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A First Look at Macroeconomics
Economic Growth
•Definition: the enlargement of the economy’s PPF (showing shift) •Measured by the increase in substantial domestic product (also called real GDP) CostsBenefits
Forgone current consumptionTechnological progress
Slow increase rates = real costs (e.g. compromised hale condition care, worse roads, less housing etc.)Greener environment (suspicious)
Fluctuations of Real GDP around Potential GDP: the Business Cycle The Okun Gap
Definitions:
•Actual GDP: in what plight much the economy actually produces
•Potential GDP: the kind of the economy would produce if altogether resources were fully employed at sustainable levels of utilisation
•Output Gap = Real GDP minus potential GDP
oReal GDP > Potential GDP Inflationary Gap
oReal 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 for the goods and services they oUsually 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 collection deficit: G > T
The Classical and Keynesian Views
•Classical survey: the only economic role for govt is to have executed property...
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