Economic Growth, Business Cycles, Unemployment, and Inflation

1. Economic Growth, Business Cycles, Unemployment, and Inflation Chapter 6

2. Laugher Curve An Indian-born economist once explained his personal theory of reincarnation to his graduate economics class.

3. Laugher Curve �If you are a good economist, a virtuous economist,� he said, �you are reborn as a physicist.�

4. Introduction Macroeconomics is the study of the aggregate moods of the economy. The four central problems are growth, business cycles, unemployment, and inflation.

5. Two Frameworks: The Long Run and the Short Run Issues of growth are considered in a long-run framework. Business cycles are generally considered in a short-run framework. Inflation and unemployment fall within both frameworks.

6. Growth The primary measurement of growth is changes in real gross domestic product. Real gross domestic product (real GDP) � the market value of goods and services stated in the prices of a given year.

7. Growth The U.S. secular growth rate is between 2.5 to 3.5 percent per year.

8. Growth Per capita real output growth has been 2.5 to 3.5 percent per year.

9. Global Experience with Growth Today's growth rates are high by historical standards. The range of growth rates among nations is wide. African countries have consistently grown below the world average.

10. Global Experience with Growth The growth trend we now take for granted started at the end of the of the18th century.

11. The Benefits and Costs of Growth Per capita economic growth allows everyone in society, on average to have more. Growth, or predictions of growth, allows governments to avoid hard questions.

12. The Benefits and Costs of Growth The costs of growth include pollution, resource exhaustion, and destruction of natural habitat.

13. Business Cycles The business cycle is the upward and downward movement of economic activity that occurs around the growth trend.

14. Business Cycles There are a number of policies regarding business cycles.

15. U. S. Business Cycles

16. The Phases of the Business Cycle The peak is the top of the business cycle. A boom is a very high peak, representing a big jump in output. The downturn is the phenomenon of economic activity starting to fall from a peak.

17. The Phases of the Business Cycle A recession is a decline in output that persists for more than two consecutive quarters in a year.

18. The Phases of the Business Cycle An expansion is an upturn that lasts at least two consecutive quarters of a year.

19. The Phases of the Business Cycle

20. Why Do Business Cycles Occur Recessions and expansions are caused primarily by demand-side of the economy. A debate exists about whether these fluctuations can and should be reduced.

21. Why Do Business Cycles Occur Most economists believe that potential depressions should be offset by economic policy.

22. Why Do Business Cycles Occur Since the late 1940s, compared to prior years:

23. Why Do Business Cycles Occur Most economists believe that business fluctuations have become less severe because of the stronger role of government in the economy.

24. Leading Indicators Leading indicators tell us what's likely to happen in the economy 12 to 15 months from now.

25. Leading Indicators Leading indicators include the following:

26. Leading Indicators Leading indicators include the following: Vendor performance, measured as a percentage of companies reporting slower deliveries from suppliers.

27. Leading Indicators Leading indicators include the following: Number of new building permits issued for private housing units.

28. Unemployment The unemployment rate is the number of people who are willing and able to work but are not working.

29. Unemployment Cyclical unemployment is that which results from fluctuations in economic activity.

30. Unemployment as a Social Problem The Industrial Revolution created the possibility of cyclical unemployment. It brought a change in how families dealt with unemployment. What had previously been a family problem, became a social problem.

31. Unemployment as Government�s Problem As capitalism evolved, capitalist societies no longer saw the fear of hunger as an acceptable answer to unemployment.

32. Unemployment as Government�s Problem Full employment � an economic climate in which just about everyone who wants a job can have one.

33. Unemployment as Government�s Problem Frictional unemployment is the unemployment caused by:

34. Unemployment as Government�s Problem The target rate of unemployment is the lowest sustainable rate of unemployment that policymakers believe is achievable under existing conditions.

35. Unemployment as Government�s Problem In the 1980s and 1990s, the target rate of unemployment was been between 5 and 7 percent.

36. Why the Target Rate of Unemployment Changed In the 1970s and early 1980s, a low inflation rate seemed to be incompatible with a low unemployment rate. Demographics have changed � different age groups have different rates of unemployment.

37. Why the Target Rate of Unemployment Changed Social and institutional structures have changed.

38. Whose Responsibility Is Unemployment? Classical economists believe that individuals are responsible for their own jobs. Keynesian economists tend to say that society owes people jobs commensurate with their training or past job experience.

39. How Is Unemployment Measured? The unemployment rate is published by the U.S. Department of Labor's Bureau of labor Statistics.

