Chapter 4 What Macroeconomics is all about

Six key macroeconomic variables

Long-run growth vs. short-run fluctuations
1. National Product and National Income
National product: the value of total production of goods
and services .
Also called output .

National product = national income? Yes !

Production of output generates income .

Ex A firm produces $100 north of

.
ice creams .

( value of national product $100) =

workers
This $100 becomes income for -
-
owners

\
input suppliers
( value of national income =
$100)

Nominal national income:

total national income measured inaerrentdollans
current -
dollar national income .

How to calculate nominal national income:

Sum of ( current price ✗ current quantity) for every
and service
good .

Ex .
Th 2018 , good 1 : 2018 price ✗ 2018 quantity
"

good 2 :
"
-1 ' ' "

+ :
2018 quantity
:

1- good N : 2018 price ✗

" "
+
Service/
' ' "
:

: :
tseniceN.TO/8priceX20l8quantitf
sum up = nominal national income in 2018
Drawbacks when comparing nominal national income across years:
Nominal national income in 2018 uses 2018 prices .

' ' ' ' ' '

in 2019 Uses 2019 prices .

change in nominal national income from

If there is a

2018 to 2019 ,
it could be dueto changes in prices ,

both
or changes in quantity ,
or .

constant
Real national income: National income measured in
dollars C base -

period dollars) .

Constant - dollar national income .

How to calculate real national income:

2002
1 .
Choose a base year . Say ,
.

z .
Calculate national income
using
2002 prices .

2018
Real national income in

= Sum of ( 20oz price ✗ 2018 quantity ) for every

and service
good .

in 2019
Real national income
= sum of ( 2002 price ✗ 2019 quantity) for every
good and service .

it must be due to
If real national income changes ,

changes in quantity .
One of the most commonly used measures of national income is called gross
domestic product (GDP). GDP can be measured in real or nominal terms.

D °
°

o
o o
o o
o

The business cycles

Potential output: It is the productive capacity of the

The real GDP that the economy would
economy
.

( land , labor , and capital)

produce if aUresouras_
were fulW¥ed ( neither excess
.
demand nor

excess supply ) .

*
y
Denote by
Output gap:= actual output - potential output
*
= Y - y

Inflationary gap: actual output exceeds potential output .

*
Y > y

overtime
Ex : workers are
working ;

machines are
running overnight .

workers ask for higher wages

cost of production T

prices T
*
Recessionary gap: Y < y
The
economy
's resources are not fully employed .

Workers reduce hours

worked
}
I
Ex :
unemployment
some are laid off ;

Machines are
idling .

workers are more willing to accept a

lower wage .

cost of production d
prices d
Why national income matters:
important of economic performance
long run :

Real GDP per capita : standard of living

lost output
short run : recessions :
unemployment ,
.

booms :
inflation problem .

2. Employment, Unemployment, and the Labor Force

Employment: The number of adult workers ( 15T ) who

have jobs .

Unemployment: The number of adult workers ( 151-3 who

are not employed but actively searching for a job .

Housewives are not part of unemployment .

Labor force:= Employment 1- Unemployment

not in the labor force
Housewives
.

are

É 100%
Unemployment rate = ✗
Labor force
Three types of unemployment:
natural turnover
1. Frictional unemployment: caused by the

in the labor market .

}
Ex .
New people enter the workforce .

takes time
some people quit .

to find
Others are fired .
a job

2. Structural unemployment: caused by mismatch between

and workers
jobs .

Ex Workers don't
.
have the required skills for
the job .

region where
not located in the
Workers are

there is demand .

*
Y = y
Full
employment occurs when the only unemployment
is frictional or structural .

3. Cyclical unemployment: Y < y*

Firms reduce production and lay off workers in

recessions .
 Unemployment

F-
090
0
0 \ pec 2022
5%

Why unemployment matters:

•☒ loss of output

• loss of income ( poverty )

•
crimes mental illness ,
etc
,
.

