Transcript Powerpoints Macro Ch6 R2

Introduction:
Thinking Like an Economist
CHAPTER 6
Economic Growth, Business Cycles, and
Structural Stagnation
Remember that there is nothing stable in
human affairs; therefore avoid undue
elation in prosperity, or undue depression
in adversity.
— Socrates
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Economic Growth, Business
Cycles, and Structural Stagnation
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Chapter Goals
 Discuss the history of macro, distinguishing Classical
and Keynesian macroeconomists
 Define growth and discuss its recent history
 Distinguish a business cycle from structural stagnation
 Relate unemployment to business cycles and
distinguish cyclical unemployment from structural
unemployment
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The Historical Development of Macro
 Classical economists believe that business cycles
are temporary glitches, and generally favor
laissez-faire, or nonactivist policies
 Keynesian economists believe that business
cycles reflect underlying problems that can be
addressed with activist government policies
 By the 1980s, Classical and Keynesian economics
merged in a new conventional macroeconomics
 Following the 2008 crash, the U.S. economy
experienced structural stagnation that
conventional economists did not anticipate
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Two Frameworks:
The Long Run and the Short Run
 The long-run growth framework focuses on incentives
for supply
• Sometimes called supply-side economics
• Issues of growth are considered in a long-run
framework
 The short-run business cycle focuses on demand
• Sometimes called demand-side economics
• Business cycles are generally considered in
a short-run framework
 Inflation and unemployment fall within both frameworks
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Two Frameworks:
The Long Run and the Short Run
 The stark division between the short-run
and the long-run frameworks is problematic
 The economy is simultaneously in the long run
and short run
 Both frameworks have to be blended into a
composite framework in which both supply and
demand influence long-run and short-run forces
 The long run is just a combination of short runs that
cannot be separated
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Growth
 Economists measure growth with changes in total
output over a long period of time
 Potential output is the highest amount of output an
economy can sustainably produce and sell using
existing production processes and resources
 U.S. economic output has grown at an annual 2.5 to 3.5
percent rate since World War I that represents the rise in
potential output. What it will be in the future is uncertain.
 Per capita output is output divided by the total population
 Even if total output is increasing, the population may be
growing even faster, so per capita output would be falling
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The Benefits and Costs of Growth
• Per capita economic growth allows everyone in society,
on average, to have more: but is this necessarily an
increase in well-being?
• Growth, or the prediction of growth, allows governments
to avoid hard questions
• Growth comes with costs:
• Pollution
• Resource exhaustion
• Destruction of natural habitat
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Business Cycles and Structural Stagnation
 A business cycle is the upward or downward movement
of economic activity that occurs around the growth trend
• Classical economists argue that the government
should just accept that business cycles occur and
take a laissez-faire stance
• Keynesians economists argue that government
can temper these fluctuations with policy actions
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Business Cycle Phases
Total
Output
Boom
Peak
Secular
Growth
Trend
Trough
Expansion
Recession
Expansion
Quarters
1
2
3
4
1
2
3
4
1
2
3
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The Phases of the Business Cycle
 The four phases of the business cycle are:
• The peak
• The downturn
• The trough
• The upturn
 A recession is a decline in real output that persists for more
than two consecutive quarters of a year
 An expansion is an upturn that lasts at least two consecutive
quarters of a year
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Structural Stagnation
 Structural stagnation is a cyclical downturn
that we do not expect to end any time soon with
major changes in the structure of the economy
 Unemployment is not due to temporary layoffs,
but to longer-term changes
 A depression is a deep and prolonged recession
 The distinction between a business cycle and
structural stagnation goes to the heart of the
modern macro policy debates
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Unemployment and Jobs
 The unemployment rate is the percentage of people
in the economy who are willing and able to work but
who cannot find jobs
 Cyclical unemployment is that which results from
fluctuations in economic activity
 Structural unemployment is that caused by the
institutional structure of an economy or by economic
restructuring making some skills obsolete
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Unemployment Rate since 1900
Percentage of labor force
unemployed
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In the mid-1940s, the U.S. government
started focusing on the unemployment rate
as a goal, and initially chose 2%, but it was
gradually increased to around 3 to 5%
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Target rate
10
0
1900
1920
1940
1960
1980
2000
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Unemployment as a Social Problem
 The Industrial Revolution changed the nature of work
and introduced unemployment as a problem for society
 There was a shift to wage labor and to a division of
responsibilities
 The Industrial Revolution created the possibility of
cyclical unemployment and changed how families dealt
with unemployment
 Early capitalism had an unemployment solution:
the fear of hunger
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Unemployment as Government’s Problem
 In the Employment Act of 1946, the U.S. government
took responsibility for unemployment
 Full employment is an economic climate where nearly
everyone who wants a job has one
 Frictional unemployment is unemployment caused
by people entering the job market and people quitting
a job just long enough to look for and find another job
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Target Rate of Unemployment
 The target rate of unemployment is the lowest
sustainable rate of unemployment that policy makers
believe is achievable under existing conditions
 The appropriate target rate of unemployment was
debatable until the downturn of 2008, but, for the US,
most economists place it around 3 to 5%
 The target rate of unemployment changes due to:
• Inflation rates
• Demographics
• Social and institutional structures
• Changing government institutions
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CALCULATION EXAMPLES
1. Calculating Economic Growth Rates:
 Annual Percentage Change in Real GDP
 To calculate this growth rate, we use the formula:
Growth of
real GDP =
Real GDP in
current year
–
Real GDP in
previous year
x 100
Real GDP in previous year
For example, if real GDP in the current year is $8.4 trillion and if real
GDP in the previous year was $8.0 trillion, then the growth rate of real
GDP is :
Growth of
real GDP =
$8.4 trillion – $8.0 trillion
$8.0 trillion
x 100 = 5%
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CALCULATION EXAMPLES
2. To calculate Real GDP Per Capita (per person), we
use the formula:
Real GDP
Population
 In current year, when real GDP is $8.4 trillion, and
the population is 202 million, then Real GDP per
capita = $41,584
$8.4 trillion
202 million
 In the previous year, when real GDP was $8.0
trillion, the population was 200 million, real GDP
per capita was $8.0 trillion divided by 200 million,
or $40,000.
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CALCULATION EXAMPLES
3. To calculate growth in Real GDP Per Capita (per
person):
- Use the formula from (1), replacing real GDP with
real GDP per person
-Use the two values of real GDP per person
calcluated in (2):
Growth rate of real
$41,584 – $40,000
x 100 = 4%
GDP per person =
$40,000
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CALCULATION EXAMPLES
4. Growth in Real GDP Per can also be estimated by
using the formula (accurate enough for rates of 10%
or less):
Growth of real
Growth rate of
=
–
GDP per person
real GDP
Growth rate of
population
Growth of
202 million – 200 million
=
x 100 = 1 %.
population
200 million
Recall, growth rate of real GDP from (1) was 5 %, so:
Growth of real GDP
= 5 % – 1 % = 4 %.
per person
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Links for Overview of Macro
Potential output:
CBO Budget Outlook
GDP report from BEA:
BEA-Dept of Commerce GDP Report
GDP per capita:
World Bank Report on global GDP
Unemployment and employment:
BLS-Dept of Labor Report
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