Transcript Economics R. Glenn Hubbard, Anthony Patrick O`Brien, 3e.

Chapter 9:Economic Growth, the Financial System, and Business Cycles
CHAPTER
9
Economic Growth,
the Financial System,
and Business Cycles
Prepared by:
Fernando Quijano
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Chapter 9:Economic Growth, the Financial System, and Business Cycles
Economic Growth, the Financial System,
and Business Cycles
Business cycle Alternating
periods of economic expansion
and economic recession.
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9.1 LEARNING OBJECTIVE
Long-Run Economic Growth
Discuss the importance of long-run
economic growth.
Long-run economic growth The process by which rising
productivity increases the average standard of living.
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Figure 9-1
The Growth in Real GDP
per Capita, 1900–2008
Measured in 2005 dollars,
real GDP per capital in the
United States grew from
about $5,600 in 1900 to
about $43,700 in 2008.
The average American in
the year 2008 could buy
nearly eight times as many
goods and services as the
average American in the
year 1900.
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9.1 LEARNING OBJECTIVE
Long-Run Economic Growth
Discuss the importance of long-run
economic growth.
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Calculating Growth Rates and the Rule of 70
Number of years to double 
70
Growth rate
What Determines the Rate of Long-Run Growth?
Labor productivity The quantity
of goods and services that can be
produced by one worker in one hour
of work.
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9.1 LEARNING OBJECTIVE
Long-Run Economic Growth
Discuss the importance of long-run
economic growth.
What Determines the Rate of Long-Run Growth?
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Increases in Capital per Worker
Capital (K) Manufactured goods
that are used to produce other
goods and services.
Technological Change
Economic growth depends more on technological change
than on increases in capital per worker.
Technological change is an increase in the quantity of
output firms can produce using a given quantity of inputs.
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9.1 LEARNING OBJECTIVE
Solved Problem
9-1
Discuss the importance of long-run
economic growth.
Chapter 9:Economic Growth, the Financial System, and Business Cycles
The Role of Technological Change in Growth
Between 1960 and 1995, real GDP per capita in Singapore grew
at an average annual rate of 6.2 percent. This very rapid growth
rate results in the level of real GDP per capita doubling about
every 11.3 years.
In 1995, Alywn Young of the University of Chicago published an
article in which he argued that Singapore’s growth depended
more on increases in capital per worker, increases in the labor
force participation rate, and the transfer of workers from
agricultural to nonagricultural jobs than on technological change.
If Young’s analysis was correct, predict what was likely to happen
to Singapore’s growth rate in the years after 1995.
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9.1 LEARNING OBJECTIVE
Long-Run Economic Growth
Discuss the importance of long-run
economic growth.
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Potential GDP
Actual and potential GDP
Potential GDP increases every year as the labor
force and the capital stock grow and technological
change occurs. The red line on the next slide
represents potential GDP, and the blue line
represents actual real GDP. During the three
recessions since 1989, actual real GDP has been
less than potential GDP.
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Chapter 9:Economic Growth, the Financial System, and Business Cycles
Long-Run Economic Growth
Figure 10.2
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Chapter 9:Economic Growth, the Financial System, and Business Cycles
Saving, Investment, and
the Financial System
9.2 LEARNING OBJECTIVE
Discuss the role of the financial
system in facilitating long-run
economic growth.
Financial system The system of
financial markets and financial
intermediaries through which firms
acquire funds from households.
An Overview of the Financial System
Financial markets Markets where financial
securities, such as stocks and bonds, are
bought and sold.
Financial intermediaries Firms, such as
banks, mutual funds, pension funds, and
insurance companies, that borrow funds from
savers and lend them to borrowers.
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Saving, Investment, and
the Financial System
9.2 LEARNING OBJECTIVE
Discuss the role of the financial
system in facilitating long-run
economic growth.
The Macroeconomics of Saving and Investment
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Y = C + I + G + NX
Y=C+I+G
I=Y−C−G
Sprivate = Y + TR − C − T
Spublic= T − G − TR
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9.2 LEARNING OBJECTIVE
Saving, Investment, and
the Financial System
Discuss the role of the financial
system in facilitating long-run
economic growth.
The Macroeconomics of Saving and Investment
Chapter 9:Economic Growth, the Financial System, and Business Cycles
S = Sprivate
+
Spublic
or
S = (Y + TR − C − T) + (T − G − TR)
or
S=Y−C−G
So, we can conclude that total saving must equal total
investment:
S=I
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Saving, Investment, and
the Financial System
9.2 LEARNING OBJECTIVE
Discuss the role of the financial
system in facilitating long-run
economic growth.
Chapter 9:Economic Growth, the Financial System, and Business Cycles
The Market for Loanable Funds
Market for loanable funds The interaction of borrowers
and lenders that determines the market interest rate and the
quantity of loanable funds exchanged.
Supply of Loanable Funds  the “Saving” curve
Demand for Loanable Funds  the “Investment” curve
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Saving, Investment, and
the Financial System
9.2 LEARNING OBJECTIVE
Discuss the role of the financial
system in facilitating long-run
economic growth.
The Market for Loanable Funds
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Demand and Supply in the Loanable Funds Market
FIGURE 9-3
The Market for Loanable
Funds
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Saving, Investment, and
the Financial System
9.2 LEARNING OBJECTIVE
Discuss the role of the financial
system in facilitating long-run
economic growth.
