Transcript Chpt17

Chapter 17
In Search of
Prosperity and
Stability
Introduction to Economics (Combined
Version) 5th Edition
Economic Growth
 The growth rate of real Gross Domestic Product (GDP) per
capita is the most common measurement of increasing
prosperity.
 Nominal GDP is stated in terms of prices at which goods are
actually bought and sold.
 Real GDP is adjusted to remove the effects of inflation.
 U.S. growth rate of real GDP is about average for the world.
Introduction to Economics (Combined
Version) 5th Edition
Sources of Growth
Growth of population
and increased labor
force participation.
Growth of
productivity (output
per worker):
Increase in capital per
worker
Increase in total
factor productivity
Industrial equipment like these robots
increase the productivity of workers.
Introduction to Economics (Combined
Version) 5th Edition
Productivity Growth in the United States
 Productivity growth varies from year to year. In the 1970s, U.S.
productivity growth slowed down. It revived again during the
hi-tech boom of the 1990s, but has recently slowed again.
Introduction to Economics (Combined
Version) 5th Edition
Growth and the Environment
 In early stages of
economic
development,
increasing production
of material goods
often leads to reduced
environmental quality
(A to B).
 In later stages,
properly managed
growth can increase
both production of
material goods and
environmental quality.
Introduction to Economics (Combined
Version) 5th Edition
Actual and Natural GDP Growth
 Because of increasing population and productivity, the nation’s
natural or potential GDP increases steadily over time. As it does so,
actual real output is sometimes above and sometimes below the
natural level. The difference is called the output gap.
Introduction to Economics (Combined
Version) 5th Edition
The Business Cycle
 The movement of GDP
above and below the
long-run trend is called
the business cycle.
 Phases of the business
cycle:




peak
contraction
trough
expansion
 A contraction lasting six
months or more is
called a recession.
Introduction to Economics (Combined
Version) 5th Edition
Employment and Unemployment
 A person is considered to be employed if he or she
works at least 1 hour per week for pay or at least 15
hours per week as an unpaid worker in a family
business.
 A person who is not currently employed but is
actively looking for work is said to be unemployed.
 The employed plus the unemployed—that is, those
who are either working or looking for work—
constitute the labor force.
 The unemployment rate is the ratio of unemployed
people to the labor force.
Introduction to Economics (Combined
Version) 5th Edition
Unemployment in the United States
 The unemployment rate rises during contractions and falls
during expansions. Because some people are always entering
the labor force or changing jobs, it never falls to zero.
Introduction to Economics (Combined
Version) 5th Edition
Broad vs. Standard Unemployment Rate
 In addition to the standard
unemployment rate, the BLS also
provides a broader measure, U-6.
 The numerator of U-6 includes the
following:
 Unemployed persons
 Marginally attached persons who
would like to work but are not
looking for personal reasons or
because they think there are no
jobs
 Part-time workers who would prefer
full-time work but can’t find it
 The denominator includes the labor
force plus the marginally attached.
Introduction to Economics (Combined Version) 5th Edition
Unemployment by
Duration
 During a recession, more
people are unemployed,
and the average duration
of unemployment also
increases. Even during a
recession, many of the
unemployed are out of
work for 14 weeks or less.
Social costs of
unemployment fall most
heavily on the long-term
unemployed, whose
numbers increase greatly
during a recession.
Introduction to Economics (Combined
Version) 5th Edition
Inflation in the United States
 Inflation means a
sustained rise in the price
level.
 Deflation means a
sustained fall in the price
level.
 Inflation, as measured by
the rate of change of the
Consumer Price Index,
often varies greatly from
month to month.
Follow Ed Dolan’s Econ Blog for monthly updates
of inflation data in slideshow format.
Introduction to Economics (Combined
Version) 5th Edition
World Inflation Averages
 Inflation was much
higher in the 1970s
and 1980s than it is
now.
 During the 1990s
inflation fell, first in
advanced countries
and then in
developing
countries.
Introduction to Economics (Combined
Version) 5th Edition
Inflation and Interest Rates
 Inflation affects interest
rates as well as prices.
 The nominal rate of
interest is expressed in
the ordinary way, in
current dollars.
 The real rate of
interest is the nominal
rate adjusted by
subtracting the rate of
inflation.
Let
• R = nominal rate of interest
• r = real rate of interest
• π = rate of inflation
Then
Introduction to Economics (Combined
Version) 5th Edition
r=R-π