Transcript Inflation - Spring Branch ISD

Economic Growth and Instability
Inflation
“Too much money”
Business
Cycles
Unemployment
Unemployment 1960-Present
Inflation
ECONOMIC GROWTH
An increase in Real GDP over time
An increase in Real GDP per capita over time
[Real GDP/population = Real GDP per capita]
•Growth is a Goal because it lessens the
burden of scarcity (everyone has more of
everything).
•Main Sources of Growth
•Increases in Resources
•Increases in Productivity (Health, training,
and education).
Growth in the United States
Improved Products - iceboxes to refrigerators
Icebox – cooled by
“natural” ice
1927 GE Monitor Top
electric refrigerator-$300
From LPs to CDs
Added Leisure
[Workweek decreased from 50 to 35 hours]
“Rule of 70”
(The arithmetic of economic growth)
70
_________________________
“Rule of 70” = % annual rate of increase (3%) = 23 years
70
70
70
[Investments to double]
years [GDP (standard of living) to double]]
6 years 9 = 8
10 = ______
_____
7 years 12 = _____
“Real Income” measures the amount of goods/services nominal income will buy.
[% change in real income = % change in nominal income - % change in PL]
5%
10%
5%
6
Nominal income rose by 10%, PL increased by 4% - then real income rose by ___%.
15
Nominal income rose by 20%, PL increased by 5% - then real income rose by ___%.
Four Phases of the Business Cycle
Real GDP
per year
Peak
Peak
Trough
One cycle
Time
Peak: real GDP reaches its maximum.
Contraction: real GDP declines 6 months.
Trough: real GDP reaches its minimum.
Expansion: an upturn - real GDP rises.
THE BUSINESS CYCLE
Phases of the Business Cycle
Level of business activity
PEAK
RECESSION
TROUGH
Time
RECOVERY
An Actual Business Cycle
Cyc
1981 - 1990
($ billion, 1992 dollars)
Real GDP
Peak
Business
les
6000
5200
Peak
4600
‘80
Trough
82
‘85
One Cycle
‘90
Four Phases of Business Cycle
Characteristics of Expansions and Recessions
Expansions
1. Less unemployment
2. Increase in real GDP
3. Rapid job growth
4. Increasing interest rate
5. Increasing prices
6. Fewer social problems
(alcoholism, domestic violence,
divorce, and suicides)
Recessions
1. More unemployment
2. Decrease in Real GDP
3. Reduced job growth
4. Lower interest rates
5. Decreasing prices
6. More social problems
(alcoholism, domestic violence,
divorce and suicide)
Average Business Cycle last 5-7 years.
The period from peak to trough (if longer than 6 months) is referred to as an economic
recession.
The period from trough to peak is referred to as economic recovery.
Business Cycles since 1930
There has been 10 recessions since 1930.
They have ranged from 6 months to 10 years in
length (averaging 7 years.) Periods of expansion
have averaged 2-10 years.
There has been a recession each decade in the our
200 year history. Usually 1 out of every 20 workers
loses their job. But the other 19 are better off
Because interest rates go down.
Unemployment:
To measure the unemployment rate, we must fist
determine who is eligible & available to work.
Labor Force = Total Population age
16 and over actively working or
looking
Not in Labor Force
Armed forces
Household workers
Students
Retirees
Disabled persons
Institutionalized
Discouraged workers
Civilian labor force
Employed
Employees
Self-employed
Unemployed
New entrants
Re-entrants
Lost job & looking
Quit job & looking
Laid off & looking
UNEMPLOYMENT
Measurement of Unemployment, 2004
Under 16
and/or
institutionalized
Total
Population
293,400,000
Not in
labor
force
74,700,000
(kids, Crazies, and
military)
71,400,000
(Retired or not
looking for work)
134,200,000
Employed
Labor
force
142,500,000
Unemployed
8,300,000
(no job but looking)
The formula for determining the unemployment
rate is;
Unemployment rate = unemployed
labor force
Full employment
does not equal 100%
employment.
Why? Because there
are different types of
Unemployment.
Wish I had not
dropped out of
Economics.
X 100
Three Types of Unemployment
Frictional – a temporary, transitional, or short-term,
type of unemployment (someone between jobs)
Examples:
1. People who get “fired” or “quits” to
look for a better job.
2. Graduates from high school or college
who are looking for a job.
3. Seasonal jobs such as agriculture,
construction, tourism, or holiday work.
Since there will always be frictional unemployment
and it does not affect economic growth, it is not
included in unemployment rates.
(Workers plan for there job lose)
Structural – a technological, or long-term type of
unemployment, caused by changes in the job market
that make certain skills obsolete.
Causes of structural unemployment;
• Automation
• Consumer taste
• Creative destruction; as jobs are created jobs are
lost. (The creation of the auto reduced the need for
carriage makers.)
Even though these jobs do not come back, structural
unemployment is not counted in unemployment rates.
Most workers will be retained (out of the labor force)
until they can find a new job. Also structural changes are
good for economic growth.
Cyclical – an economic downturn in the business cycle,
caused by decreased aggregate demand for goods and
services. These cyclical fluctuations can lead to lay-offs,
and cyclical unemployment.
Even though these jobs will come back cyclical
unemployment is real unemployment, because it
affects economic growth.
