All credit for this text goes to...
Ragan, C. T. S. (2024). Macroeconomics (18th Canadian ed.). Pearson Canada.
Define the key macroeconomic variables: national income, unemployment, productivity, inflation, interest rates, exchange rates, and net exports
What is macroeconomics?
Study of the economy as a whole
Aggregates and averages, not individual markets
Microeconomics: Individual markets, individual decisions (supply/demand for apples)
Macroeconomics: Economy-wide aggregates (total output, unemployment rate, price level)
| Micro Question | Macro Question |
|---|---|
| What’s the price of apples? | What’s the overall price level? |
| How many people work at this firm? | What’s the national unemployment rate? |
| How much does this firm produce? | What’s total national output? |
What is national income?
National income = National product = National output = GDP
Four names for the same thing
The equivalence: Production of goods and services generates income. Every dollar of output becomes someone’s income (wages, profits, payments to suppliers). By definition, what’s produced = what’s earned.
A firm sells $100 of ice cream:
- Workers get wages
- Suppliers get payments
- Owners get profit
- Total income = $100 = value produced
No value disappears. Production ≡ Income.
What is GDP?
GDP (Gross Domestic Product) = the specific measurement tool for national income/output
What does GDP measure?
Total value of goods and services produced by the economy during a year.
How do we aggregate different goods into one number?
Multiply quantities by prices, then sum Dollars are the common unit that lets us add apples + cars + haircuts
You can’t add 1,000 apples + 50 cars + 500 haircuts directly — different units.
Solution: Convert everything to dollars.
But this creates a problem If prices change, GDP changes — even if we produced the exact same stuff.
We need a way to separate “made more stuff” from “charged more for same stuff.”
What is the difference between Nominal and Real GDP?
Idea
Nominal = face value (how many dollars)
Real = purchasing power (how much stuff those dollars buy)
Etymology of “Nominal”
From Latin nominalis → from nomen meaning “name”
Literal meaning: “In name only” — what something is called, not necessarily what it is.
| Usage | Meaning |
|---|---|
| ”A nominal fee” | A fee in name only — token amount, not the real cost |
| ”Nominal leader” | Leader in name only — title but no real power |
| ”Nominal GDP” | GDP in name only — the dollar label, not the real value |
Idea
Nominal = what it’s NAMED
Real = what it actually IS
Nominal vs. Real GDP
| Term | Other Names | What It Measures |
|---|---|---|
| Nominal GDP | Current-dollar GDP | Output × this year’s prices |
| Real GDP | Constant-dollar GDP | Output × base year prices |
Why does this distinction matter?
The raw dollar number can be misleading. You need context to see what's actually happening.
| If Nominal GDP ↑ | Possible Cause | What Actually Happened |
|---|---|---|
| Real GDP ↑, Prices constant | Produced more stuff | Genuine growth ✓ |
| Real GDP flat, Prices ↑ | Same stuff, higher prices | Inflation only ✗ |
| Both ↑ | Mix | Some growth + some inflation |
The formula: Nominal GDP change ≈ Real GDP change + Inflation
How does constant-dollar GDP work?
Pick a base year. Value ALL years' output at that year's prices. This strips out price changes so only quantity changes show.
Same output, different measures:
Year Apples Price Nominal Value Real Value (2023 prices) 2023 1,000 $2 $2,000 $2,000 2024 1,000 $3 $3,000 $2,000 Nominal GDP “grew” 50%. Real GDP: 0% growth.
Reality: Same apples, higher prices. No real growth — just inflation.
Why do we care about real vs. nominal?
Real GDP is the bullshit detector. It answers: "Are we producing more stuff, or just charging more?"
| Question You’re Trying to Answer | Which GDP? | Why? |
|---|---|---|
| Are we producing more stuff? | Real | Strips out price illusion |
| Are people better off? | Real (per capita) | More stuff per person = higher living standard |
| Is the economy in recession? | Real | Recession = falling real output |
| How much tax revenue will government collect? | Nominal | Taxes paid in current dollars |
Your salary:
- 2024: 100 → buy 10 baskets
- 2025: 110 (+10%) → still buy 10 baskets
Nominal income: ↑ 10% 🎉 Real income: 0% change 😐
The raise was an illusion — purchasing power unchanged.
