduation, others are fired–natural turnover in the labour market
Structural unemployment
Structural unemployment occurs when there is a mismatch between the structure of the supplies of labour & the structure of the demands of labour–no more mines, minor no longer job, or too many software developers on market with no available labour
Full employment
Full employment occurs when the only unemployment is frictional and structural–a situation that corresponds to actual GDP being equal equal to potential GDP
Cyclical unemployment
Cyclical unemployment occurs when actual GDP does not match potential GDP–the economy is not at full employment–rises and falls with the ebb and flow of the business cycle.
Seasonal fluctuation in unemployment
Examples of seasonal fluctuations in unemployment: a fisher out of a job in winter, and a ski instructor out of a job in the summer–Statistics Canada adjusts the unemployment statistics to remove these fluctuations.
Recent history: labour force since 1976
The labour force and employment (nearly doubled) have grown since 1976 with only a few interruptions.
Why unemployment matters
Unemployment and its social significance is enormous because it involves economic waste and human suffering. The loss of income may push people into poverty, lead to crime, mental unrest and general social unrest if long-term. In the past, only personal savings, private charity, help from friends and relatives existed, now we have employment insurance and social assistance/welfare for short-term safety nets. One cannot rely on it for the long-term
how many fingers do u have
the answer is 10. thoughts and prayers it stays that way even after ur last day on earth
ProDucTiviTY and its recent history
Productivity is a measure of the amount of output that the economy produces per unit of input (land, labour, and capital)
Employment has increased significantly since the 1970s, partly due to rising population, and increase of population that chooses to participate in the labour force,
Canada’s stock of physical capital–the buildings, factories, and machines used to produce output–more or less steadily
Productivity in Canada has increased in almost every year over the past half-century
Labour productivity
Labour productivity is the level of real GDP produced divided by unit of labour employed/hours worked
Measuring output by number of hours worked is more accurate because the average number of hours worked per employed worker changes over time which has also decreased overtime.
Rising labour productivity is an important contributor to rising material living standards (incomes)
Why productivity matters
Productivity matters bc
Long term: productivity growth is the single largest cause of rising material living standards over long periods of time.
Short term: standards of living are more affected with the ebb and flow of the business cycle
Price Level
Price level is the average level of all prices in the economy, expressed as an index number.
Since it is measured with an index number, its value at any specific time has meaning only when it is compared with its value at some other time.
Inflation (we be going through tough times with inflation rn ngl…saw a small pack of blueberries for 6 dollars a few months ago…rip)
A rise in the average level of all prices. Usually expressed as the annual percentage change in the Consumer Price Index
CPI
CPI is an index of the average prices of goods and services commonly bought by households.
RATE OF INFLATION
The rate of inflation measures the annual rate of increase in the price level–not perfect measure of the cost of living bc it does not automatically account for ongoing quality improvements or for changes in consumers’ expenditure patterns.
- Survey the consumption behaviour of consumers
- Calculate the cost of the goods and services purchased by the average consumer in the year in which the original survey was done. Define this as the base period of the index
- Calculate the cost of purchasing the same bundle of goods and services in other years
- Divide by the result of Step 3 (in each year) by the result of Step 2, and multiply by 100. The result is the value of the CPI for each year
Why inflation matters
We measure economic values in terms of money, and we use money to conduct our economic affairs.
Purchasing power of money
Purchasing power of money is the amount of goods and services that can be purchased with a unit of money
Real value of money
Real value of money refer to the amount of goods and services that can be purchased with a given amount of money
Inflation reduces the purchasing power of money. It also reduces the real value of any sum fixed in nominal (dollar) terms.
Anticipated inflation
If households and firms fully anticipate inflation over the coming year, they will be able to adjust many nominal prices and wages so as to maintain their real values.
It has a smaller effect on the economy than unanticipated inflation
Unanticipated inflation
Unanticipated inflation leads to more changes in the real value of prices and wages. So the economy’s allocation of resources will be affected more
Interest rates kaching kaching
Interest rate is the price paid per dollar borrowed per period of time, expressed either as a proportion (0.06) or as a percentage (6%)
The rate charged on a loan that is not to be repaid for a long time will usually differ from the rate on a loan that is to be repaid quickly.
