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Summary ECO1011S
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The following document is a summary of lecture content for the ECO1011S course. The notes cover unit 9, 10 and 13.
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UNIT 13 SUMMARY13.1) Growth and Fluctuations:
Economic growth is not a smooth process. Often hear about an economy going through a
boom, or recession, as growth swings from positive to negative.
Recession=
NBER definition: Output is declining. It is over when the economy begins to grow again.
Alternative definition: Output below a normal level. Over when output back to normal level
These movements from boom to recession and visa versa are known as a business cycle.
Business Cycle= Alternating periods of faster and slower (or even negative) growth rates.
The economy goes from boom to recession and back to boom.
13.2) Output growth and changes in unemployment:
Relationship between output and unemployment fluctuations is known as Okun’s law.
Okun’s Law= The empirical regularity that changes in the rate of growth of GDP are
negatively correlated with the rate of unemployment.
Okun noticed that with high output, came an increase in employment…
Represented by downward sloping line on graph; Y axis (unemployment); X axis (output)
Eg: In US, for every 1% increase in output, unemployment decreases by 0.38 % points.
Therefore, says that Okun’s coefficient is -0.38
Okun’s coefficient= The change in the unemployment rate in percentage points predicted to
be associated with a 1% change in the growth rate of GDP.
Summarize relationship between output, unemployment and wellbeing like this
Output growth Unemployment Wellbeing
, 13.3) Measuring the aggregate economy:
Aggregate output/GDP = total output in an economy across all sectors and regions.
It is everything from nails to toothbrushes, tractors, shoes, haircuts, management
consultancy, street cleaning, yoga teaching, plates, bandages, books, and the millions of
other services and products in the economy.
National accounts are statistics published by national statistical offices that use information
about individual behaviour to construct a quantitative picture of the economy as a whole.
National Accounts= System used for measuring overall output and expenditure in country.
3 different ways to estimate GDP:
Spending: The total spent by households, firms, the government, and residents of
other countries on the home economy’s products.
Production: The total produced by the industries that operate in the home economy.
Production is measured by the value added by each industry: this means that the
cost of goods and services used as inputs to production is subtracted from the value
of output. These inputs will be measured in the value added of other industries,
which prevents double-counting when measuring production in the economy as a
whole.
Income: The sum of all the incomes received, comprising wages, profits, the incomes
of the self-employed, and taxes received by the government.
Value Added= For a production process this is the value of output minus the value of all
inputs (called intermediate goods). The capital goods and labour used in production are not
intermediate goods. The value added is equal to profits before taxes plus wages.
This information is all represented in the circular flow:
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