Transcript Business Cycles, Unemployment, and Inflation

8
Introduction to Economic Growth and
Instability
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Economic Growth
Increase in real GDP or real GDP per
capita over some time period
Percentage rate of growth
Growth as a goal
Arithmetic of growth: Rule of 70
Approximate
number of years
required to double
real GDP
LO1
70
=
annual percentage rate
of growth
25-2
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Economic Growth
Growth in U.S. real GDP 1950-2009
–Increased 6 fold
–3.2% per year
• Growth in U.S. real GDP per capita
–Increased more than 3 fold
–2% per year
• Qualifications
–Improved products and services
–Added leisure
–Other impacts
LO1
25-3
Modern Economic Growth
• Began with the Industrial Revolution
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LO2
in late 1700s
Ongoing increases in living standards
Time for leisure
Social change
Democracy
Human lifespan doubled
25-4
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LO2
Modern Economic Growth
Began in Britain
Has spread slowly
Starting date main cause of worldwide
differences in living standards
Catching up is possible
–Leader countries invent technology
–Follower countries adopt technology
–Can grow faster
25-5
Modern Economic Growth
Country
Real GDP
per capita,
1960
United States
$ 14,766
United Kingdom
11,257
France
9,347
Ireland
6,666
Japan
5,473
Singapore
4,149
Hong Kong
3,849
South Korea
1,765
Real GDP
per capita,
2007
$42,887
32,181
29,663
41,625
30,585
44,619
43,121
23,850
Average annual
growth rate,
1960-2007
2.3%
2.3
2.5
4.0
3.7
5.2
5.3
5.7
Figures are in 2005 dollars
Source: Penn World Table version 6.3, pwt.econ.upenn.edu
LO2
25-6
Modern Economic Growth
LO3
25-7
Institutional Structures of Growth
–Strong property rights
–Patents and copyrights
–Efficient financial institutions
–Literacy and widespread education
–Free trade
–Competitive market system
LO3
25-8
Determinants of Growth
Supply factors
Demand factor
• Increases in quantity
• Households, businesses,
and quality of natural
and government must
resources
purchase the economy’s
• Increases in quality and
expanding output
quantity of human
resources
Efficiency factor
• Increases in the supply
• Must achieve economic
(or stock) of capital goods
efficiency and full
• Improvements in
employment
technology
LO3
25-9
Accounting for Growth
• Factors affecting productivity growth
–Technological advance (40%)
–Quantity of capital (30%)
–Education and training (15%)
–Economies of scale and resource
allocation (15%)
LO3
25-10
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LO4
Productivity Growth
Average rate of growth
–1.5% per year 1973-1995
–2.8% per year 1995-2009
Affects real output, real income, and
real wages
Pay higher wages without lowering
profit
25-11
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LO5
Economic Growth
Is economic growth desirable and
sustainable?
The antigrowth view
–Environmental and resource
issues
In defense of economic growth
–Higher standard of living
–Human imagination can solve
environmental and resource issues
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LO5
Economic Growth
Growth is the path to greater material
abundance
Results in higher standards of living
Increases leisure time
Allows for the expansion and
application of human knowledge
25-13
Global Perspective
LO5
25-14
The Business Cycle
• Alternating increases and decreases
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LO1
in economic activity over time
Phases of the business cycle
• Peak
• Recession
• Trough
• Expansion
26-15
The Business Cycle
Peak
Level of real output
Peak
Peak
Trough
Trough
Time
LO1
26-16
Causation: A First Glance
• Business cycle fluctuations
 Primary causation is total spending
(probably)
 Affects both capital goods and consumer
durables but services and nondurables are
somewhat shielded Economic shocks
 Prices are “sticky” downwards
 Economic response entails decreases in
output and employment
LO1
26-17
Unemployment
Total
population
(307.3
million)
Under 16
and/or
Institutionalized
(71.4 million)
Unemployment rate =
# of unemployed
X 100
labor force
Not in
labor
force
(81.7 million)
Unemployment rate =
Employed
(139.9 million)
14,265,000
X 100 = 9.3%
154,142,000
Labor
force
(154.2
million)
Unemployed
(14.3 million)
LO2
26-18
Unemployment
• Unemployment – labor force equals about 50% of the
total population
– Unemployment rate =unemployed/ civilian labor
force x 100
• Bureau of the Census
– Monthly survey
• 60,000 households
