National Product/Income
Production of output, to generate income
Aggregation
Nominal national income
Nominal national income
Total national income measured in current dollar
Real national income
National income measured in constant (base-period) dollar
Changes only when the quantities changes
GDP (2)
- Gross domestic product
- Can be measure in real or nominal income
Business cycle (4)
- Trough (moment between recession and recovery)
- Recession (downward deviation from potential GDP)
- Recovery (upward trend )
- Peak (highest real GDP)
Potential output
- Y*
- highest GDP that can be sustained over the long term
Output gap (3)
- Difference between potential output and actual output (Y-Y*)
- Y<Y* = recessionary gap
- Y>Y* = inflationary gap
Why national income matters (5)
- Important measure of economic performance
- Recession => unemployment and lost output
- Boom can bring inflation
- Determines the standard of living with the real per capita
- Economic grow doesn’t make everyone better off
Unemployment rate formula
(Number of people unemployed / Number of people in the labour force) x 100
When the economy is at full employment, why does unemployment still exist? (2)
- Frictional unemployment
- Structural unemployment
What happens when the real GDP is lower than potential GDP?
Cyclical unemployment
Graph stats on employment/unemployment (2)
- Employment grows at roughly the same rate as the labour force
- Short-term fluctuations in unemployment rate are substantial (Ex: 2019, 1982 recession and 2020 pandemic)
Why unemployment matters (4)
- 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 (2)
- Measure of the amount of output that the economy produces per unit of input (Output/Input)
- Single largest cause of rising material living standard over long period of time
Labour productivity (2)
- Real GDP/ level of employment (in total hours worked)
- Increase in the last 50 years
Price level
Average level of all price in the economy as an index number
CPI
Consumer Price Index
Why inflation matters (6)
- Money’s value comes from what we can purchase
- Purchasing power (what goods/services can be bought with a unit of money)
- Reduce purchasing power and real value of nominal terms (dollars)
- Anticipating inflation helps maintain real values
- Unanticipated inflation creates more changes in real value
- Inflation rarely full anticipated/unanticipated
Interest rates
Price paid per dollar borrowed per period of time, expressed either as a proportion of as a percentage
Prime interest rate and bank rate
Create interest rate change in the same direction as theirs
Nominal/Real interest rate
- Nominal: increase based on original sum
- Real: increase based on current sum
Why do interest rates matter (2)
- Compares effects on savers to that of borrowers
- Impact on investment plans
Notable period of exchange rate between CAD and USD (2)
- Depreciation of CAD in late 1990s
- Appreciation of CAD from 2002-2012
