Ragan: Economics
Sixteenth Canadian Edition
Chapter 19
What Macroeconomics Is All
About
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Chapter Outline/Learning Objectives
Section
Learning Objectives
Blank
After studying this chapter, you will be able to
19.1 Key Macroeconomic Variables
1. define the key macroeconomic variables:
national income, unemployment, productivity,
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.
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19.1 Key Macroeconomic Variables (1 of 4)
• National Product and National Income
• The production of output generates income.
• The meaning of aggregation
– This gives nominal national income, which is total
national income measured in current dollars.
• Real national income is national income
measured in constant (base-period) dollars. It
changes only when quantities change.
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19.1 Key Macroeconomic Variables (2 of 4)
• One of the most commonly used measures of
national income is called gross domestic product
(GDP).
• GDP (Gross Domestic Product)
– It measures the final value of all goods and services
that are produced within a country in a given time
period.
• GDP can be measured in real or nominal terms.
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Four Markets in Macroeconomics
• Labor Market
• Goods Market
• Bonds Market
• Money Market
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What you are going to hear me talking
about today
• Economic Growth
• Business Cycles
• Unemployment
• Inflation
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Two Important Terms
• Long-Term Economic Growth
• Short-Term Fluctuations
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Growth vs. Business Cycle
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U.S. Business Cycles
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The Four Phases
• The Peak
• The Downturn
• The Trough
• The Upturn
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The Boom
• Labor shortages
• Raw materials
shortages.
• Prices rise
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The Recession
• People lose jobs
• Firms shut down
• Prices fall
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How to Define a Recession
• Common usage defines a recession as a fall in
real GDP for two successive quarters.
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How Do We Measure the Economy?
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Key Macroeconomic Variables
Output and Income
The production of output generates income.
• Potential Output: Y*
• Actual Output: Y
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Employment, Unemployment, and
the Labor Force (US)
Employment: the number of workers (16+) who hold jobs.
Unemployment: the number who are not employed but are
actively looking for a job.
Labor force: the total number of employed + unemployed.
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Definitions in Canada
• Labor force defined by Statistics Canada as "that
portion of the civilian noninstitutional population 15
years of age and over who, during the reference
week [in which the employment survey was
taken], were employed or unemployed."
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Unemployment Rate
Unemployment =
Rate
Number of people unemployed
Number of people in the labor
force
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X 100
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Full and Cyclical Unemployment
The unemployment rate when Y=Y* is called full employment.
Cyclical unemployment is neither structural or frictional
- changes with the ebb and flow of the business cycle
Even when Y = Y*, some unemployment exists:
• frictional unemployment
• structural unemployment
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Unemployment Rate since 1900
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Labour Force, Employment, and
Unemployment, 1960–2018 Figure 19-3
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Okun’s rule of thumb
1%Δ unemployment →
2% Δ output in opposite direction
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Recession
• Output falls
• The price level falls
• Unemployment rate rises
• Household income drops
• Firm profits drop
• Investment return falls
• Financial crisis
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Discussion
• What can we do?
• What can the government do?
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Some Comments
• Spend more money…
• Save money, spend wisely…
• Educate ourselves
• Get rid of poverty
• Go back to school
• Buy local products
• Work harder
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Productivity
• Productivity is a measure of the amount of output
that the economy produces per unit of input.
• Labour productivity is the 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 four decades.
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Canadian Labour Productivity, 1976–2017
Figure 19-4
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Introducing Three Concepts
• The Price Level
• Inflation
• The Rate of Inflation
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The Price Level
The price level is the average of all
prices in an economy.
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Inflation
• Inflation is a continual rise in the price level.
• Deflation is a continual fall in the price level.
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Inflation Rate
• It is the pace at which the price level rises.
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The Price Level and the Inflation Rate,
1960–2018 Figure 19-5
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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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How Do We Measure Them?
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The Price Index
• Price index – a number that summarizes what happens to
a weighted composite of prices of a selection of goods
over time.
• The Consumer Price Index (CPI):
the average price of the goods and services that are
bought by a typical family.
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The Consumption Basket
Food and beverage (15.0%)
Housing (42.7%)
Apparel (3.7%)
Transportation
(17.2%)
Other (3.5%)
Medical care (6.3%)
Education and
Communication
(6.0%)
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Recreation (5.6%)
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CPI: the consumer price index
The CPI is based on the price of a typical “consumption
basket,” relative to the price in the base year:
CPI t
PQ
∑
=
∑P Q
t
0
0
0
× 100
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An Example
• In 2008, a student’s monthly spending on average.
Photocopies
$0.1
140 sheets
Pizza
$8
15 pizzas
Coffee
$0.75
88cups
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• In 2018,
Photocopies
$0.05
200 sheets
Pizza
$9
17 pizzas
Coffee
$1
100cups
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Question
• If we take year 2008 as the base year, how do you
compute the student price index?
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2008
2018
Photoco $0.1
pies
140
sheets
Photoco $0.05 200
pies
sheets
Pizza
$8
15
pizzas
Pizza
$9
17 pizzas
Coffee
$0.75
88cups
Coffee
$1
100cups
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2008 as the base year
𝐶𝐶𝐶𝐶𝐼𝐼2018
0.05 × 140 + 9 × 15 + 1 × 88
× 100
=
0.1 × 140 + 8 × 15 + 0.75 × 88
230
× 100 = 115
=
200
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2008
2019
Photoco $0.1
pies
140
sheets
Photoco
pies
$0.05
250
sheets
Pizza
$8
15
pizzas
Pizza
$10
20 pizzas
Coffee
$0.75
88cups
Coffee
$1
99cups
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2008 as the base year
𝐶𝐶𝐶𝐶𝐼𝐼2019
0.05 × 140 + 10 × 15 + 1 × 88
× 100
=
0.1 × 140 + 8 × 15 + 0.75 × 88
245
=
× 100 = 122.5
200
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Inflation Rate
CPI t − CPI t −1
Rate of Inflation =
×100%
CPI t −1
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Calculate the Inflation Rate
• CPI2008 = 100
• CPI2018 = 115
• CPI2019 =122.5
• What is the inflation rate from 2018 to 2019 in the
current example?
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CPI2019 − 𝐶𝐶𝐶𝐶𝐼𝐼2018
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 =
× 100%
CPI2018
122.5 − 115
× 100%
=
115
= 6.5%
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Expected and Unexpected Inflation
• Expected and unexpected inflations affect
behavior differently.
• Expected inflation is inflation people expect to
occur.
• Unexpected inflation is inflation that surprises
people.
• Inflationary expectations can accelerate large
inflation.
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Costs of Inflation
• Inflation may not make a nation poorer.
• It can redistribute income.
• It can reduce the amount of information that prices
convey.
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How Does Unexpected Inflation
Redistribute Income?
A. Borrowers
B. Lenders
D. Tenants
C. Landlords
F. Employer
E. Employee
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What Lies Ahead?
To organize our thinking about macroeconomics, we must
develop some tools. These will include:
• discussing the 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
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