When the number of job seekers equals
the number of job vacancies the
economy is said to be at its natural rate
of unemployment.
At the NRU, the economy is said to be
producing its potential output.
The NRU is set at about 4%
unemployment. This is the
unemployment that the economy works
best at.
When the economy fails to create
enough jobs for all who are able and
willing to work (unemployment is on the
rise), then the economy loses it full
potential to produce goods and
services. This called the GDP gap.
GDP gap = the amount by which actual
GDP falls short of potential GDP.
Potential and Actual GDP, 1990-1998
During 1991 recession
Potential
$300 billion of production
is lostGDP less Actual GDP
7,750
Billions
of 1992
dollars
Actual
Real
GDP
7,500
7,250
Potential GDP greater than Actual GDP
7,000
6,750
Potential Real GDP
6,500
6,250
(Full-Employment GDP)
6,000
90
91
92
93
94
95
96
97
98
99
The GDP gap measures the monetary loss of cyclical unemployment
The higher the unemployment rate, the larger the GDP gap.
Okun’s Law – for every
percentage point of
unemployment above the
natural rate (4%), there will
occur a 2% lose of
economic potential. (A 2%
GDP gap will be created
for every percent above
NRU.)
Okun’s Law
GDP Gap = Unemployment Rate over 4% x2
6.5% unemployment, so 1.5 x 2% = 3%.
If nominal GDP =$100 Billion, then economy will lose $3 Billion in
potential productivity.
(100 x .03 = 3)
1. Unemployment is 7%; Nominal GDP is $200 billion.
3
Real unemp. is __%.
The % gap is __%.
Y being forgone is $__
6
12 B.
2. Unemployment is 8%; Nominal GDP is $500 billion.
4
40 B.
8
Real unemp. is __%.
The % gap is __%.
Y being forgone is $__
3. Unemployment is 10%; Nominal GDP is $100 billion.
6
12B.
Real unemp. is __%.
The % gap is 12
__%. Y being forgone is $__
Inflation:
Inflation; is a rise in the general level of
prices.
Moderate inflation (about 3%) is necessary for
economic stability. It is the byproduct of a
strong spending/full employment economy. It
also makes it easier for businesses to adjust
real wages downward if demand falls.
But too much inflation (hyperinflation) can be a
disruptive economic force. Causing economic
collapse and making money worth less.
In the 1920s,
Germany
staggered
under the
effects of
hyperinflation.
This worthless
pile of money
was supposed
to be burned.
Regardless of the amount all inflation hurts
the following people;
• Those on fixed-incomes; inflation causes
their real income to fall.
• Savers; inflation deteriorates the value of
savings.
• Creditors; inflation deteriorates the value of
loans to be paid back.
If inflation is anticipated creditors can avoid
the affects of it, by charging enough interest
to cover inflation rates.
Real Interest Rate
Nominal I.R. – inflation rate = Real I.R.
10%
-
6
%
=
Nominal Anticipated
Inflation
Interest
Rate
4%
Real
Interest
Rate
Consumer Price Index (CPI)
(CPI = rate of inflation)
The CPI is a market basket of 364 items that the
typical householder buys. It does not include
exports because we do not buy exports but does
include imports. About 55% of the CPI is services.
The “Market Basket”
When inflation is studied in a certain period
(inflation in the last 10 yrs) you choose the
year that has the cheapest market basket
price total. This will be your base year and
will have a CPI = 100 (1 basket = 1 basket x
100). All other years can measured from the
base year to see the affects
of inflation.
Figuring Inflation
Current yr index – last yr index
172-166=6
C.P.I. = Last yr index
x 100;
166
x100 = 3.6%
130.7-124.0(6.7)
116-120(-4)
333-300(33)
11%
124.0 x 100 = ____
300 x 100 = ____
-3.3%
5.4% 120 x 100 = ____
The CPI was 166.6 in 1999 and 172.2 in 2000.
Therefore, the rate of inflation for 2000 was
(2.7/3.4/4.2)% [5.6/166.6 x 100 = 3.4%]
If the CPI falls from 160 to 149 in a particular
year, the economy has experienced (inflation/deflation)
of (5/-4.9/-6.9)%. [-11/160 x 100 = -6.9%]
If CPI rises from 160.5 to 163.0 in a particular year,
the rate of inflation for that year is (1.6/2.0/4.0)%.
Types of Inflation
Demand-Pull Inflation – an increase in total
spending beyond the full employment output
rate in the economy.
“Too many dollars chasing too few goods”
The demand for goods is pulling the price
level up.
Demand-Pull Inflation
AS
AD2
AD1
PL2
E2
“Bad News”
PL1
-higher prices
E1
“Good News”
- more jobs
Q1
Q2
Cost-Push Inflation – an increase in per-unit
production cost, which cause higher price levels.
Caused by;
1. Wage-push – an increase labor wages increase
production cost.
2. Supply-side shocks – increase in the cost of
raw materials (oil prices).
Cost-push inflation
AS2
AD
PL2
This economy is
stagnating
Inflating
$2.25
AS1
PL1
As PL are
inflating.
Stagflation
Stagnating
Q2
Q1
Beneficial cost push
AD
AS1
AS2
99 cents
PL1
PL2
Q1
Q2
The End