Chapter 19 - Summary Macroeconomics PDF

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Chapter 19 – Introduction to Macroeconomics 19.1 Key Macroeconomic Variables 

The value of the total production of goods and services in a country is called its national product. Because production of output generates income in the form of claims on that output, the total is also referred to as national income. One of the most commonly used measures of national income is gross domestic product (GDP).

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Potential output is the level of output produced when factors of production are fully employed. The output gap is the difference between actual and potential output.

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The unemployment rate is the percentage of the labour force not employed and actively searching for a job. The labour force and employment have both grown steadily for the past half-century. The unemployment rate fluctuates considerably from year to year. Unemployment imposes serious costs in the form of economic waste and human suffering.

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Labour productivity is measured as real GDP per employed worker (or per hour of work). It is an important determinant of material living standards.

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The price level is measured by a price index, which measures the cost of purchasing a set of goods in one year relative to the cost of the same goods in a base year. The inflation rate measures the rate of change of the price level. For almost 20 years, the annual inflation rate in Canada has been close to 2 percent.

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The interest rate is the price that is paid to borrow money for a stated period and is expressed as a percentage amount per dollar borrowed. The nominal interest rate is this price expressed in money terms; the real interest rate is this price expressed in terms of purchasing power.

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The flow of credit – borrowing and lending – is very important in a modern economy. Disruptions in the flow of credit can lead to increases in interest rates and reductions in economic activity.

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The exchange rate is the number of Canadian dollars needed to purchase one unit of foreign currency. A rise in the exchange rate is a depreciation of the Canadian dollar; a fall in the exchange rate is an appreciation of the Canadian dollar.

19.2 Growth Versus Fluctuations

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Most macroeconomic variables have both long-run trends and short-run fluctuations. The sources of the two types of movements are different.

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Important questions for macroeconomics involve the role of policy in influencing longrun growth as well as short-run fluctuations....