The Market for Loanable Funds
Explaining Movements in Saving, Investment, and Interest Rates
Chapter 9:Economic Growth, the Financial System, and Business Cycles
FIGURE 9-4
An Increase in the
Demand for Loanable Funds
An increase in the demand for
loanable funds increases the
equilibrium interest rate from i1
to i2, and it increases the
equilibrium quantity of loanable
funds from L1 to L2. As a result,
saving and investment both
increase.
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Saving, Investment, and
the Financial System
9.2 LEARNING OBJECTIVE
Discuss the role of the financial
system in facilitating long-run
economic growth.
The Market for Loanable Funds
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Explaining Movements in Saving, Investment, and Interest Rates
Crowding out A decline
in private expenditures as
a result of an increase in
government purchases.
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Saving, Investment, and
the Financial System
9.2 LEARNING OBJECTIVE
Discuss the role of the financial
system in facilitating long-run
economic growth.
The Market for Loanable Funds
Explaining Movements in Saving, Investment, and Interest Rates
Chapter 9:Economic Growth, the Financial System, and Business Cycles
FIGURE 9-5
The Effect of a Budget
Deficit on the Market for
Loanable Funds
When the government
begins running a budget
deficit, the supply of
loanable funds shifts to the
left. The equilibrium
interest rate increases
from i1 to i2, and the
equilibrium quantity of
loanable funds falls from
L1 to L2. As a result, S and
I both decline.
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9.3 LEARNING OBJECTIVE
The Business Cycle
Explain what happens during the
business cycle.
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Some Basic Business Cycle Definitions
FIGURE 9-6
The business cycle: movements in real GDP (Y) from 2006-2013.
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9.3 LEARNING OBJECTIVE
The Business Cycle
Explain what happens during the
business cycle.
How Do We Know When the Economy Is in a Recession?
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Table 9-1
The U.S Business Cycle
Peak
Trough
LENGTH OF
RECESSION
July 1953
May 1954
10 months
August 1957
April 1958
8 months
April 1960
February 1961
10 months
December 1969
November 1970
11 months
November 1973
March 1975
16 months
January 1980
July 1980
6 months
July 1981
November 1982
16 months
July 1990
March 1991
8 months
March 2001
November 2001
June 2009
8 months
18 months
December 2007
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The Business Cycle
Chapter 9:Economic Growth, the Financial System, and Business Cycles
How Do We Know When the Economy Is in a Recession?
This is what the media tells you:
“A recession is two consecutive quarters of declining
real GDP.”
This is what an economist believes:
“A recession is a significant decline in general activity
spread across the economy and lasting more than a few
months. The decline is visible in production,
employment, real income, and wholesale-retail trade.”
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The Business Cycle
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Whirlpool makes household appliances—durable goods. So we expect their
sales to be strongly affected by recessions.
The charts show that the entire household
appliance industry was particularly hard-hit
by the recession of 2007-2009.
The effect of the business cycle on
Whirlpool.
Panel
a
shows
movements in real GDP; panel b
shows movements in the real value
of manufacturers’ sales of household
appliances.
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The Business Cycle
What Happens during the Business Cycle?
Chapter 9:Economic Growth, the Financial System, and Business Cycles
The Effect of the Business Cycle on the Inflation Rate
Notice that inflation tends to rise toward the end of an expansion and fall over the course of
each recession. Toward the end of a typical expansion, the inflation rate begins to rise.
Recessions, marked by the shaded vertical bars, cause the inflation rate to fall. By the end of
a recession, the inflation rate is significantly below what it had been at the beginning of the
recession.
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The Business Cycle
What Happens during the Business Cycle?
Chapter 9:Economic Growth, the Financial System, and Business Cycles
The Effect of the Business Cycle on the Unemployment Rate
As firms see their sales start to fall in a recession, they generally reduce production and lay off
workers. Notice that unemployment often continues to rise after the end of each recession.
Unemployment rises during recessions and falls during expansions. The reluctance of firms to
hire new employees during the early stages of a recovery means that the unemployment rate
usually continues to rise even after the recession has ended.
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9.3 LEARNING OBJECTIVE
The Business Cycle
Explain what happens during the
business cycle.
What Happens during the Business Cycle?
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Is the “Great Moderation” Over?
FIGURE 9-10
Fluctuations in Real
GDP, 1900–2008
Fluctuations in real GDP
were greater before 1950
than they have been
since 1950.
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9.3 LEARNING OBJECTIVE
The Business Cycle
Explain what happens during the
business cycle.
What Happens during the Business Cycle?
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Is the “Great Moderation” Over?
Table 9-2
Until 2007, the Business
Cycle Had Become Milder
PERIOD
AVERAGE LENGTH
OF EXPANSIONS
AVERAGE LENGTH
OF RECESSIONS
1870-1900
26 months
26 months
1900-1950
25 months
19 months
1950-2009
61 months
11 months
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9.3 LEARNING OBJECTIVE
The Business Cycle
Explain what happens during the
business cycle.
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Will the U.S. Economy Return to Stability?
Economists have offered several explanations of why the
U.S. economy experienced a period of relative stability from
1950 to 2007:
• The increasing importance of services
and the declining importance of goods.
• The creation of unemployment insurance and other
government transfer programs that provide funds to
the unemployed. (These are called “automatic
stabilizers.”)
• Active federal government policies to stabilize the
economy. (Via monetary policy and fiscal policy.)
• The increased stability of the financial system.
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KEY TERMS
Chapter 9:Economic Growth, the Financial System, and Business Cycles
Business cycle
Capital (K)
Crowding out
Financial intermediaries
Financial markets
Financial system
Labor productivity
Long-run economic growth
Market for loanable funds
Potential GDP
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