4 - macro econ

• Macroeconomic variables


  National income, unemployment, productivity, inflation, interest rates, exchange rates, net exports
• Macroeconomic issues


  • About either long-run trends or short-run fluctuations
  • Government policy is relevant for both
• National income


  Total national income measured in current dollars
• Real national income


  National income measured in constant (base-period) dollars
• Gross domestic product (GDP)


  Measure of national income
• Real GDP has risen steadily since 1975, demonstrating the long-term growth of the Canadian economy
• Real GDP also shows short-term fluctuations around the trend

  
• Business cycle


  • Trough
  • Recession
  • Recovery
  • Peak
• Potential output (Y*)


  The output gap measures the difference between potential output and actual output
• When Y < Y*

  The output gap is a recessionary gap
• When Y > Y*


  The output gap is an inflationary gap
• Why national income matters

  • Measure of economic performance
  • Recessions associated with unemployment and lost output
  • Booms can bring inflation
  • Long-run trend in real per capita is an important determinant of standard of living
  • Economic growth doesn't make everyone better off
• Employment

  Number of people employed
• Unemployment


  Number of people unemployed
• Labour force


  Number of people in the labour force
• Unemployment rate


  Number of people unemployed / Number of people in the labour force * 100
• Frictional unemployment


  Unemployment due to natural turnover in the labour market
• Structural unemployment


  Unemployment due to mismatch between jobs and workers
• Cyclical unemployment


  Unemployment when real GDP is less than potential GDP
• Employment has grown roughly in line with the growth in the labour force
• The unemployment rate has been as low as 5.7 percent in 2019 and as high as 12 percent during the deep recession of 1982. During the COVID-19 pandemic, the unemployment rate increased to a high of 13.7 percent, and then gradually fell throughout 2020
• Why unemployment matters


  • Enormous social significance
  • Loss of income
  • Loss of output
  • Crime, mental illness, and general social unrest tend to be associated with long-term unemployment
• Productivity


  Measure of the amount of output that the economy produces per unit of input
• Labour productivity


  Level of real GDP divided by the level of employment (or total hours worked)
• There has been a significant increase in labour productivity over the past half-century
• Productivity growth is the single largest cause of rising material living standards over long periods of time
• Price level


  The average level of all prices in the economy expressed as an index number
• Inflation


  Increase in the price level
• Consumer Price Index (CPI)


  Measure of inflation
• Purchasing power of money


  The amount of goods and services that can be purchased with a unit of money
• Inflation reduces the purchasing power of money
• Unanticipated inflation generally leads to more changes in the real value of prices and wages
• Interest rate


  The price paid per dollar borrowed per period of time
• Nominal interest rate vs. real interest rate
• Why interest rates matter


  • Compare effects on savers to that on borrowers
  • Impact on investment plans
• Exchange rate


  The price of one currency in terms of another
• Appreciation


  Increase in the value of a currency
• Depreciation


  Decrease in the value of a currency
• Canada's exports and imports have increased fairly closely in step with each other over the past 40 years
• Net exports


  The difference between exports and imports