• Unemployed = people available for work who
made a specific effort to find a job during the
past month and who, during the most recent
survey week, worked less than 1 hour for pay or
profit
• Bureau of Labor Statistic determines the
unemployment rate
Unemployment
• Criticisms of unemployment
• Involuntary part-time workers
counted as if full-time (these people
are partially employed and partially
unemployed)
• Discouraged “frustrated” workers
are not counted as unemployed
LO2
26-20
Types of Unemployment
– Frictional Unemployment = workers who are “between jobs”
– Cyclical Unemployment = unemployment directly related to
swings in the business cycle
– “Deficient-demand” unemployment
– Effected by recession
– Often mixed with other types of unemployment
– Affected workers usually get their jobs back
» Seasonal Unemployment = resulting from changes in
the weather or demand for certain products
– Structural Unemployment = fundamental change in the
economy reduces the demand for workers and their skills
(usually need to be “retrained”)
– Consumer taste changes
– Industrial operation changes, automation
– Geographical changes
LO3
26-21
Definition of Full Employment
–“Full Employment”--Not Zero employment
• Natural Rate of Unemployment (NRU)
• Full employment level of unemployment
• Can vary over time
• Demographic changes
• Changing job search methods
• Public policy changes
• Actual unemployment can be above or
fall below the NRU
LO3
26-22
Economic Cost of Unemployment
• When the economy fails to crate enough
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LO3
jobs for all who are able and willing to
work potential production of goods and
services is irretrievably lost
GDP Gap
• GDP gap = actual GDP – potential GDP
• Can be negative or positive
Okun’s Law
• Every 1% of cyclical unemployment
creates a 2% GDP gap
26-23
Economic Cost of Unemployment
LO3
26-24
Unequal Burdens
• Occupation-low skill = high unemployment
• Age-Teenage = high unemployment
• Race and ethnicity-minority = high
unemployment
• Gender-men and women very similar
• Education-less educated =high
unemployment
• Duration-unemployed over 15 wks very
small %
LO3
26-25
Noneconomic Costs
• Loss of skills and loss of self-respect
• Plummeting morale
• Family disintegration
• Poverty and reduced hope
• Heightened racial and ethnic tensions
• Suicide, homicide, fatal heart attacks,
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LO3
mental illness
Can lead to violent social and political
change
26-26
LO3
26-28
Inflation
• General rise in the price level
• Inflation reduces the “purchasing
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power” of money
Consumer Price Index (CPI)
CPI =
CPI =
LO3
Price of the Most Recent Market
Basket in the Particular Year
Price estimate of the Market
Basket in 1982-1984
207.3
-
201.6
x
100
x
100 = 2.8%
201.6
26-29
Types of Inflation
• Demand-Pull inflation
• Excess spending relative to output
• Central bank issues too much
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LO3
money
Cost-Push inflation
• Due to a rise in per-unit input costs
• Supply shocks
26-30
Redistribution Effects of Inflation
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Nominal income
• Unadjusted for inflation
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Real income = measure of the amount of goods/services
nominal income can buy
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Purchasing power
Real income=nominal income/PI (in hundredths)
Inflation may redistribute real income
Anticipation inflation/unanticipated inflation
Nominal income adjusted for inflation
Anticipated vs. unanticipated income
• “Inflation premium”
• Real interest rate =
inflation premium
LO3
nominal rate –
26-32
Who is Hurt by Inflation?
• Fixed-income receivers
• Real incomes fall (nominal income doesn’t
rise with prices)
• Savers
• Value of accumulated savings
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LO3
deteriorates
Creditors
• Lenders get paid back in “cheaper
dollars”
26-33
Who is Unaffected or Helped by Inflation?
• Flexible-income receivers
• COLAs (cost-of-living adjustments)
• Social Security recipients
• Union members
• Debtors
• Pay back the loan with “cheaper
dollars”
LO3
26-34
Does Inflation Affect Output?
• Cost-push inflation
• Reduces real output
• Redistributes a decreased level of
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LO3
real income
Demand-pull inflation
• One view is that zero inflation is
best
• Another view is that mild inflation is
best
26-35