CHAPTER 8
Introduction to Economic Growth and Stability
Economic Growth means an increase in real GDP
has occurred or there has been an increase in real GDP per
capita.
There are two ways to grow:
An increase in real GDP over time
An increase in real GDP per capita
over time
ECONOMIC GROWTH
•Growth as a Goal
•Arithmetic of Growth
•Rule of 70
•Main Sources of Growth
•Increases in Resources
•Increases in Productivity
Productivity is real output per unit of input.
Long-run economic growth in all capitalist societies has been
interrupted by periods of economic instability. This instability
takes the form of upturns and downturns in the business cycle.
The Business Cycle refers to alternating rises and declines in
the level of economic activity.
THE BUSINESS CYCLE
Phases of the Business Cycle
RECESSION
TROUGH
Level of business activity
PEAK
Time
RECOVERY
There are many causes of the business cycle:
innovations, changes in productivity, too little
money in the banks, and the level of total
spending (C+Ig+G+Xn).
Durable goods are more likely affected by the
swings in the business cycle.
The problem with the business cycle is that
unemployment follows the business cycle.
Unemployment rate=(unemployed/labor
force)*100
This rate may be too low because it does not
include part-time employment or discouraged
workers.
Types of unemployment:
Frictional: people between jobs
Structural: the demand for the products in certain
industries has declined
Cyclical: general decline in demand
Full employment rate of unemployment or natural rate =
frictional and structural. Anything over this is cyclical
unemployment.
The economic cost of unemployment: Okun’s Law indicates
that for every 1 percentage point by which the actual
unemployment rate exceeds the natural rate, there will be a
GDP gap of 2 percent.
UNEMPLOYMENT
Unequal Burdens of Unemployment
•
•
•
•
•
•
Occupation
Age
Race and Ethnicity
Gender
Education
Duration
Noneconomic
Costs:Suicide,Crime,Abuse
International Comparisons
GLOBAL PERSPECTIVE
Unemployment Rates 5 Industrial Nations
1992 - 2002
15
France
U.K.
10
Germany
U.S.
Japan
5
0
1992
1997
2002
Source: Economic Report of the President, 2003
INFLATION
Defined and Measurement
• A rising general level of prices
• Rate of inflation calculated
using index numbers
Consumer Price Index
CPI =
Price of most recent market
basket in the particular year
Price of the same market
basket in 1982-1984
x 100
INFLATION
• 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%
INFLATION
Types of Inflation
DEMAND-PULL INFLATION
•Results from any situation that increases demand
beyond the capacity of the economy to meet the
demand
COST-PUSH INFLATION
• Rising Per-Unit Production Costs
• Supply-Side Inflation
• Supply Shocks
REDISTRIBUTIVE EFFECTS
OF INFLATION
Nominal Income: Number of $ received
Real Income:Nominal Income/Price Index
Who is Hurt? Fixed Incomes, Savers,
Creditors
Effect Depends Upon Anticipations
• Anticipated Inflation
• Unanticipated Inflation
ANTICIPATED INFLATION
11%
=
+
5%
Nominal
Interest
Rate
Real
Interest
Rate
6%
Inflation
Premium
REDISTRIBUTIVE EFFECTS
OF INFLATION
Who is Unaffected or
Helped by Inflation?
• Flexible-Income Receivers
• Cost of Living
Adjustments (COLAs)
• Debtors
Inflation affects output. When oil prices increase, that input
now is more expensive for firms that use oil, so their prices
increase and higher prices are associated with reduced
output.
Hyperinflation has occurred in some economies. This means
that the prices increase so fast and that people may return
to a barter economy to cope. It can cause economic
collapse.