Economic Growth and
the Financial system
Economic Growth, the
Financial System,
and Business Cycles
Business cycle: Alternating
periods of economic expansion
and economic recession.
Long-Run Economic Growth
Long-run economic growth: The process by which rising
productivity increases the average standard of living.
The Growth in Real
GDP per Capita,
1900–2010
Measured in 2005
dollars, real GDP per
capita in the United
States grew from about
$5,600 in 1900 to about
$42,200 in 2010.
The average American in
the year 2010 could buy
nearly eight times as
many goods and services
as the average American
in the year 1900.
The Connection between
Economic Prosperity and Health
Long-Run Economic
Growth
Calculating Growth Rates and the Rule of 70
Number of years to double 
70
Growth rate
What Determines the Rate of Long-Run Growth?
Labor productivity: The quantity of
goods and services that can be
produced by one worker or by one
hour of work.
Long-Run Economic
Growth
What Determines the Rate of Long-Run Growth?
Increases in Capital per Hour Worked
Capital Manufactured goods that are
used to produce other goods and
services.
Technological Change
Economic growth depends more on technological change than
on increases in capital per hour worked.
Technological change is an increase in the quantity of output
firms can produce using a given quantity of inputs.
Saving, Investment, and the
Financial System
Financial system: The system of
financial markets and financial
intermediaries through which
firms acquire funds from
households.
Saving, Investment, and the
Financial System
The Macroeconomics of Saving and Investment
Y = C + I + G + NX
Y=C+I+G
I=Y−C−G
Sprivate = Y + TR − C − T
Spublic= T − G − TR
Saving, Investment, and the
Financial System
The Macroeconomics of Saving and Investment
S = Sprivate
+
Spublic
or
S = (Y + TR − C − T) + (T − G − TR)
or
S=Y−C−G
So, we can conclude that total saving must equal total
investment:
S=I
Market for loanable funds: The interaction of borrowers and lenders that
determines the market interest rate and the quantity of loanable funds
exchanged.
The Market for Loanable Funds
Demand and Supply in the Loanable Funds Market
The Market for Loanable
Funds
Equilibrium in Loanable Funds
The Market for Loanable Funds
Explaining Movements in Saving, Investment,
and Interest Rates
An Increase in the
Demand for
Loanable Funds
Crowding out: A decline in private expenditures
as a result of an increase in government
purchases.
The Effect of a Budget
Deficit on the Market
for Loanable Funds
- Who sets the interest rate? Central
Banks?
- Kind of.
ANY good tradesman will tell you the importance of the bits of a house
that you cannot see. Never mind the new kitchen: what about the
rafters, the wiring and the pipes? So it is with financial markets. The
stockmarkets are the most visible: as they soar or swoon, the headlinewriters get to work. The money markets, however, are the plumbing of
the system. Normally, they function efficiently and unseen, allowing
investment institutions, companies and banks to lend and borrow
trillions of dollars for up to a year at a time. They are only noticed when
they go wrong. And, like plumbing, when they do get blocked, they
make an almighty stink.
(Source: Blocked Pipes, The Economist, Oct 2nd 2008)
Business cycle
The Business Cycle
Some Basic Business Cycle Definitions
The Business Cycle
What Happens during a Business Cycle?
The Effect of the Business Cycle on Boeing
The Effect of the Business Cycle on Boeing
What Happens during a Business Cycle?
The Effect of the Business Cycle on the Inflation Rate
What Happens during a Business Cycle?
The Effect of the Business Cycle on the Inflation Rate
The Impact of
Recessions
on the Inflation Rate
Don’t Let This Happen to YOU!
Don’t Confuse the Price Level and the Inflation Rate
What Happens during a Business Cycle?
The Effect of the Business Cycle on the Unemployment Rate
How the Recession of
2001 Affected the
Unemployment Rate
What Happens during a Business Cycle?
The Effect of the Business Cycle on the Unemployment Rate
How Recessions
Affect the
Unemployment
Rate
What Happens during a Business Cycle?
The Effect of the Business Cycle on the Unemployment Rate
The Impact of Recessions
on the Unemployment
Rate
What Happens during a Business Cycle?
Recessions Have Been Milder and the Economy Has Been More Stable
Since 1950
Fluctuations in Real
GDP, 1900–2008
Fluctuations in real GDP were
greater before 1950 than they
have been since 1950.
Why Is the Economy More Stable?
• The increasing importance of services
and the declining importance of goods.
• The establishment of unemployment
insurance and other government transfer
programs that provide funds to the
unemployed.
• Active federal government policies to
stabilize the economy.