Economic Growth &
Instability
Defining Growth
► Increase
► Increase
in Real GDP
in GDP per capita – Important
because GDP numbers can be deceptive
based on population sizes
Growth as a Goal
► Means
more abundance of materials and
ability to answer the economizing problem –
reduces scarcity
► “Rule of 70” – Used by economists to
determine how long it will take a measure
to double
► Ex = 70 / % OF Growth = Years to Double
► Growth accomplished by increasing inputs
or increasing productivity
The Growth of the United States
► Real
GDP has increased 6X since 1940
► Per Capita GDP has increased has risen
almost 4X
► Problems in measuring growth include the
lack of solid measure for quality
improvements, increased leisure time, and
harm towards the environment
Business Cycle
► US
record of growth certainly seen periods
of economic instability
► Inflation often follows rapid growth and
unemployment and decline in output
following recession & depression
4 Phases of Business Cycle
► Peak
– “Full Employment” & Near Capacity
Output
► Recession – Decline in Output, Income,
Employment, and Trade lasting 6 months or
more
► Trough – Bottom of a recession period
► Recovery – Out is expanding towards Peak
Level
Causation & the Business Cycle
► Causation
– Fluctuation in Business Cycle
► Innovations & Technological Advancement
may trigger consumer spending
► Productivity Changes
► Consumer spending
► Instability of durable goods
Unemployment
► Frictional
unemployment – Consists of
those searching for jobs, indicates mobility,
and is good for the economy
► Structural unemployment – due to
changes in structure or geographic
► Cyclical – Caused by changes in the
business cycle
Full Employment
► Understood
that 100% employment cannot
be achieved. 4-6% is the desired goal
► Full employment = Structural + Frictional
► Referred to as the natural rate of
unemployment
► Natural rate is achieved when markets are
in balance, when the number job seekers =
the number of vacancies
Categorizing Unemployment
► Under
16 and/or institutionalized
► Not in the labor force and not seeking
employment
► Those working and/or willing to work
► Natural rate now approx 5.5% due to
increases in competition in markets and age
of work force
Unemployment Rate
►%
of labor force that is not employed
► Part-time workers are counted as employed
► Discouraged or “under employed” not
figured in to the unemployment statistic
Okun’s Law
► For
every 1% that the unemployment rate
exceeds the natural rate, GDP will fall 2% of
output potential
Inflation
► Inflation
is measured by comparing price
indexes from a given year and the one
before it.
Types of Inflation
► Demand
Pull Inflation – An excess of
consumer spending creates a shortage of
goods which causes prices to rise
► Cost-push inflation –Prices rise to due per
unit cost increases
► Tough to distinguish which is which in a real
world setting
Inflation Redistribution
► Fixed
income groups are hurt because their
purchasing power and disposable income
has decreased
► Savers hurt because their dollars are worth
less
► Debtors helped because their debts have
decreased
Additional Information
► Inflation
Premium – amount interest rates
are increased to cover inflation
► Hyperinflation – occurs when inflation is not
handled properly, usually met with severe
socioeconomic consequences i.e Post-War
Japan, Germany after WWI