Transcript GROWTH BUSINESS CYCLES UNEMPLOYMENT INFLATION

GROWTH
BUSINESS CYCLES
UNEMPLOYMENT
INFLATION
Economic Growth
• Measurement
– Gross Domestic Product (GDP)
– Market value of final goods and services produced
– Details later
Economic Growth
• Nominal GDP (OK measure)
– Goods and services valued at their current prices
• Real GDP (Better measure)
– Goods and services valued in prices of a base or
reference year.
• Real Per capita GDP (Best measure)
– GDP divided by population
6-3
Per Capita Income by Region
6-4
Region
Growth Rate:
1950-2009
Income: 1950
Income: 2009
China
4.4%
$ 439
$ 6,050
Jqpan
4.8%
$1,900
$22,500
North America
2.0%
$9,500
$31,000
Latin America
1.6%
$2,500
$ 6,500
Western Europe
2.6%
$6,500
$21,200
Eastern Europe
2.2%
$3,100
$ 7,600
Africa
1.1%
$1,300
$ 1,700
World
2.1%
$2,100
$ 7,300
Benefits and Costs of Growth
• Benefits
– If real per capita GDP increases, everyone in society will on
average, have more.
– Governments avoid hard choices
• Costs
–
–
–
–
6-5
Pollution
Resource exhaustion
Destruction of natural habitat
Materialism
Four Phases of the
Business Cycle
2 qtrs decline
Expansion
Recession
2 qtrs rise
Expansion
Total Output
Peak
0
6-6
Trough
Secular
growth
trend
Jan.- Apr.- July- Oct.- Jan.- Apr.- July- Oct.- Jan.- Apr.Mar June Sept. Dec. Mar June Sept. Dec. Mar June
U.S. Business Cycles
6-7
Business Cycles
• Important terms
– Recession: 6 months of declining real output
2002, 2008 to ?
– Depression: Long period of
declining output and high
unemployment
1930s and ???
Changes in Business Cycles Over Time
Duration (in months)
Business Cycles
Pre-World War II
(1854-1945)
Post-World War II
(1945-2006)
Average length of expansions
29
57
Average length of recessions
21
10
Length of shortest recession
7
6
Length of longest recession
6-9
65 (1933-39)
16+ (2007-2009)
Leading Indicators
• Average work week
• New orders for capital
goods
• Unemployment claims
• Building permits
• Index of consumer
expectations
6-10
• Stock prices
Unemployment
• Types
–
–
–
–
–
Frictional
Structural
Cyclical
Seasonal
Underemployment
Measuring Unemployment
– Monthly interviews
– Criteria
• 16 years or older
• Available for work
• Tried to find work
Calculating Unemployment
number unemployed
unemployme nt rate 
 100
labor force
• Labor force
– Able to work
– Have a job
– Don’t have a job, but looking for a job
• Number unemployed
– Able to work
– Don’t have a job, but looking for a job
6-13
Unemployment Rates since 1900
6-14
Unemployment by Microeconomic
Subcategories
6-15
See Text, p. 171
Accuracy of the Unemployment
Rate
• Discouraged workers
• Under-employed
• Survey bias
6-16
Target Rate of Unemployment
• Target rate of unemployment
– Used to be called “Full Employment”
– The lowest sustainable rate achievable under existing conditions.
• Currently considered to be about 5%
• Can change due to:
– Population demographics
– Social and institutional structures
– Government programs
6-17
Unemployment and Potential
Output
• Potential output – output at:
– Target rate of unemployment
and
– Target rate of capacity utilization
• Okun’s rule of thumb:
Unemployment rate up by 1%
→ Output down by 2%
6-18
Inflation
• General increase in prices
• Cause: Too much money chasing
too few goods
Effects of Inflation
• Unanticipated inflation: Who is harmed?
– Lenders
– People with fixed incomes
– Anybody making decisions
• Anticipated inflation
Measurement of Inflation
• Monthly interviews
Measurement of Inflation
• Market Basket
2009 Price
$3.00/gal
$4.50/lb
2010 Price
4.00/gal
$6.00/lb
100 gal gas 10 lbs steak
2009 Cost $300
$45
2010 Cost $400
$60
Inflation Rate (460-345/345) = 33%
Total Cost
$345
$460
Real World Price Indexes
• GDP Deflator
• Consumer Price Index
• Producer Price Index (PPI)
6-23
Composition of CPI
Food and beverage (15.0%)
Housing (42.7%)
Apparel (3.7%)
Transportation
(17.2%)
Other (3.5%)
Medical care (6.3%)
Education and
Communication (6.0%)
6-24
Recreation (5.6%)
Price Indices and the “Base Year”
• Base year selected
– Currently, 1982 for the CPI
– Price index is always 100 for the base year
• Rate of inflation is the % change in the
price index from one period to the next
6-25
Calculating the Rate of Inflation
YEAR
PRICE INDEX
2007
96
2008
100
4.17%
2009
104
4.00%
2010
114
9.62%
Inflation Rate = Change in Price Index
Earlier Year Price Index
6-26
ANNUAL RATE OF
INFLATION
Real Verses Nominal Output
• Nominal output is measured at current prices.
• Real output is nominal output:
– Adjusted for price level changes from a “Base Year.”
nominal output
real output 
 100
price index
6-27
Real Versus Nominal Prices
Suppose that the nominal price of gasoline is $3.25 per gallon. The CPI (1982
base year) is 190%. Find the real price of a gallon of gasoline.
nominal price $3.25
real price 
 100  $1.71
price index 190
6-28
HYPERINFLATION
• Definition: > 50%/month
•
•
•
•
•
•
Jan
Feb
Mar
April
May
June
1.00
1.50
2.25
3.38
5.06
7.60
July
Aug
Sept
Oct
Nov
Dec
Jan
11.39
17.09
25.62
38.44
57.67
86.50
129.74
HYPERINFLATION (cont)
• Germany (after WWI)
• 1 egg
Marks
• Pre-War Price .08
• Nov/1923 Price 80,000,000,000
HYPERINFLATION (cont)
• Hungary (after WWII)
– Inflation rate:
3,810,000,000,000,000,000,000,000,000,000
HYPERINFLATION (cont)
• Bolivia (1985)
– 118,000%
HYPERINFLATION (cont)
• Turkey
exchange rate
HYPERINFLATION (cont)
• Cause: Turning on the printing
presses
• People’s reaction?
Deflation
• Continuing decrease in prices
• Distributional impacts (reverse of inflation)
– Borrowers lose
– Those on fixed incomes gain
• Other impacts
– Consumers postpone purchases
– Asset values (e.g., stocks and real estate) decline
• The dangers
– Demand decreases, so businesses produce less
– Financial institutions may become insolvent
• Deflationary spiral