Transcript Lecture 8

Economic Growth and
Instability
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Economic Growth
Economic growth can be define as:
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An increase in real GDP over some time
period, or:
An increase in real GDP per capita over
some time period.
Which to use?
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Country
(1999)
GDP
GDP per capita
China
$980 b
$780
Denmark
$170 b
$32,030
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With any measure, economic growth is a
percentage rate change of growth per
year:
If GDPr2002=$200 and GDPr2003=$210, then
the rate of growth=
[(210-200)/(200)] x 100 = 5%
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Growth as a Goal
One of the most important economic goals
 To raise total outputs relative to
population
 This will lead to raising real wages and
income and standards of living:
More goods and services, leisure, higher
educations…
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growth can reduce the effect of scarcity
Growing economy can consume more
today while increasing its capacity to
produce more in the future.
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Arithmetic of Growth
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Why the rate of growth is important?
Because it matters!
In the USA, a 1% growth rate increase
means $100 billion more outputs.
We use the “rule of 70” : we can find the
number of years for some measure to
double:
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Approximate number
Of years required to
= 70/annual %Δrate
Double GDPr
of growth
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Ex. A 3% annual rate of growth will double
GDPr in 23 years: (70/3)
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Ex. Growth of 8% per year will double
GDPr in 9 years: (70/8)
 Can be used to compare 2 countries:
Country (A)’s GDPr = country’s (B) GDPr, but
(A) grows at 4% while 2% for (B), then, it
takes (A) 18 years to double while 35
years for (B).
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Main Sources of Growth
Can increase real outputs in two main
ways:
A.
Increasing inputs of resources
B.
Increasing the productivity of these
resources
Productivity: real output per unit of inputs
and increase when health, training,
education, and motivation of workers are
improved (technology)
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The Business Cycle
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Economic growth experience periods of
instability:
Recession and depression: a decline in
GDPr and significant increase in
unemployment and/or rapid inflation.
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Phases of Business Cycle (BC)
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BC: Alternating rises and declines in the
level of economic activity over periods of
times.
level of outputs increases to a peak then
declines to a trough:
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The BC:
Level of outputs
Peak
Peak
Trough
time
Trough
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At a peak, the economy is at full
employment and level of real output is at
or close to economy’s full capacity. The
price level is more likely to rise during this
period.
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A peak is followed by a recession, this is a
period of decline in total outputs, income,
and employment.
Contraction in business activity in many
sectors.
Because most prices cannot fall
immediately, the price level falls only if the
recession is severe.
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
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Trough of the recession or depression:
outputs, unemployment, at their lowest
levels.
Recovery: output and employment rise
toward full employment.
Business fluctuations?
Economy vs. sectors?
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