How does this connect to Chapter 3 concepts?
Same pattern as absolute vs. relative price Raw number can mislead. Context reveals reality.
| Chapter | Raw Number | Adjusted for Context |
|---|---|---|
| Ch 3 (Micro) | Absolute price (dollar on tag) | Relative price (compared to other goods) |
| Ch 4 (Macro) | Nominal (face value) | Real (purchasing power) |
| Concept | What You’re Comparing To |
|---|---|
| Relative price | Other goods’ prices right now |
| Real value | Prices from a base year (over time) |
Same intuition: Don’t trust face value — adjust to see the real picture.
How does constant-dollar GDP connect to index numbers from Chapter 2?
Same logic — fix one variable to isolate change in another
| Concept | Base Year Role | What It Isolates |
|---|---|---|
| CPI (Index numbers) | Prices in base year = 100 | Price changes over time |
| Real GDP (Constant-dollar) | Prices fixed at base year levels | Quantity changes over time |
CPI: Hold the basket of goods constant → see how prices change
Real GDP: Hold prices constant → see how quantities change
What is potential GDP?
Potential GDP (Y*) = what the economy COULD produce at sustainable capacity Not maximum — sustainable
The car analogy:
| Concept | Car Version | Economy Version |
|---|---|---|
| Potential | Comfortable cruising speed (110 km/h) | Y* — sustainable output with resources fully employed |
| Actual | Whatever you’re doing right now | Y — what we’re actually producing |
| Maximum | Redlining at 200 km/h (unsustainable) | Overtime, extra shifts, inflationary pressure |
Potential GDP (Y) means: *
- All workers who want jobs have jobs
- Factories running at normal capacity
- No resources sitting idle
- BUT not overheating
Potential ≠ Maximum
Potential is what you can sustain. Maximum is what you can briefly spike to — at a cost.
Why do researchers disagree on potential GDP?
Actual GDP is measured. Potential GDP is estimated.
| Measure | How We Get It |
|---|---|
| Actual GDP (Y) | Directly measured from economic data |
| Potential GDP (Y*) | Estimated using statistical models |
Different researchers use different estimation approaches → different Y* values → disagreement.
This is similar to the unemployment rate — it’s an estimate with known limitations, not a perfect count.
What is the output gap?
Measures how far actual output is from sustainable capacity
| Gap | Math | What’s Happening | Name |
|---|---|---|---|
| Negative | Y < Y* | Resources idle, output below capacity | Recessionary gap |
| Zero | Y = Y* | At sustainable capacity, full employment | Equilibrium |
| Positive | Y > Y* | Running hot, above sustainable capacity | Inflationary gap |
Why those names:
| Gap | Named For… |
|---|---|
| Recessionary | Associated with recessions — unemployment, waste, human suffering |
| Inflationary | Creates upward pressure on wages and prices — inflation risk |
How does this connect to Chapter 3 equilibrium?
Same structure as surplus/shortage in supply and demand
| Chapter 3 (Micro) | Chapter 4 (Macro) |
|---|---|
| Equilibrium price | Potential GDP (Y*) |
| Surplus (Qs > Qd) | Inflationary gap (Y > Y*) |
| Shortage (Qd > Qs) | Recessionary gap (Y < Y*) |
The parallel:
- Both have an equilibrium state (balance point)
- Both have two types of disequilibrium with different names
- Both disequilibria create pressure
Where the analogy breaks down:
In micro, market forces automatically push price back toward equilibrium.
In macro, the economy doesn’t automatically snap back to Y*. Recessions can persist. This is why government policy matters.
What is the business cycle?
