Macroeconomics Notes
A First Look at Macroeconomics
Economic Growth
• Definition: the expansion of the economy’s PPF (outward shift)
• Measured by the increase in real domestic product (also called real GDP)
Costs Benefits
Forgone current consumption Technological progress
Slow growth rates = real costs (e.g. compromised health care, worse roads, less housing etc.) Greener environment (questionable)
Fluctuations of Real GDP around Potential GDP: the Business Cycle The Okun Gap
Definitions:
• Actual GDP: how much the economy actually produces
• Potential GDP: what the economy would produce if all resources were fully employed at sustainable levels of utilisation
• Output Gap = Real GDP minus potential GDP o Real GDP > Potential GDP Inflationary Gap o Real GDP < Potential GDP Recessionary/Okun Gap
Unemployment
• Unemployment rate: number of unemployed people expressed as a percentage of all the people who have jobs or are looking for one
• Why is this not a perfect measure?
1. Excludes discouraged workers
2. Measures unemployed individuals rather than unemployed labour hours
• Why is unemployment a problem?
1. Lost production and income (underutilisation of resources)
2. Lost human capital (reduces individual’s job prospects)
Inflation
• Price level: average of the prices that people pay for the goods and services they buy o Usually measured by the Consumer Price Index
• Inflation rate: annual percentage change in the price level
• Why is inflation a problem?
1. Redistributes income and wealth: some people gain and others lose depending on the real value of wealth (which is affected by inflation)
2. Diverts resources from production: becomes more profitable to forecast the inflation rate correctly than to invent a new product
Surpluses, Deficits and Debts
• Government budget surplus: T > G
• Government budget deficit: G > T
The Classical and Keynesian Views
• Classical view: the only economic role for govt is to enforce
Economic Growth
• Definition: the expansion of the economy’s PPF (outward shift)
• Measured by the increase in real domestic product (also called real GDP)
Costs Benefits
Forgone current consumption Technological progress
Slow growth rates = real costs (e.g. compromised health care, worse roads, less housing etc.) Greener environment (questionable)
Fluctuations of Real GDP around Potential GDP: the Business Cycle The Okun Gap
Definitions:
• Actual GDP: how much the economy actually produces
• Potential GDP: what the economy would produce if all resources were fully employed at sustainable levels of utilisation
• Output Gap = Real GDP minus potential GDP o Real GDP > Potential GDP Inflationary Gap o Real GDP < Potential GDP Recessionary/Okun Gap
Unemployment
• Unemployment rate: number of unemployed people expressed as a percentage of all the people who have jobs or are looking for one
• Why is this not a perfect measure?
1. Excludes discouraged workers
2. Measures unemployed individuals rather than unemployed labour hours
• Why is unemployment a problem?
1. Lost production and income (underutilisation of resources)
2. Lost human capital (reduces individual’s job prospects)
Inflation
• Price level: average of the prices that people pay for the goods and services they buy o Usually measured by the Consumer Price Index
• Inflation rate: annual percentage change in the price level
• Why is inflation a problem?
1. Redistributes income and wealth: some people gain and others lose depending on the real value of wealth (which is affected by inflation)
2. Diverts resources from production: becomes more profitable to forecast the inflation rate correctly than to invent a new product
Surpluses, Deficits and Debts
• Government budget surplus: T > G
• Government budget deficit: G > T
The Classical and Keynesian Views
• Classical view: the only economic role for govt is to enforce