Chapter 19 Economy
 Studies the overall or aggregate
 The overall price level, not individual prices
 Total production in the economy, not the production by individual firms
 Adjusts to changes across the whole economy
 National income = national product (output of the total economy aka GDP)
Gross Domestic Product
 Total output produced is the total value of all goods and services produced
 Production of output generates income
 The quality of total output is measured in dollars
 Nominal National Income: [measured in current dollar – equilibrium year prices]
 The dollar value of total output
Macroeconomics
 Unemployment
 Inflation
 Interest rates
 Business Cycles
 Exchange Rates
 Economic Growth
Real GDP
 Measures income at base-period prices
 Nominal GDP – Inflation = Real GDP
 If price level changes over time are removed, only changes in production remain
 Changes in Real GDP
 Measures changes in production
Potential GDP [Y*]
 Potential national income (output)
 What the economy could produce
 If all resources were employed at their normal levels of utilization
 Often called full-employment income
 Output gap- The difference between potential and actual output
 Denote potential output by Y* and actual by Y.
 Output Gap = Y* - Y

Recessionary Gap
 When actual income (output) is less than potential income

Inflationary Gap
 When actual income (output) exceeds potential income
When GDP is below potential
 Output and incomes are lost
 Can never recover these losses
When GDP is above potential
 Can generate inflation
 Growth in potential GDP can increase future incomes
 But...
 Increase in average income doesn’t mean increase for all- Not all benefit
Employment
 Number of adult workers (15 and over) who hold jobs
Unemployment
 Number of individuals not employed but actively searching for a job
Labour force
 Total number of people who are wither employed or unemployed
Unemployment rate
 Percentage of the labour force that is unemployed
Unemployment Rate = Number of People Unemployed / Number of people in the labour force * 100
e.g.
Labour force = 100
Unemployed= 10
Unemplyment rate = 100/10*100
= 10%
Full employment [ Y=Y* ]
 Some unemployment exists
 Frictional

 Structural
Frictional unemployment
 Caused by normal turnover of labour (retirement, quits, ect.) – Hiring takes time
Structural unemployment
 Occurs because of a mismatch between available workers and jobs
Full employment
 Occurs when all unemployment is frictional and structural
 There is no Cyclical Unemployment
 At potential GDP [ Y* ]
 Natural Rate of Unemployment [U*] exists at Y*
Unemployment [U] changes over the business cycle
During recessions, U rises above U*
During booms U falls below U*
Cyclical Unemployment
 When U>U* which exists at Y*
Seasonal Unemployment
 U may rise by 0.3 percentage points in January
 Stats Canada seasonally adjusts figure to remove this
 Can see trends more clearly
Effects of Unemployment
 Economic Problems:
 Loss of output, loss of skills, ect.
 Immense human suffering
 Illness, breakdowns, ect.
 Social Problems
 Homelessness, crime
Productivity
 Productivity = Real GDP/Employment (total hours worked) o More people participating in the labour force\ o Increasing trend towards machines etc. o Rising employment
 Largest cause of rising material standards

Price level
 The average level of all prices in the economy
 Denoted by P
Inflation
 The rate at which the price level is changing
Consumer Price Index [CPI]
 The most common measure of the price level
 Based on the price of a typical consumer “basket” of goods and services
 CPI for the base period is set to 100 [always]
 CPI in later years shows prices as a ratio of the price in the base period
Problem
In the economy of Ultimate Pleasure, the typical urban household consumes the following goods and