Business cycle = actual GDP fluctuating around potential GDP over time The continual ebb and flow of economic activity
The four phases (follow the path):
PEAK (top)
/\
/ \
RECOVERY RECESSION
/ \
/ \
TROUGH ← ← ←
(bottom)
Mnemonic: “TRPR” — Trip Around
| Phase | Position | Direction | Memory Hook |
|---|---|---|---|
| Trough | Bottom | — | You’re in a trough (ditch) |
| Recovery | Middle | ↑ | Climbing out, recovering |
| Peak | Top | — | Mountain peak |
| Recession | Middle | ↓ | Receding (falling back) |
What are the informal terms?
| Rising Half | Falling Half |
|---|---|
| Boom (going up = booming) | Slump (going down = slumping) |
What is a recession?
Recession = real GDP falls for two consecutive quarters
A deep, long-lasting recession is called a depression (like the 1930s Great Depression — GDP fell 30%, unemployment hit 20%).
What is unemployment?
Unemployment = adults without jobs who are ACTIVELY SEARCHING — Not just "doesn't have a job"
The building blocks:
| Term | Definition |
|---|---|
| Employment | Adults (15+) who have jobs |
| Unemployment | Adults without jobs who are actively searching |
| Labour force | Employment + Unemployment |
The formula:
Why only people who are looking?
The unemployment rate measures people who WANT to work but CAN'T find a job
People without jobs who AREN’T looking include:
| Person | Why Not Looking | Counted as Unemployed? |
|---|---|---|
| Retiree | Chose to stop working | No |
| Full-time student | Chose to study | No |
| Stay-at-home parent | Chose to raise kids | No |
| Discouraged worker | Gave up looking | No — controversial |
The Trap
Discouraged workers — people who WANT jobs but gave up — are NOT counted as unemployed.
This makes the unemployment rate look artificially low during bad times.
How do we know if someone is “looking”?
Statistics Canada asks in a monthly survey — it's self-reported
The Labour Force Survey:
- ~56,000 households sampled monthly
- Each household stays in sample for 6 months, then rotates out
- Questions asked: Did you work? Did you search? What did you do to search?
| If You Say… | You’re Counted As… |
|---|---|
| ”I worked last week” | Employed |
| ”I didn’t work but I applied to 5 jobs” | Unemployed |
| ”I didn’t work and I haven’t looked” | Not in labour force |
The unemployment rate is an estimate with known limitations
- It’s a sample, not a census (margin of error exists)
- It’s self-reported (memory, interpretation vary)
- Discouraged workers disappear from the count
The skill is knowing what the number captures and what it misses.
What are the types of unemployment?
Three types: Frictional (turnover) + Structural (mismatch) + Cyclical (recession)
| Type | Cause | Example | Exists When Economy Is Healthy? |
|---|---|---|---|
| Frictional | Normal turnover — people between jobs | You quit to find something better; new grad job hunting | Yes — always some turnover |
| Structural | Mismatch between skills/location and available jobs | Coal miners when mines close; factory workers replaced by automation | Yes — always some mismatch |
| Cyclical | Business cycle — economy in recession | Laid off because demand collapsed (2008, 2020) | No — only during downturns |
What is full employment?
Full employment = only frictional + structural unemployment remain Cyclical unemployment = 0 → Y = Y*
“Full employment” doesn’t mean 0% unemployment. It means everyone who CAN be matched to a job IS matched — the remaining unemployment is friction and structural adjustment.
How does structural unemployment connect to organizational behavior?
Structures constrain outcomes independent of individual merit
| Concept | What the “Structure” Does |
|---|---|
| Structural unemployment | Job market structure mismatches skills — individual effort can’t fix it |
| Procedural justice (OB) | Process structure determines fairness — outcomes alone don’t |
| Bureaucracy (OB) | Organizational structure enables consistency but blocks adaptation |
The common thread: Navigating structures — whether labor markets or organizational processes — matters as much as individual capability.
See Structures Constrain Outcomes Independent of Merit
What is productivity?
Productivity = output per unit of input
Labour productivity (most common measure):
Labour can be measured as number of workers OR total hours worked.
Factory productivity:
- Before: 100 cars ÷ 50 workers = 2 cars per worker
- After robots: 150 cars ÷ 40 workers = 3.75 cars per worker
- Productivity increase: 87.5%
What drives long-run GDP growth?