3. Productivity ( long-run variable)

Definition: The amount of output the
economy
produces per unit of
hypnotic
land ,
labor , capital)

Labor productivity: real GDP per unit of labor employed .

 The measure

①
is better .

The average
number of hours

per worker declined .

Why productivity matters: It is the single largest

cause of rising matenallorihgstandard C real

GDP per capita) over long periods of time .

4. Inflation and the Price Level

Price level: The average level of all prices in
the economy expressed as
,
index number
an
.

Inflation: A rise in the price level .

Consumer Price Index (CPI): An index of the average

price of a basket of goods of

services commonly
Canadian households
bought by
.

About price index:

1 .
It does not have units .

when do
2 .
It only has a
meaning we a

comparison across years .

Ex CPI in 2017 = 131

.

CPI Tn 2002 = 100 C base year )

basket of goods is
The price of the same

than Th 2002
31% higher in 2017 .

Example: Suppose CPI in April 2018 was 133.8 and in April 2017 it was 130.4.
What is the rate of inflation during this one-year period?
rate of inflation = 133--8-130-4 -

✗ too %
130 . 4

=
2.6%
 The price level

① is

times
1960
more

as
than six

high as in

12%-3
•
increase in the world

of oil ( OPEC)
price

6.8% in Nov 2022

←
q• oil price , supply disruptions ,
and
1991 , Bank of Canada strong
→ in demand
has
inflation targeting
policy .

Why inflation matters:

Purchasing power of money: the amount of goods and services

that can be purchased with a

given amount of
MOG '

Higher inflation →
purchasing power d
 Fully anticipated inflation ÷
.
Households and firms can
adjust
to maintain their real values
prices and wages .

Ex .
Workers andfirms expect 2% inflation
wages 4 by 2% next year .

and actual inflation is exactly 2% .

Unanticipated inflation
Ex .
Workers and firms expect 2% inflation .

wages
4 by 2% next
year
and actual inflation is 10% .

The economy's allocation of resources will be

affected more .

5. Interest Rates
dollar borrowed per period
Definition: price paid per
proportion co 06)
oftime , expressed either
as a .

C 6 %)

faxes
or as a percentage
.

a rate that is typical of all various

+ rates .

•
suppress a lot of details
interest rates
•
⇐

Easy to follow as move

together .

I
b-
Nominal vs. real interest rate
= nominalinterest rate - inflation
loan in terms
measures the return on a

of purchasing power .

Example: Suppose your friend lends you $100 and that the loan is repayable in
one year. If you pay her $108 in one year, what is the nominal interest rate?
What is the real interest rate if inflation is zero? 8%? 10%?
① nominal interest rate =

-108¥ ✗ 100% = 8%

② real interest rate =

8% -0% =
8%
③ " " "
= 8% -

8% =
0%
④ "
"
" = 8% -
10% =
-2%

Gap
=
inflator

µ
425%
/ inflation 6.8%
real interest rate <o
 Why interest rates matter:
real interest rate altect the
1 .
Changes in

standard of living of sowers and borrowers .

2. An important determinant of investment

by firms
lÉe less costly to borrow

investment

6. Exchange Rates and Trade Flows

In June 2018 you could buy 0.66 euros for each dollar that you gave up. Or you
could buy 1 euro for 1.52 dollars.
① 0.66 euros per dollar : the number of foreign
currencies required to purchase
one unit of
domestic currency .

the number of domestic

{
② 1. 52 dollars per euro :

purchaseoneunitotpforeizncurre-ny.ec
currencies required to

Definition of exchange rate:

valuable It takes less

Appreciation: $ are more .

c$_pTourchase one unit of foreign currencies

decreases
exchange rate
=
.
Depreciation: C$ are less valuable .
It takes more

purchase one unit of foreign currencies

rate increases
exchange =
.

:÷÷
world prices
of goods .

..

¥
these goods .

world prices

After2009 ,

imports > exports

9. ↳ tradedeficit

Netexpoas > o
trade surplus

/
←

Net exports =
Exports -
Imports