macroeconomics
- focus on the performance of the economy as a whole
- short and long run fluctuations - business cycles
standard of living
- access to goods and services that make life easier, safer, healthier, more enjoyable
national product
- most comprehensive measure of a nation’s overall level of economic output
- sometimes called national output
nominal GDP
- measure of the value of final goods and services produced in a country in a year using current prices
real GDP
- measure of the final value of goods and services produced in a country in a year during specific time periods (usually a year) using constant prices
average living standards over time
- output per person better indicator
- GDP/capita
recession
- period where economy is growing at a rate significantly below normal
- 2 consecutive quarter rule
- particularly severe: depression
expansion
- period where the economy is growing at a rate significantly above normal
- normally lasts longer than a recession
- particularly strong: boom
peak
- high point of economic activity (GDP) prior to downturn
trough
- low level of economic activity (GDP) prior to recovery
why do we have fluctuations
- driven by unexpected events that people struggle to adjust to
causes of shocks
- irregular innovation
- productivity changes
- monetary factors
- political events
- financial instability
characteristics of short run fluctuations
- irregular length and severity
- felt through the economy, uneven industrial impact
- durable goods more sensitive to impact and interest rate fluctuations
- services and non durables less sensitive to fluctuations - cant not consume
- unemployment and inflation affected
key macroeconomic variables
- national product and national income
- employment, unemployment, labour force
- productivity
- inflation and price level
- interest rates
- exchange rates and trade flows
national output (Y) (income GDP)
- level of actual production of the economy
- total production of goods and services = total income
potential output (Y*)
- level of production produced when factors of production are fully employed
output gap
- actual output (Y) - potential output (Y*)
- if YY*, inflationary gap
potential output employment
- when the economy is at potential output there is full employment
- frictional rate of unemployment
- natural rate of unemployment
frictional unemployment
- due to natural turnover
- takes time to find job/employees
structural unemployment
mismatch btwn jobs and workers
cyclical unemployment
- caused by decline in total spending
- when real GDP is less than potential GDP
true unemployment rate may be different than figures because
- rate excludes 3 groups of workers
- discouraged workers: people who want a job but havent made an effort to find one in the past 4 weeks bc they believe there are no jobs
- involuntary part time workers: people who want to work full time but can only find part time work
productivity
- measure of the amount of output the economy produces per unit of input
- has been significant increase over the past 4 decades
- single largest cause of rising material living standards
labour productivity
real GDP/level of unemployment
inflation
- unemployment can be reduced only at the cost of higher inflation and vice versa
- rise in the general level of prices and is measured as the % change in a price index (sich as CPI)
how CPI is calculated
- index that measures the price of a fixed market basket of goods ans services typically bought by a consumer
- CPI = 100 x cost of basket in current year / cost of basket in base year
calculate inflation rate
- % change in CPI
- inflation rate = CPI this year - CPI last year/CPI last year x 100
why does inflation matter
- value money for what we can purchase with it
- purchasing power: amount of goods and services that can be bought with a unit of money
- inflation rate reduces purchasing power
- reduces real value of any sum fixed in nominal dollar terms
consequences of inflation
- people usually think its bad
- affects ppl differently
- depends on intensity and if anticipated
- if not inticpiaed, those with fixed incomes, savers and creditors are hurt
interest rates
- the price paid per dollar borrowed per period of time
- expressed as a proportion or percentage
- burden of borrowing depends on real interest rate
nominal interest rate
price paid per dollar borrowed per period of time
real interst rate
- nominal rate of interest adjusted for the change in purchasing power
- nominal i - inflation
exchange rate
the number of units of domestic currency required to purchase one unit of foreign currency
rise in exchange rate
takes more canadain dollars to purchase one unit of foreign currency - depreciation of canadian dollar
fall in exchange rate
takes fewer canadian dollars to purcahse one unit of foreign currency - appreciation of canadian dollar
foreign currency
foreign currencies or claims on foreign currencies like bank deposit, cheques, promissory notes, that are payable in foreign money
trade balance
- difference between exports and imports (net exports)
- trade surplus and deficit
trade surplis
- exports exceed imports
trade deficit
imports exceed exports
role of government policy
- should something be done to minimize impact of fluctuations (short term)
- some argue no