Three sources: more employment, more capital, higher productivity
| Source | What It Means |
|---|---|
| More employment | More people working |
| More capital | More machines, factories, equipment |
| Higher productivity | Getting more output from the same inputs |
Key insight:
- Short run: Output changes mostly come from employment (hire/fire workers)
- Long run: Productivity gains matter more — technology, efficiency, better processes
How do economics and OB relate on productivity?
Economics measures the WHAT. OB explains the WHY.
| Level | Discipline | Question |
|---|---|---|
| Macro | Macroeconomics | How much output per input? (the number) |
| Market | Microeconomics | Which firms/industries lag? (location) |
| Organization | OB | What structures/conditions drive output? (diagnosis) |
| Individual | Psychology/OB | What makes THIS person produce more? (levers) |
The chain:
Macro: Canada's labour productivity is 3% below US
↓
Micro: Which industries? Which firms lag?
↓
OB: What about those firms' structures causes this?
↓
Individual: What's blocking these workers specifically?
See Productivity Across Levels — Macro to Individual
Understand that most macroeconomic issues are about either long-run growth or short-run fluctuations
What is long-run growth?
Long-run growth = Y* rising over time (economy's capacity expands)
The upward trend in potential GDP over years and decades, driven by:
- Population growth
- Capital accumulation
- Technological progress
Why it matters: Living standards over generations. Are your grandchildren better off than you?
What are short-run fluctuations?
Short-run fluctuations = Y bouncing around Y* (business cycles)
The waves of actual GDP above and below potential over months and quarters.
Why it matters: Real pain RIGHT NOW — unemployment, lost income, business failures.
Short-run fluctuations aren't just "noise"
A recession is “short-run” but it means:
- People lose jobs
- Businesses close
- Output is permanently lost (you can’t get 2020’s production back)
Who focuses on what?
| Audience | Tends to Focus On | Why |
|---|---|---|
| Politicians/Media | Short-run | Immediate, visible, affects elections |
| Economists | Both, but emphasize long-run | Compound growth dominates over decades |
Long-run growth determines where we're headed. Short-run fluctuations determine who gets hurt along the way.
Are macro short-run/long-run related to micro time horizons?
Conceptually similar — but defined by what adjusts, not calendar time
| Discipline | Short Run Defined By | Long Run Defined By |
|---|---|---|
| Micro | At least one input is fixed (can’t change factory size) | All inputs can adjust |
| Macro | Prices and wages are “sticky” — don’t fully adjust | Prices and wages fully adjust; economy returns to Y* |
The shared logic:
Short-run vs. long-run isn’t about months vs. years. It’s about what has time to adjust.
| Time Horizon | What’s Fixed | What Can Adjust |
|---|---|---|
| Short-run | Some things stuck | Only some variables respond |
| Long-run | Nothing stuck | Everything can respond |
Practical durations (rough, not fixed):
| Context | Short-run Might Mean | Long-run Might Mean |
|---|---|---|
| Business cycle | Quarters to ~2 years | 5+ years |
| Recession | The downturn itself | Recovery and return to trend |
| Micro (firm) | Can’t build new factory | Can build, expand, exit market |
How does government policy impact long-run growth and short-run fluctuations?
Policy applies to both — different goals for each
| Bucket | Government Policy Goal | Examples |
|---|---|---|
| Long-run growth | Expand Y* (grow capacity) | Invest in education, infrastructure, technology, immigration |
| Short-run fluctuations | Keep Y close to Y* (smooth cycles) | Stimulus during recessions, cooling during overheating |
More detail in later chapters.
Key notation summary
| Symbol | Meaning |
|---|---|
| Y | Actual GDP (what’s actually produced) |
| Y* | Potential GDP (sustainable capacity) |
| Y - Y* | Output gap (recessionary if negative, inflationary if positive) |
Graduate note candidates from this chapter
- Potential Is Not Maximum — Sustainability Over Spike — potential is sustainable cruising, not redlining
- Structures Constrain Outcomes Independent of Merit — structural unemployment, procedural justice, organizational navigation
- Productivity Across Levels — Macro to Individual — macro measures, micro locates, OB diagnoses, individual fixes