Ch 7. Intro to Economic
Growth & Instability
A.
Economic Growth –  in either real
GDP or Real GDP per capita over time.
In 2001, China’s GDP was
1,1131 Billion compared to
Denmark’s 166 Billion.
However, Denmark’s GDP
per capita was $31,090
compared to China’s $890.
-- The time period is calculated
as a quarter (3-months) or year.
-- Real GDP is GDP adjusted
for inflation.
-- Real GDP per capita = dividing
real GDP by the size of the
population.
1.
2.
“Rule of 70.”
Sources of growth.
Rule of 70
Approx # of
Years required =
70
to double the
annual % rate
Real GDP
of growth
A 3% annual rate of growth will double
Real GDP in about 23 (= 70 divided by .03)
-- Rule of 70 tells us the number of years it will take for some measure to double,
given its annual percentage increase, by dividing that % increase into 70.
-- Sources of growth: increasing inputs of resources or increasing productivity.
B.
Business cycle -  &  levels of
economic activity.
1. Peak
2. Recession
3. Trough
4. Recovery
The 4 Seasons = Business cycle
I
Summer U
(Boom)
Spring
Fall
(Recovery)
(Recession)
Winter
(Depression)
-- Trough is where a recession or depression bottoms out.
-- Causes in fluctuations: changes in production, supply, demand, spending, policies.
The Business Cycle
Phases of the Business Cycle
Level of Real Output
Peak
Peak
Trough
Trough
Time
Cyclical Impact:
Durables and Nondurables
Peak
C.
Unemployment
1. Frictional
2. Structural
3. Cyclical
Does not include those
under 16 years old and/or
institutionalized.
-- Frictional – between jobs.
-- Structural – skills not needed or possess no skills.
-- Cyclical – caused by a decline on spending (recession).
Unequal Burden:
-- Occupation
-- Age
-- Race & ethnicity
-- Gender (similar)
-- Education
Unemployment
Labor Force, Employment, and Unemployment, 2005
Under 16
And/or
Institutionalized
(70.5 Million)
Not in
Labor Force
(76.8 Million)
Total
Population
(296.6 Million)
Employed
(141.7 Million)
7,591,000
149,320,000 X 100 = 5.1%
unemployment rate
Unemployed
(7.6 Million)
Labor
Force
(149.3 Million)
D.
Full employment: # of job seekers = #
of job vacancies. No cyclical
unemployment
-- Full employment, or the natural rate of employment (NRU) fluctuates over time
due to fewer workers after the baby boomers, growth of temp workers, and
doubling of the prison population since 1985.
E.
Okun’s Law – for every 1% point the
unemployment rate exceeds the natural
rate (full employment), a negative GDP
gap of 2% point occurs.
-- Macroeconomist Arthur Okun discovered the relationship between the
unemployment rate and the GDP gap.
Okun’s Law
Actual and potential
GDP and the
unemployment.
(a) Difference between
actual & potential GDP
is the GDP gap. A
negative gap measures
the output the economy
sacrifices when actual
GDP falls short of
potential GDP. A
positive GDP gap
shows the opposite.
(b) A high
unemployment rate
means a large GDP gap
(negative), and a low
unemployment rate
means a small or even
positive GDP gap.
F.Inflation –  in level of prices.
1. Consumer Price Index (CPI) –
main measure of inflation.
Rate of inflation = 179.9 – 177.1 x 100 = 1.6%
177.1
The CPI was 179.9 in 2002, up from 177.1 in 2001.
i = Δ in CPI X 100
current CPI
Rule of 70:
A 1.6% annual rate of inflation will
double the price level in about 43 years.
-- When inflation occurs, each dollar of income will buy fewer goods &
services than before (reduces ‘purchasing power’).
-- CPI is compiled by the Bureau of Labor Statistics (BLS).
-- The BLS arbitrarily sets the CPA equal to 100 for 1982-84 (start point).
-- The gov’t uses the index for monthly reports on inflation rates.
-- CPI reports the price of a ‘market basket’ of 300 consumer goods/services.
-- The BLS updates the composition of the market basket every 2 years.
-- Will take 6 years to double the inflation rate at 12%.
Two Types of Inflation
Demand-Pull Inflation – Caused by an
excess of total spending beyond the
economy’s ability to produce. When
inflation is rapid and sustained, it may be
due to an overissuance of money by the
central bank (the U.S. Federal Reserve).
Cost-Push Inflation – Results from an
increase in resource costs.
Who’s hurt / helped by Inflation?
HURT
Fixed-income
receivers
Savers (less
purchasing
power)
Creditors
(lenders)
HELPED
Flexible-income
receivers
(COLAs)
Debtors (home
loans)
G.
H.
I.
Hyperinflation
Deflation.
Nominal income
(money) vs. real
income.
-- Nominal Income: # of dollars in wages,
rent, income, or profits.
-- Real Income: amount of goods/services
that nominal income can buy.
The German Weimar Republic printed so
much money to pay Its bills after WWI that
prices rose 1.3 trillion times.
A German woman in 1923 burning
Deutsche Marks because it was cheaper
than buying wood to burn.