Transcript Macro Ch 7 presentation 1 Economic Growth and Inflation

Macro Chapter 7
Presentation 1- Economic Growth
Consumer Price Index (CPI)
• CPI reports inflation each month and year
• Reports the price of a basket of 300 consumer
goods a typical urban consumer would buy
• Includes foreign goods
CPI =
Price of the Most Recent Market
Basket in the Particular Year
Price of the Same Market
Basket in 1982-1984
x
100
GDP per Capita
• Divide GDP by the size of the pop.
• US GDP 2010 was 14.3 Trillion
• Population of US was 310 million
• Per Capita = 14.3 trillion/310 million
• = $46,860
• US #13 (1. Luxembourg 2. Norway 3. Qatar
4. Switzerland 5. UAE)
Economic Growth
1. An increase in real GDP over some time
period
2. An increase in real GDP per capita
occurring over some period of time
Main Sources of Growth
• Society can grow through:
• 1. Increasing inputs of resources
• 2. Increasing the productivity of the
resources used
• Productivity- real output per unit of
input
Rule of 70
• Approx number of years required to
double GDP
• = 70/annual percentage rate of growth
• Ex- If China’s growth rate is 8%, it will
take their economy about 9 years to
double GDP
• = 70/8= appx. 9
The Business Cycle
•
Downturn
• Recession / Contraction
– 6 months or more of decline in total output, income
and unemployment
– The period of time during which aggregate economic activity is
falling
• If the recession is particularly severe, it becomes a
depression.
• During a recession
– Many sectors of the economy experience declining sales and
production
– Workers are laid off or forced to work only part-time
• Peak: the point in which output starts to decline
Upturn
• After reaching the low point of the contraction
(the trough), aggregate economic activity
begins to increase.
• The period of time during which aggregate
economic activity grows is an expansion or a
boom.
• The high point of the expansion is called a
peak.
Demand-Pull Inflation
• When resources are fully employed, the
business sector cannot respond to excess
demand by increasing output
• Excess demand causes an increase in cost
• “too much spending chasing too few goods”
Cost-Push Inflation
• Rising per-unit costs of production lower
profits and force the prices up
• Supply Shock- abrupt increases in the cost of
raw materials
• Ex. Skyrocketing prices of oil in 1973-74 and
1979-80
• Per unit cost=
total input cost/# of units of output
Hyperinflation
• An extremely high and fast inflation rate
• Ex- Germany in post-WW1
• Serbia in 1994 the inflation rate went up 1.56
million %
COLA
• Cost of Living Adjustment
• An increase in benefits as inflation occurs
• EX- Retirement of Firemen increases by 3%
each to keep up with the increased cost of
living
Who is Hurt by Inflation?
• 1. Fixed Income Receivers- not adjusted for
cost-of-living
• 2. Savers- real purchasing power of a saved
account deteriorates
• 3. Creditors- lenders are repaid with money
that has less purchasing power
Who is Not Hurt by Inflation?
• 1. Flexible income receivers- cost-of-living
adjustments
• 2. Debtors- pay back loans with less valuable
money