Macroeconomics: The study of the determination of economic aggregates, such as total output,
total employment, the price level, and the rate of economic growth, the examination of the
economy as a whole (the big picture)
A full understanding of macroeconomics requires understanding the nature of short-run
fluctuations as well as the nature of long-run economic growth.
Key Macroeconomic Variables
Output and Income
National Product (Output): The value of a nations overall level of economic activity
The production of goods and services generates income
For the nation as a whole, all of the economic value that is produced ultimately belongs
to someone in the form of an income claim on that value
The value of national product = The value of national income
National Income
To measure national income, add up the values of the many different goods and
services that are produced
Nominal National Income
National income measured in current dollars
Number of units of each good produced x Price at which each unit is sold
A change in NNI is caused by a change in either the quantities or prices on which
it is based
Not comparable across various years
Real National Income
National income measured in constant (base-period) dollars
Number of units of each good produced x Base-period price
The sum of quantities valued at prices that prevailed in the base period
Since prices are held constant, changes in RNI from one year to another reflect
changes in only quantity
Comparable across various years
Gross Domestic Product (GDP)
One of the most commonly used measures of national income
The total value of goods and services produced within a country in 1 year
Can be measured in either nominal or real terms
Recession: A fall in the level of real GDP, known as 2 consecutive quarters of negative
GDP (real GDP falls)
Income per person (real per capita national income) is essentially equal to our standard of living.
Employment, Unemployment, and the Labor Force
National income and employment are closely related - If more output is to be produced,
more workers must be used in production (+ in employment) or existing workers must
produce more (+ in productivity)
In the short run, changes in output are accomplished by changes in employment
In the long-run, changes in both employment and productivity are significant
The CPI is not a perfect measure of the cost of living because it does not automatically
account for ongoing quality improvements or for changes in consumers expenditure
patterns
Since the price level is measured with an index number, its value at any specific time has
meaning only when it is compared with its value at some other time
Rate of Inflation: A measure of the annual rate of increase in the price level
To calculate the rate of inflation between any 2 years, calculate the percentage rate
change
Interest Rates
Interest Rate: The price that is paid to borrow money for a stated period of time, which
can be expressed as a percentage amount per year per dollar borrowed
Prime Interest Rate: The rate that banks charge to their best business customers
Bank Rate: The rate that the Bank of Canada charges on short-term loans to commercial
banks (RBC, CIBC)
Types of Interest Rates
1) Nominal Interest Rate: The cost of borrowing in current year dollars
2) Real Interest Rate: The nominal rate of interest adjusted for the change in the
purchasing power of money (RIR = Nominal Interest Rate - Rate of Inflation)
The burden of borrowing depends on the real, not the nominal rate of interest
Banks play a crucial role by intermediating between those households and firms that
have available funds and those who require funds
Exchange Rates
Exchange Rate: The number of units of domestic currency required to purchase 1 unit of
foreign currency
Foreign Exchange: Foreign currencies that are traded on the foreign exchange market
Foreign Exchange Market: The market in which different national currencies are traded
Appreciation: A rise in the exchange rate - It takes more units of domestic currency to
purchase 1 unit of foreign currency
Depreciation: A fall in the exchange rate - It takes fewer units of domestic currency to
purchase 1 unit of foreign currency
Imports and Exports
Imports: Goods and services we bring into our country, M
Exports: Goods and services we give out to other countries, X
Net Exports: The difference between exports and imports, NX (NX = X - M)
If the CAD depreciates, net exports will rise (X +, M -)
If the CAD appreciates, net exports will fall (X -, M +)
Growth Versus Fluctuations
Most macroeconomic variables have both long-run trends and short-run fluctuations, but the
sources of the 2 types of movements are different.
Important questions for macroeconomics involve the role of policy in influencing long-run
growth as well as short-run fluctuations.