Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
8
C HAPTE R
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
Next
Slide
Introduction to
Economic Growth and
Instability
End
Show
8-1
Copyright McGraw-Hill/Irwin, 2005
ECONOMIC GROWTH
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
End
Show
8-2
Next
Slide
An increase in real GDP over time
An increase in real GDP per capita
over time
•Growth as a Goal
•Arithmetic of Growth
•Rule of 70
•Main Sources of Growth
•Increases in Resources
•Increases in Productivity
Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
ECONOMIC GROWTH
Growth in the United States
•Improved Products and
Services
•Added Leisure
•Other Impacts
Key Terms
Previous
Slide
End
Show
8-3
Next
Slide
•Relative International
Growth Rates
Copyright McGraw-Hill/Irwin, 2005
THE BUSINESS CYCLE
Economic Growth
The Business
Cycle
Phases of the Business Cycle
PEAK
Unemployment
RECESSION
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
Next
Slide
TROUGH
Level of business activity
Inflation
Time
End
Show
8-4
Copyright McGraw-Hill/Irwin, 2005
RECOVERY
THE BUSINESS CYCLE
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
End
Show
8-5
Next
Slide
Causation: A First Glance
•Many Causation Theories
•Cyclical Impact
•Capital Goods
•Consumer Durables
•Service Industries
•Nondurable Consumer
Goods
Copyright McGraw-Hill/Irwin, 2005
UNEMPLOYMENT
Economic Growth
Measurement of Unemployment, 2002
The Business
Cycle
Unemployment
Inflation
Under 16
and/or
institutionalized
74,700,000
Not in
labor
force
71,400,000
CPI
Redistributive
Effects of
Inflation
Total
Population
288,600,000
Anticipated
Inflation
Effects of
Inflation on
Output
134,200,000
Key Terms
Employed
Previous
Slide
Next
Slide
End
Show
8-6
Unemployed
Copyright McGraw-Hill/Irwin, 2005
Labor
force
142,500,000
8,300,000
UNEMPLOYMENT
Economic Growth
Measurement of Unemployment, 2002
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Unemployment
rate
unemployed
=
labor force
x 100
Anticipated
Inflation
Part-Time Employment
Effects of
Inflation on
Output
Key Terms
Previous
Slide
Next
Slide
Discouraged Workers
End
Show
8-7
Copyright McGraw-Hill/Irwin, 2005
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
End
Show
8-8
Next
Slide
Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Full-Employment Rate of
Unemployment
Natural Rate of
Unemployment (NRU)
Copyright McGraw-Hill/Irwin, 2005
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
Economic Costs of Unemployment
GDP Gap and Okun’s Law
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
For every 1% unemployment
exceeds the natural rate...
Key Terms
Previous
Slide
End
Show
8-9
The amount by which actual GDP
falls short of potential GDP
Next
Slide
Approximately a
2% GDP Gap occurs
Copyright McGraw-Hill/Irwin, 2005
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
End
Show
8 - 10
Next
Slide
Unequal Burdens of Unemployment
• Occupation
• Age
• Race and Ethnicity
• Gender
• Education
• Duration
Noneconomic Costs
International Comparisons
Copyright McGraw-Hill/Irwin, 2005
GLOBAL PERSPECTIVE
Economic Growth
The Business
Cycle
Unemployment
Unemployment Rates 5 Industrial Nations
1992 - 2002
15
Inflation
France
CPI
Redistributive
Effects of
Inflation
U.K.
10
Germany
Anticipated
Inflation
U.S.