40. Unemployment Rate Since 1900

41. Calculating the Unemployment Rate The unemployment rate � the number of unemployed individuals divided by the number of people in the civilian labor force then multiplied by 100.

42. Calculating the Unemployment Rate The labor force � those people in an economy who are willing and able to work.

43. Unemployment/Employment Figures (in millions)

44. How Accurate Is the Official Unemployment Rate? The unemployment rate does not include discouraged workers. Discouraged workers � people who do not look for a job because they feel they do not have a chance of getting one.

45. How Accurate Is the Official Unemployment Rate? The unemployment rate counts as employed those who are underemployed.

46. How Accurate Is the Official Unemployment Rate? The unemployment rate includes as unemployed, people who say they are looking for a job who are really not.

47. How Accurate Is the Official Unemployment Rate? The Bureau of Labor Statistics uses the labor force participation rate and the employment rate to gauge the state of the labor market.

48. How Accurate Is the Official Unemployment Rate? The labor force participation rate measures the labor force as a percentage of the total population at least 16 years old.

49. Unemployment and Potential Output The capacity utilization rate indicates how much capital is available for economic growth. Capacity utilization rate � the rate at which factories and machines are operating compared to the maximum sustainable rate at which they could be used.

50. Unemployment and Potential Output Potential output � output that would be achieved at the target rates of unemployment and of capacity utilization.

51. Unemployment and Potential Output Okum's rule of thumb is used to determine the effect changes in the unemployment rate will have on income.

52. Microeconomic Categories of Unemployment Microeconomic policies are sometimes used to supplement macroeconomic policies for dealing with unemployment.

53. Microeconomic Categories of Unemployment The following categories of unemployment are analyzed by economists:

54. Unemployment by Microeconomic Subcategories, 2002

55. Unemployment by Microeconomic Subcategories, 2002

56. Inflation Inflation is a continual rise in the price level. From 1800 until World War II, the U.S. inflation rate and price level fluctuated. Since World War II, the rate fluctuated, but the movement of the price level has been consistently upward.

57. Inflation Since 1900

58. Measurement of Inflation Inflation is measured with changes in price indexes. Price index � a number that summarizes what happens to a weighted composite of prices of a selection of goods over time.

59. Creating a Price Index A price index is calculated by dividing the current price of a basket of goods by the price of the basket in a base year then multiplying by 100.

60. A Simple Year-to-Year Market Basket Comparison

61. Real-World Price Indexes Real-world price indexes include the PPI, the CPI, and the GDP deflator.

62. The GDP Deflator The GDP deflator (gross domestic product deflator) is an index of the price level of aggregate output or the average price of the components in GDP relative to a base year.

63. The GDP Deflator Another price index is the chain-type price index for GDP which uses a GDP deflator with a constantly moving base year.

64. The GDP Deflator The GDP deflator is the measure of inflation most economists favor since it includes the widest number of goods.

65. The Consumer Price Index (CPI) The consumer price index (CPI) measures the prices of a fixed "basket" of consumer goods. It is weighed according to each component's share of an average consumer's expenditures.

66. The Consumer Price Index (CPI) Many economists believe that the CPI as currently constituted, overstates inflation by one percentage point.

67. The Consumer Price Index (CPI) Personal consumption expenditure (PCE) deflator � a measure of prices of goods that consumers buy that allows yearly changes in the basket of goods that reflect actual consumer purchasing habits.

68. Composition of CPI

69. The Producer Price Index (PPI) The producer price index (PPI) is an index of prices that measures average change in selling prices received by domestic producers of goods and services over time. It gives an early indication as to where inflation is headed.

70. Real and Nominal Concepts Nominal output is the total amount of goods and services measured at current prices. Real output is the total amount of goods and services produced, adjusted for price level changes.

71. Real and Nominal Concepts The �real� amount is the nominal amount divided by the price index.

72. Expected and Unexpected Inflation Expected and unexpected inflation affects behavior differently. Expected inflation is inflation people expect to occur. Unexpected inflation is inflation that surprises people.

73. Expected and Unexpected Inflation Expectations of inflation play an important role in the inflation process.

74. Costs of Inflation Inflation may not make a nation poorer. It can redistribute income from those who do not raise their prices to those who do. It can reduce the amount of information that prices are supposed to convey.

75. Costs of Inflation Inflation is usually accepted by governments as long as it stays at a low level.

76. Costs of Inflation Hyperinflation � exceptionally high levels of inflation of, say, 100 percent or more a year.

77. Economic Growth, Business Cycles, Unemployment, and Inflation End of Chapter 6