Chapter 19: What Macroeconomics Is All About Copyright © 2014 Pearson Canada Inc.

Chapter 19: What Macroeconomics

Is All About

Copyright © 2014 Pearson Canada Inc.

Chapter Outline/Learning Objectives

Section Learning ObjectivesAfter studying this chapter, you will be able to

19.1 Key Macroeconomic Variables

1. define the key macroeconomic variables: national income, unemployment, inflation, interest rates, exchange rates, and net exports.

19.2 Growth Versus Fluctuations

2. understand that most macroeconomic issues are about either long-run trends or short-run fluctuations, and that government policy is relevant for both.

Copyright © 2014 Pearson Canada Inc. 2Chapter 19, Slide

19.1 Key Macroeconomic Variables

Output and Income

The production of output generates income.

To measure total output in dollars, we add up the values of the many different goods produced.

This gives nominal national income.

With base-period prices, we get real national income.


Fig. 19-1 Growth and Fluctuations in Real GDP, 1965–2011

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(i) The level of real GDP (ii)Annual growth rate of real GDP


Real GDP fluctuates around a rising trend:

• the trend shows long-run economic growth

• the short-run fluctuations show the business cycle

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APPLYING ECONOMIC CONCEPTS 19-1

The Terminology of Business Cycles


Potential output is what the economy could produce if all resources were employed at their normal levels of utilization.

• often called full-employment output

The output gap measures the difference between potential output and actual output.

Output Gap = Y – Y*

When Y < Y*, there is a recessionary gap.

When Y > Y*, there is an inflationary gap.

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The Terminology of Business Cycles


Fig. 19-2 Potential GDP and the Output Gap, 1985–2011

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(ii)The output gap(i) Potential and actual GDP


Employment, Unemployment, and the Labour Force

Employment: the number of workers (15+) who hold jobs.

Unemployment: the number who are not employed but are actively looking for one.

Labour force: the total number of employed + unemployed.

Unemployment rate: the number of unemployed expressed as a percentage of the labour force.


Even when Y = Y*, some unemployment exists:

• frictional unemployment (natural turnover)

• structural unemployment (mismatch between jobs and workers)

When Y < Y*, there is cyclical unemployment.

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Unemployment Rate

= Number of people unemployedNumber of people in the labour force

X 100

Chapter 19, Slide Copyright © 2014 Pearson Canada Inc.

Fig. 19-3 Labour Force, Employment, and Unemployment, 1960–2011

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(ii)Unemployment rate(i) Labour force and employment

Copyright © 2014 Pearson Canada Inc. Chapter 19, Slide

• Long-term trend: employment has grown roughly in line with the growth in the labour force.

• Short-term fluctuations have been substantial

– from 3.4% in 1966 to 12% in 1982.

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Why Does Unemployment Matter?

Some unemployment is desirable, as it reflects the time required for workers and firms to "find" each other so that good matches are made. But some unemployment is associated with human hardship, especially for those individuals with skills that are not in high demand by firms.


Productivity

Productivity: a measure of output per unit of input.

• often measured as GDP per worker

• or GDP per hour of work

Increases in productivity are probably the single largest determinant of long-run increases in material living standards.

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Fig. 19-4 Canadian Labour Productivity, 1976–2011

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Real GDP per worker

is measured in thousands of dollars!


Inflation and Price Level

Price level: the average level of all prices in the economy.

Inflation: the rate at which the price level is changing.

The CPI is based on the price of a typical "consumption basket,” relative to the price in some base year:


Why Inflation Matters?

The purchasing power of money is negatively related to the price level.

Also, because it is hard to forecast accurately, inflation adds to the uncertainties of economic life.

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APPLYING ECONOMIC CONCEPTS 19-2

How the CPI Is Constructed


Fig. 19-5 The Price Level and the Inflation Rate, 1960–2012


Interest Rates

The interest rate is the price of "credit," and the flow of credit is crucial to firms and households in a modern economy.

Nominal interest rate: the rate expressed in money terms.

Real interest rate: the rate expressed in terms of purchasing power.


Fig. 19-6 Real and Nominal Interest Rates, 1965–2012


The International Economy

Foreign exchange: foreign currencies or claims on foreign currencies.

Exchange rate: the number of Canadian dollars required to purchase one unit of foreign currency.

A depreciation of the Canadian dollar means that it is worth less on the foreign-exchange market.

a rise in the exchange rate


Fig. 19-7 Canadian–U.S. Dollar Exchange Rate, 1970–2012


The balance of payments accounts record all payments made in international transactions—goods, services, and assets.

• trade balance

• current account balance

• capital account balance

For Canada, exports and imports are both very large—roughly 35% of GDP—but the trade balance is usually small.


Fig. 19-8 Canadian Imports, Exports, and Net Exports, 1970–2011


19.2 Growth Versus Fluctuations

Long-Term Economic Growth

Long-term growth is considerably more important for a society’s living standards from decade to decade than short-term fluctuations.

There is considerable debate regarding the ability of government to influence the economy's long-run growth rate.


Short-Term Fluctuations

Short-term fluctuations are often called business cycles.

Economists debate the effectiveness of monetary and fiscal policy in influencing these fluctuations.

Some economists argue that despite the "power" of policy to affect the economy, governments should not attempt "fine-tuning."


What Lies Ahead?

To organize our thinking about macroeconomics, we must develop some tools. These will include:

• discussing measurement of national income

• building a simple model of the economy

• modifying the model to make it more realistic

• using our model to analyze some pertinent economic issues


Chapter 19: What Macroeconomics Is All About Copyright © 2014 Pearson Canada Inc.

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Transcript of Chapter 19: What Macroeconomics Is All About Copyright © 2014 Pearson Canada Inc.