Introduction to Economic Growth and Instability

1. 7 Introduction to Economic Growth and Instability

2. Chapter Objectives • The Business Cycle and its Primary Phases • How Economic Growth is Measured and Why is it Important • How Unemployment and Inflation are Measured • The Types of Unemployment and Inflation and their Various Economic Impacts

3. W 7.1 Economic Growth • Increase in Real GDP • Increase in Real GDP Per Capita • Growth as a Goal • Arithmetic of Growth • Rule of 70 Approximate number of years required to double real GDP 70 = annual percentage rate of growth

4. Economic Growth • Main Sources of Growth • Increases in Inputs • Increases in Resource Productivity • Productivity Defined • Productivity in the United States • Improved Products and Services • Added Leisure • Other Impacts

5. GLOBAL PERSPECTIVE Selected Growth Rates U.S. France Germany U.K. Percentage Change (annual rate) Italy Japan 1997 1999 2001 2003 2005 Source: Economic Report of the President, 2006

6. O 7.1 The Business Cycle Phases of the Business Cycle Peak Peak Trend Peak Expansion Growth Level of Real Output Recession Expansion Trough Recession Trough Time Cyclical Impact: Durables and Nondurables

7. Unemployed x = Unemployment Rate 100 Labor Force W 7.2 Unemployment • Twin Problems of the Business Cycle • Unemployment • Inflation • Measurement of Unemployment • Labor Force • Unemployment Rate • Part-Time Employment • Discouraged Workers

8. Unemployment Labor Force, Employment, and Unemployment, 2005 Under 16 And/or Institutionalized (70.5 Million) Not in Labor Force (76.8 Million) Total Population (296.6 Million) Employed (141.7 Million) Labor Force (149.3 Million) Unemployed (7.6 Million)

9. Unemployment • Types of Unemployment • Frictional Unemployment • Structural Unemployment • Cyclical Unemployment • Full Employment Defined • Full-Employment Rate of Unemployment • Natural Rate of Unemployment (NRU)

10. GDP Gap - = Actual GDP Potential GDP W 7.3 Unemployment • Economic Cost of Unemployment • Potential Output • GDP Gap and Okun’s Law

11. 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 The GDP Gap GDP (billions of 1996 dollars) 10 8 6 4 2 0 The Unemployment Rate 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Unemployment (percent of civilian Labor force) 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Unemployment Actual and Potential GDP and the Unemployment Rate GDP gap (positive) Potential GDP GDP gap (negative) Actual GDP Source: Congressional Budget Office & Bureau of Economic Analysis

12. Unemployment • Unequal Burdens • Occupation • Age • Race and Ethnicity • Gender • Education • Duration • Noneconomic Costs

13. GLOBAL PERSPECTIVE Unemployment Unemployment Rates in Five Industrial Nations, 1995-2005 France Italy Germany Unemployment Rate (percent) U.S. Japan 1995 2000 2005 Source: Bureau of Labor Statistics

14. Price of the Most Recent Market Basket in the Particular Year x CPI = 100 Price of the Same Market Basket in 1982-1984 Inflation • Inflation Defined • Measurement of Inflation • Consumer Price Index

15. Inflation Rate (percent) Inflation Annual Inflation Rates in the United States, 1960-2005 Source: Bureau of Labor Statistics

16. GLOBAL PERSPECTIVE Inflation Inflation Rates in Five Industrial Nations, 1995-2005 Italy U.S. Inflation Rate (percent) France Germany Japan 1995 2000 2005 Source: Bureau of Labor Statistics

17. Inflation • Types of Inflation • Demand Pull Inflation • Cost-Push Inflation • Per Unit Production Costs • Redistributive Effects • Nominal and Real Income • Anticipations • Anticipated Inflation • Unanticipated Inflation

18. W 7.4 Inflation • Who is Hurt by Inflation? • Fixed-Income Receivers • Savers • Creditors • Who is Unaffected or Hurt by Inflation? • Flexible-Income Receivers • Cost-of-Living Adjustments (COLAs) • Debtors

19. O 7.2 Inflation • Anticipated Inflation • Nominal Interest Rate • Real Interest Rate • Inflation Premium 11% 6% = + 5% Inflation Premium Nominal Interest Rate Real Interest Rate

20. Inflation • Deflation • Mixed Effects • Arbitrariness • Cost-Push Inflation and Real Output • Demand-Pull Inflation and Real Output • Hyperinflation

21. The Stock Market and the Economy Last Word Do Stock Prices Affect Macroeconomic Instability? • Supply and Demand in the Stock Market • Collective Expectations of Future Profits and Losses • Dow Jones Industrial Average (DJIA) • Volatility of the Stock Market • Wealth Effect • Investment Effect • Studies Show Consumption and Investment Unaffected • Little Impact on Macroeconomy • Stock Market Bubbles Do Have an Impact • Stock Price Cycle Predictions • Index of Leading Indicators • Stock Prices Not a Reliable Predictor Alone

22. economic growth real GDP per capita rule of 70 productivity business cycle peak recession trough expansion labor force unemployment rate discouraged workers frictional unemployment structural unemployment cyclical unemployment full-employment rate of unemployment natural rate of unemployment (NRU) potential output GDP gap Okun’s law inflation Consumer Price Index (CPI) demand-pull inflation cost-push inflation per-unit production costs nominal income real income anticipated inflation unanticipated inflation cost-of-living adjustments (COLAs) real interest rate nominal interest rate deflation hyperinflation Key Terms

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