Effects of
Inflation on
Output
Japan
5
Key Terms
Previous
Slide
End
Show
8 - 11
Next
Slide
0
1992
1997
2002
Source: Economic Report of the President, 2003
Copyright McGraw-Hill/Irwin, 2005
INFLATION
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
End
Show
8 - 12
• A rising general level of prices
• Rate of inflation calculated
using index numbers
Consumer Price Index
CPI =
Key Terms
Previous
Slide
Defined and Measurement
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
Price of most recent market
basket in the particular year
Price of the same market
basket in 1982-1984
x 100
INFLATION
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
End
Show
8 - 13
Next
Slide
• Rule of 70 - Applied
• Facts of Inflation
• U.S. Double-Digit Inflation
in Late 70s and Early 80s
• Currently Relatively Mild
• Other Nations in 2002
•Romania – 23%
•Belarus – 43%
•Turkey – 45%
•Myanmar – 57%
Copyright McGraw-Hill/Irwin, 2005
GLOBAL PERSPECTIVE
Inflation Rates in Five Industrial Nations
1992 - 2002
Economic Growth
The Business
Cycle
Unemployment
10
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Italy
Germany
5
Effects of
Inflation on
Output
U.S.
France
Japan
Key Terms
Previous
Slide
End
Show
8 - 14
Next
Slide
0
1992
1997
2002
Source: Bureau of Labor Statistics
Copyright McGraw-Hill/Irwin, 2005
INFLATION
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
End
Show
8 - 15
Next
Slide
Types of Inflation
DEMAND-PULL INFLATION
COST-PUSH INFLATION
•Rising Per-Unit
Production Costs
•Supply-Side Inflation
•Supply Shocks
•Complexities
Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business
Cycle
Unemployment
REDISTRIBUTIVE EFFECTS
OF INFLATION
Nominal Income
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipations
Anticipated
Inflation
Effects of
Inflation on
Output
• Anticipated Inflation
Key Terms
Previous
Slide
End
Show
8 - 16
Real Income
Next
Slide
• Unanticipated Inflation
Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business
Cycle
Unemployment
REDISTRIBUTIVE EFFECTS
OF INFLATION
Who is Hurt by Inflation?
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
• Fixed-Income Receivers
• Savers
• Creditors
Key Terms
Previous
Slide
End
Show
8 - 17
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Effects of
Inflation on
Output
Key Terms
End
Show
8 - 18
Who is Unaffected or
Helped by Inflation?
• Flexible-Income Receivers
• Cost of Living
Adjustments (COLAs)
• Debtors
Anticipated
Inflation
Previous
Slide
REDISTRIBUTIVE EFFECTS
OF INFLATION
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
End
Show
8 - 19
Next
Slide
REDISTRIBUTIVE EFFECTS
OF INFLATION
Addenda
•Deflation
•Mixed Effects
•Arbitrariness
Copyright McGraw-Hill/Irwin, 2005
ANTICIPATED INFLATION
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
11%
=
+
Anticipated
Inflation
Effects of
Inflation on
Output
5%
Key Terms
Previous
Slide
End
Show
8 - 20
Next
Slide
Nominal
Interest
Rate
Copyright McGraw-Hill/Irwin, 2005
Real
Interest
Rate
6%
Inflation
Premium
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
Previous
Slide
End
Show
8 - 21
Next
Slide
EFFECTS OF INFLATION
ON OUTPUT
•Cost-Push Inflation
and Real Output
•Demand-Pull Inflation
and Real Output
•Hyperinflation &
Breakdown
Copyright McGraw-Hill/Irwin, 2005
economic growth
real GDP per capita
rule of 70
productivity
business cycle
peak
recession
trough
recovery
labor force
unemployment rate
discouraged workers
frictional unemployment
structural unemployment
cyclical unemployment
full-employment rate of unemployment
natural rate of unemployment (NRU)
Copyright McGraw-Hill/Irwin, 2005
potential output
GDP gap
Okun’s Law
inflation
Consumer Price Index (CPI)
demand-pull inflation
cost-push inflation
per-unit production costs
nominal income
real income
anticipated inflation
unanticipated inflation
cost of living adjustments
(COLAs)
real interest rate
nominal interest rate
deflation
hyperinflation
BACK
END
Economic Growth
The Business
Cycle
Unemployment
Inflation
CPI
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
BASIC
MACROECONOMIC
RELATIONSHIPS
Key Terms
Previous
Slide
End
Show
8 - 23
Next
Slide
Chapter 9
Copyright McGraw-Hill/Irwin, 2005