Lecture for Thurs 26 August Flashcards
If we produce more than potential output, what can this lead to?
inflation
If we produce less than potential output, what can this lead to?
unemployment
What is on each axis of the graph showing the growth trend line/potential output/normal output?
x axis: time
y axis: real GDP
What is the shape of the growth trend line/potential output/normal output line?
this is linear and increases ie. as time goes on, real GDP increases
What does the growth trend line/potential output/normal output line show?
This shows the level of output that an economy can produce substantially over time. It is the estimate of the levels of output but what it actually produces can be more or less than this.
What is a recession (market contraction)?
This is when the economy is growing at a rate lower than normal so we are producing output less than potential output
What is an expansion (market recovery)?
This is when the economy is growing at a rate higher than normal so we are producing output more than potential output
What is a peak?
This is the high point prior to downturn or the beginning of a recession
What is a trough?
This is the end of the recession or low point prior to the expansion
What rises an output falls?
unemployment
Changes in real GDP are inversely related to what?
the unemployment rate
During times of ________, unemployment _________ substantially
recession
rises
While output can ________ without changes in the __________ level, in most cases _______ fluctuations and __________ fluctuations occur together
fluctuate
unemployment
output
unemployment
What is potential output?
This is the full employment output ie. the normal rate of output
What is the natural rate of unemployment?
This is the full employment level of unemployment
What is the symbol for potential output?
Y*
What are three other names for potential output?
- potential real GDP
- full-employment output
- normal output
Define potential output
This is the amount of output (real GDP) that an economy can sustainably produce when using its resources, such as capital and labour, at normal rates; ie. if all resources are employed optimally (not over or under utilised), for a given level of technology
What is the symbol for actual output?
Y
Does actual output always equal potential output?
no
Actual output equals what?
real GDP (squiggly line whereas potential output is the straight line)
Potential output, Y* is a function of what?
What is the equation for this function? What do each of these components mean?
level of technology (A), capital (K), labour resources (L)
Y* = AF (K, L) where
A = level of technology
K* = capital used at the full employment level at normal rates
L* = labour resources used at the full employment level at normal rates
How can we calculate the output gap?
actual output (Y) - potential output (Y*)
What happens during a recessionary gap?
Y* > Y
ie. potential output is greater than the potential output
ie. Y - Y* is negative
What happens during an expansionary gap?
Y > Y*
ie. actual output is greater than the potential output
ie. Y - Y* is positive
What are two problems with a recessionary gaps?
- capital and labour resources are not fully utilised
- output and employment are below normal levels
One of the issues with a recessionary gap is the capital and labour resources are not fully utilised. Expand on this
There is higher than normal levels of unemployment and there is wasted and under-utilised resources
One of the issues with a recessionary gap is the output and employment are below normal levels. Expand on this
This means that you are not producing at potential and therefore unemployment increases
What are three problems with the expansionary gaps?
- higher output and employment than normal
- demand for goods exceed the capacity to produce them at normal rates and prices rise
- high inflation reduces economic efficiency
Why is it an issue that there is higher output and employment than normal during an expansion?
Because this could indicate than the economy overheats and it could lead to inflation.
When you are producing potential output, you are using your resources at what rates?
normal rates
What is the only way to produce more than potential output?
to use resources at more than normal rates
What happens to the labour resources when you are producing a higher output level than potential?
To produce higher level of output than potential, you have to overwork the workers and this means that they will want to be paid more. This increases costs which is passed onto consumers in higher prices which leads to inflation
What happens to the capital resources when you are producing a higher output level than potential?
To produce higher level of output than potential, you have to be using the machines more than normal which is over-working the machines. This can cause it to break down so you have to pay for repairs more frequently so this adds to costs which causes higher prices for consumers and this leads to inflation
What is the symbol for full employment?
u*
What is another name for full employment?
natural rate of unemployment
Define full employment
This is the rate of unemployment when the economy is producing its potential output
ie. the level of unemployment that the economy can handle and still produce potential output
Does full employment means that unemployment is zero?
no
Does actual unemployment (u) always equal the natural rate of unemployment (u*)?
no
What is the role of Treasury?
They estimate the natural rate of unemployment ie. they estimate the rate of unemployment that the NZ economy can handle and still be expected to produce at natural rates of unemployment
The natural rate of unemployment is unemployment that does not go away on its own, even in the _________ run
long
Define natural rate of unemployment
This is the amount of unemployment that the economy normally experiences when we are producing an output equal to potential output
What are the three types of unemployment?
- frictional
- structural
- cyclical
Define frictional unemployment
This is when there is a mismatch between jobs and workers in the short term ie. workers are searching for a new job and are temporarily unemployed in the meantime
Define structural unemployment?
This is when there is a mismatch between jobs and workers in the long term due to a skills mismatch: the skills that some workers have differ from those that the employers need
Define cyclical unemployment
This is associated with the short term ups and downs of the business cycle: it refers to the year-to-year fluctuations in unemployment around its natural rate
there might be fewer jobs when there is a recession
When in a recession, what types of unemployment do you expect?
frictional
cyclical
strutural
When in an expansion, what types of unemployment do you expect?
frictional
structural
What is the total (actual) unemployment (u)?
F + S + C
actual unemployment unemployment
What is the natural rate of unemployment (u*)?
This is frictional + structural because cyclical = 0
This is the unemployment an economy has when producing potential output (Y*)
How can we calculate cyclical unemployment?
total unemployment - natural rate
u - u*
What three things occur at the natural rate of unemployment?
- there is no recessionary or expansionary gap
- actual output is equal to potential output
- we are at full employment
