Transcript Chapter 19 - Columbia College

Chapter 19:
What Macroeconomics
Is All About
Copyright © 2014 Pearson Canada Inc.
Chapter Outline/Learning Objectives
Section
Learning Objectives
After 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.
Chapter 19, Slide 2
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.
Copyright © 2014 Pearson Canada Inc.
Chapter 19, Slide 3
Fig. 19-1
Growth and Fluctuations in Real GDP, 1965–2011
(i) The level of real GDP
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(ii)Annual growth rate of real GDP
Chapter 19, Slide 4
Real GDP fluctuates around a rising trend:
• the trend shows long-run economic growth
• the short-run fluctuations show the business cycle
APPLYING ECONOMIC CONCEPTS 19-1
The Terminology of Business Cycles
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Chapter 19, Slide 5
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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Chapter 19, Slide 6
The Terminology of Business Cycles
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Chapter 19, Slide 7
Fig. 19-2
Potential GDP and the Output Gap, 1985–2011
(i) Potential and actual GDP
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(ii)The output gap
Chapter 19, Slide 8
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.
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Chapter 19, Slide 9
Unemployment =
Rate
Number of people unemployed
X 100
Number of people in 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.
Copyright © 2014 Pearson Canada Inc.
Chapter 19, Slide 10
Fig. 19-3
Labour Force, Employment,
and Unemployment, 1960–2011
(i) Labour force and employment
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(ii)Unemployment rate
Chapter 19, Slide 11
• 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.
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.
Copyright © 2014 Pearson Canada Inc.
Chapter 19, Slide 12
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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Chapter 19, Slide 13
Fig. 19-4
Canadian Labour Productivity, 1976–2011
Real GDP per worker
is measured in
thousands of
dollars!
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Chapter 19, Slide 14
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:
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Chapter 19, Slide 15
APPLYING ECONOMIC CONCEPTS 19-2
How the CPI Is Constructed
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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Chapter 19, Slide 16
Fig. 19-5
The Price Level and
the Inflation Rate,
1960–2012
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Chapter 19, Slide 17
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.
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Chapter 19, Slide 18
Fig. 19-6
Real and Nominal Interest Rates, 1965–2012
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Chapter 19, Slide 19
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
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Chapter 19, Slide 20
Fig. 19-7
Canadian–U.S. Dollar Exchange Rate, 1970–2012
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Chapter 19, Slide 21
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.
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Chapter 19, Slide 22
Fig. 19-8
Canadian Imports, Exports, and Net Exports, 1970–2011
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Chapter 19, Slide 23
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.
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Chapter 19, Slide 24
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."
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Chapter 19, Slide 25
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
Copyright © 2014 Pearson Canada Inc.
Chapter 19, Slide 26