Week 1: Macroeconomic and the trade-off of unemployment and inflation
Self-regulating economy: problems such as unemployment are resolved without government intervention, through
the working of the invisible hand
Paradox of shift: when families and business are worried about the possibility of economic hard times, they prepare
by cutting their spending. This depresses the economy as consumers spend less and businesses react by laying off
workers. As a result, families and businesses may end up worse off.
Profligate behaviour: when families and businesses feel optimistic about the future, they spend more today. This
stimulates the economy, leading to businesses hiring more workers and further expansion of the economy.
Monetary policy: uses changes in the quantity of money to alter interest rates, which in turn affect the level of
overall spending.
Fiscal policy: uses changes in taxes and government spending to affect overall spending
Recessions: periods of economic downturn when output and employment are falling.
Expansions: are periods of economic upturn when output and employment are rising.
Peak: the point at which the economy turns from expansion to recession.
Trough: the point at which the economy turns from recession to expansion.
Long-run economic growth: the sustained upward trend in the economy’s output over time.
Long-run growth per capita: sustained upward trend in output per person.
Inflation: a rise in the overall level of prices
Deflation: a fall in the overall level of prices
Price-stability: when the overall level of prices changes slowly or not at all.
Open economy: economy that trades goods and services with other countries
Trade deficit: when the value of goods and services bought from foreigners is more than the value of goods and
services it sells to them
Trade surplus: when the value of goods and services bought from foreigners is less than the value of the goods and
services it sells to them
Final goods and services: goods and services sold to the final/end user
Intermediate goods and services: goods and services bought from one firm by another firm that are used as inputs
for production of final goods and services
Gross Domestic Product: the total value of all final goods and services produced in the economy during a given year
• Measuring GDP as a value of production of final goods and services
• Measuring GDP as spending on domestically produced final goods and services
• Measuring GDP as factor income earned from firms in the economy
Nominal GDP: the total value of all final goods and services produced in the economy during a given year, calculated
using the current prices in the year in which the output is produced
Real GDP: the total value of all final goods and services produced in the economy during a given year, calculated
using the prices of a selected base year
Chain dollars: the method of calculating changes in real GDP using the average between the growth rate calculated
using an early base year and the growth rate calculated using a late base year
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, GDP per capita: an economy’s average aggregate output per person
Aggregate price level: measure of the overall level of price in an economy
Market basket: a consumer’s typical basket of goods and services
Price index: measures the cost of producing a given market basked in a given year
Price Index in a given year = Cost of market basket in a given year
x 100
Cost of market basked in base year
Inflation rate: the percent change per year in the price index
Inflation rate = (Price index year 2 - Price index year 1)
x 100
Price index in year 1
CPI: measures the cost of the market basket of a typical urban family
PPI: measures changes in prices of goods purchased by producers
GDP deflator: for a given year the GDP deflator is equal to 100 times the ratio of nominal GDP for that year to real
GDP for that year
Employment: the number of people currently employed, either full or part-time
Unemployment: the number of people who are actively looking for work but unable to find it
Unemployment rate = Number of unemployed workers
x 100
Labor force
Labour Force: the sum of unemployment and employment
Labour Force Participation Rate: the percentage of the population aged 16 or older that is in the labour force
Labour force participation rate = Labour force
x 100
Population between 16 and older
Discouraged workers: individuals who want to work but have told government researchers that they aren't currently
searching because they see little prospect of finding a job given the state of the job market
Marginally attached workers: people who say they would like to have a job and have looked for work in the recent
past but are not currently looking for work
Underemployed workers: people who work part-time jobs because they cannot find full-time work
Frictional unemployment: unemployment due to the time workers spend in job search
Structural unemployment: when there are more people seeking jobs in a particular labour market than there are
jobs available at the current wage rate, even when the economy is at the peak of the business cycle
Labor Unions: manage to bargain collectively for all of a firm’s workers to have higher wages, more successfully than
if individuals bargained themselves
Efficiency Wages: set above equilibrium by employers as an incentive for better employee performance
Minimum Wages: a government handed floor on the price of labour
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Self-regulating economy: problems such as unemployment are resolved without government intervention, through
the working of the invisible hand
Paradox of shift: when families and business are worried about the possibility of economic hard times, they prepare
by cutting their spending. This depresses the economy as consumers spend less and businesses react by laying off
workers. As a result, families and businesses may end up worse off.