Prime interest rate
Prime interest rate is the rate that banks charge to their best business customers, when it changes most other rates change in the same direction
Bank rate
Bank rate is the rate that the bank of Canada (Canada’s central bank) charges on short-term loans to commercial banks such as the Royal Bank or the Bank of Montreal
Nominal interest rate
Nominal interest rate is the price paid per dollar borrowed per period of time (the one we find at the bank as a consumer)
Real interest rate
Real interest rate is the nominal rate of interest adjusted for the change in the purchasing power of money. It is equal to the nominal interest rate minus the rate of inflation
The burden of borrowing depends on the real, not the nominal, rate of interest
It has been less than the nominal interest rate over the past five decades due to the presence of inflation.
Approximate Fisher equation
r ≈ R - π
r = real interest rate
R = nominal interest rate
π = rate of inflation
Two different real interest rates :
Expected VS Actual
Expected real interest rate (r(e)) : r(e) ≈ R - π(e)
Actual real interest rate (r(a)) : r(a) ≈ R - π(a)
Where R = nominal interest rate;
π(e) = expected rate of inflation;
π(a) = actual rate of inflation
Why interest rates matter
Interest rates affect returns of i.e. savers, borrowers, firms (changes in real interest rate lead to changes in the cost of borrowing and thus changes in firms’ investment plans which affects the level of economic activity)
Interest Rates and “Credit Flows”
A loan represents a flow of credit between lenders and borrowers, with the interest rate representing the price of this credit. Banks intermediate between households & firms that have available funds and those that require it (they make the credit market)
Exchange rate
Exchange rate is the number of Canadian dollars required to purchase one unit of foreign currency, it depends on supply and demand with imports/exports
Foreign exchange
Foreign currencies that are traded on the foreign-exchange market
Depreciation
Depreciation is the rise in the exchange rate–the domestic currency has become less valuable so that it takes more units of domestic currency to purchase one unit of foreign currency
OLD 1 USD = 1.3CAD
NOW 1 USD = 1.4CAD
The CAD depreciated against the US dollar that appreciated
Appreciation
Appreciation is a fall in the exchange rate–the domestic currency has become more valuable so that it takes fewer units of domestic currency to purchase one unit of foreign currency
OLD 1 USD = 1.3CAD
NOW 1 USD = 1.4CAD
The USD appreciated against the CAD that depreciated
Trade-weighted exchange rate
Trade-weighted exchange rate is a weighted-average exchange rate between the home country and its trading partners, where the weights reflect each partner’s share in the home country’s total trade.
Canadian-US exchange rate history
The Canadian-US exchange rate has been quite volatile over the past five decades. Both domestic policy and external events have important effects on the Canadian exchange rate–for example it is believed that the appreciation of CAD 1986-1992 was caused in part by Bank of Canada’s efforts to reduce the rate of inflation.
Imports
Import is buying many goods and services from other countries
Exports
Export is selling many goods and services to other countries
Trade balance/net exports and its recent history
Trade balance/net exports are the difference between exports and imports (it is indicative of productivity through exports)
Though imports and exports have increased dramatically over the past four decades the trade balance has remained roughly in balance, but it is has stayed relatively small especially when viewed as a proportion of total GDP
Long-Term Economic Growth
Both total output and output per person have risen for many decades in most advanced countries which leads to rising average living standards, but economists argue over different variables that might or might not affect the economy.
There is a growing debate about whether economic growth generates excessive costs in terms of resource depletion and environmental damage
Others argue about the involvement the government holds over developing new technologies–that if the private sector is left on its own it can produce inventions and innovation that will guarantee a satisfactory rate of long-term growth. Others say that they were actually supported by public funds–i.e. Military funding for computers, the internet, etc.
Short-Term Fluctuations
Short term fluctuations lead economists to study the causes of business cycles–especially recessions–which requires understanding monetary policy i.e. the Bank of Canada (central)’s policy with respect to the quantity of money that it makes available to the whole economy.
Economists argue that inflation in the 1970s-1980s was related to monetary policy.
They also argue that when the Bank of Canada implemented a policy in the 1990s to reduce inflation also led to the recession, others say that the slowdown of the US economy was an important contributor to Canada’s recession.
Government budget deficits and surpluses–they think that in recessionary years the government should increase spending and reduce taxes, and decrease spending and taxes when the economy is booming.
Government policies–income tax, employment insurance, are to mitigate short term fluctuations in national income, some say the government cannot “fine tune” the economy
congrats & bravo
it is time to go outside and eat some grass
