Transcript Slide 1

26
Introduction
to Economic
Growth and
Instability
 The
Business Cycle and its Primary
Phases
 How Economic Growth is Measured and
Why is it Important
 How Unemployment and Inflation are
Measured
 The Types of Unemployment and
Inflation and their Various Economic
Impacts
Increase
in Real GDP
Increase in Real GDP Per Capita
Growth as a Goal
 What
is scarcity?
 How can growth help overcome it ?
 An economy experiencing economic growth is
better able to meet people’s wants and
resolve socioeconomic problems
 A growing economic, unlike a static economy,
can consume more today while increasing its
capacity to produce more in the future!!!
 Mathematical
approximation of the effect of
growth
 Approximate
number of years required to
double GDP = 70/ (annual percentage rate of
growth)
1.
2.

Increasing its inputs of resources
Increasing productivity of inputs
Productivity (real output per unit of input)
rises by increasing health, sanitation,
training, education, motivation etc
 Does
growth take place persistently?
 Case
of Pakistan: episodic growth between
2000-2005
 Now?

Phases of economic growth/ activity are
characterized as business cycles
 Business
cycle is the alternate rise and
decline in the level of economic activity,
sometimes over several years

Peak: temporary maximum in activity. Economy
is near or at full employment, and the level of
real output is at or very close to the economy’s
capacity. Price level is likely to rise

Recession: a period of decline in total output,
employment, trade, income.

Trough: bottom lowest in the temporary cycle

Recovery: rise in output and employment
towards full employment. A recession is usually
followed by a recovery and expansion
Phases of the Business Cycle
Peak
Level of Real Output
Peak
Peak
Trough
Trough
Time
Cyclical Impact:
Durables and Nondurables
 Causes
of business cycles
 Shocks to the economy


Changes in productivity
changes in spending levels
 Growth
trend is the overall trend of the
business cycles


Expansionary
Contractionary
 Who

is affected the most through a cycle?
Capital goods/ consumer durables can be put off
to a later date e.g. car industry in the US
 Whereas,

Non-durable consumer goods (services) harder to
remove oneself from e.g. medical, legal services
 Twin


Problems of the Business Cycle
Unemployment
Inflation
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)
Unemployed
(7.6 Million)
Labor
Force
(149.3 Million)
 Measurement
of Unemployment
 Labor
Force
 Unemployment Rate


Part-Time Employment
Discouraged Workers
Unemployment Rate
=
Unemployed
Labor Force
x 100
 Those
part of the labor force which are not
employed

must be actively seeking work to be considered
unemployed
 Unemployment
rate = unemployed * 100
labor force
Frictional
1.


In search of employment
In between jobs, fresh graduates
Structural
2.


Changes in consumer preferences, consumer
demand and in technology e.g hand made products
Structurally unemployed find hard to obtain new
jobs without retraining, additional education or
relocating
Cyclical
3.

Caused by changes in spending , less demand and
less income causes higher unemployment e.g.
Credit Crunch 2008. Typically begins in the
recession phase of the business cycle
 The
maximum population that can be
employed at a time (considering only
structural and frictional unemployment)
 Natural

Rate of Unemployment (NRU)
unemployment rate at full employment level.
When number of job seekers equal the number of
job vacancies. This is always a positive
percentage.
Economic
Cost of Unemployment
Potential Output
GDP Gap and Okun’s Law
GDP
Gap = Actual GDP - Potential GDP
 Large

unemployment has costs
Causes a GDP gap


The amount by which actual GDP falls short of
potential GDP (at full employment levels)
Okun’s law: for every 1percentage point
unemployment rises above NRU a GDP gap of 2
percent occurs
 Cost
of unemployment is unequally
distributed

Different groups experience different
unemployment rates

Unemployment varies by
 Occupation
 Age
 Race
and ethnicity
 Gender
 Education
 Duration

Non-economic costs:
 depression,
socio-political unrest, lowering
morale, poverty, ethnic and racial tension
 Rise
in the general level of prices
 Each dollar buys fewer goods and services
 Reduces the purchasing power of money
Price indices
 Consumer price index
 Each month or each year
 Market basket of some 300 consumer
goods and services
CPI =
Price of the Most Recent Market
Basket in the Particular Year
Price of the Same Market
Basket in 1982-1984
x
100
Quantity
in Basket
2006
(kg or
Price
litre)
Flour
2007
Cost of
basket
Price
Cost of
basket
2008
Price
6
Rs. 200
1200
Rs. 300
Rs. 150
Oil
1.5
Rs. 80
120
Rs. 150
Rs. 50
Milk
1
Rs. 40
40
Rs. 55
Rs. 30
Rice
3
Rs. 300
900
Rs. 250
Rs. 250
Total cost
Price
index
2260
100
Cost of
basket
 Demand-pull
Excess of total spending beyond the economy’s
capacity to produce
 Excess demand for goods, can push up prices
 “too much spending chasing too few goods”
 Cost-push
 Supply or cost side of economy
 Rising per-unit production costs
 Reduces profits and thus reduces output
 Prices rise
 Also known as supply shocks

 Inflation
hurt some people , leaves others
unaffected, and actually helps still others

Anticipations
 Anticipated Inflation, avoid or lesson effects of
inflation
 Unanticipated Inflation( not expected)
 Nominal
vs. Real income
Nominal income is the number of dollars received as
wages, rent, interest, profits
 Real income = Nominal income / price index
Real income is measures the amount of goods &
services nominal income can buy. It is the
purchasing power of nominal income
% change in real income = % change in nominal
income - % change in price level
 Who
is Hurt by Inflation?
 Fixed-Income Receivers
 Savers
 Creditors
 Who
is Unaffected or Hurt by Inflation?
 Flexible-Income Receivers
 Cost-of-Living Adjustments (COLAs)
 Business
 Debtors

Deflation: the effects of unanticipated declines in
the price level. People with fixed nominal
incomes will benefit. Creditors and Savers will
benefit.

Hyperinflation is extraordinarily rapid inflation.
Money loses its value and status as medium of
exchange
 Anticipated Inflation
 Nominal Interest Rate
 Real Interest Rate
 Inflation Premium
6%
11%
=
+
5%
Nominal
Interest
Rate
Real
Interest
Rate
Inflation
Premium
Basic
Macroeconomic
Relationships