Profligate behaviour: when families and businesses feel optimistic about the future, they spend more today. This
stimulates the economy, leading to businesses hiring more workers and further expansion of the economy.
Monetary policy: uses changes in the quantity of money to alter interest rates, which in turn affect the level of
overall spending.
Fiscal policy: uses changes in taxes and government spending to affect overall spending
Recessions: periods of economic downturn when output and employment are falling.
Expansions: are periods of economic upturn when output and employment are rising.
Peak: the point at which the economy turns from expansion to recession.
Trough: the point at which the economy turns from recession to expansion.
Long-run economic growth: the sustained upward trend in the economy’s output over time.
Long-run growth per capita: sustained upward trend in output per person.
Inflation: a rise in the overall level of prices
Deflation: a fall in the overall level of prices
Price-stability: when the overall level of prices changes slowly or not at all.
Open economy: economy that trades goods and services with other countries
Trade deficit: when the value of goods and services bought from foreigners is more than the value of goods and
services it sells to them
Trade surplus: when the value of goods and services bought from foreigners is less than the value of the goods and
services it sells to them
Final goods and services: goods and services sold to the final/end user
Intermediate goods and services: goods and services bought from one firm by another firm that are used as inputs
for production of final goods and services
Gross Domestic Product: the total value of all final goods and services produced in the economy during a given year
• Measuring GDP as a value of production of final goods and services
• Measuring GDP as spending on domestically produced final goods and services
• Measuring GDP as factor income earned from firms in the economy
Nominal GDP: the total value of all final goods and services produced in the economy during a given year, calculated
using the current prices in the year in which the output is produced
Real GDP: the total value of all final goods and services produced in the economy during a given year, calculated
using the prices of a selected base year
Chain dollars: the method of calculating changes in real GDP using the average between the growth rate calculated
using an early base year and the growth rate calculated using a late base year
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, GDP per capita: an economy’s average aggregate output per person
Aggregate price level: measure of the overall level of price in an economy
Market basket: a consumer’s typical basket of goods and services
Price index: measures the cost of producing a given market basked in a given year
Price Index in a given year = Cost of market basket in a given year
x 100
Cost of market basked in base year
Inflation rate: the percent change per year in the price index
Inflation rate = (Price index year 2 - Price index year 1)
x 100
Price index in year 1
CPI: measures the cost of the market basket of a typical urban family
PPI: measures changes in prices of goods purchased by producers
GDP deflator: for a given year the GDP deflator is equal to 100 times the ratio of nominal GDP for that year to real
GDP for that year
Employment: the number of people currently employed, either full or part-time
Unemployment: the number of people who are actively looking for work but unable to find it
Unemployment rate = Number of unemployed workers
x 100
Labor force
Labour Force: the sum of unemployment and employment
Labour Force Participation Rate: the percentage of the population aged 16 or older that is in the labour force
Labour force participation rate = Labour force
x 100
Population between 16 and older
Discouraged workers: individuals who want to work but have told government researchers that they aren't currently
searching because they see little prospect of finding a job given the state of the job market
Marginally attached workers: people who say they would like to have a job and have looked for work in the recent
past but are not currently looking for work
Underemployed workers: people who work part-time jobs because they cannot find full-time work
Frictional unemployment: unemployment due to the time workers spend in job search
Structural unemployment: when there are more people seeking jobs in a particular labour market than there are
jobs available at the current wage rate, even when the economy is at the peak of the business cycle
Labor Unions: manage to bargain collectively for all of a firm’s workers to have higher wages, more successfully than
if individuals bargained themselves
Efficiency Wages: set above equilibrium by employers as an incentive for better employee performance
Minimum Wages: a government handed floor on the price of labour
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