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“When more and more people are thrown out of work, unemployment results.” Calvin Coolidge 30th US President PowerPoint Presentation
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“When more and more people are thrown out of work, unemployment results.” Calvin Coolidge 30th US President. Introduction to Economic Growth and Instability. Chapter Objectives. The Business Cycle and its Primary Phases How Economic Growth is Measured and Why is it Important

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slide1

“When more and more people are thrown out of work, unemployment results.”Calvin Coolidge30th US President

Introduction to Economic Growth and Instability

chapter objectives
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

economic growth change in real gdp
Economic GrowthChange in Real GDP

Example:

Real GDP2004 = $10,755.7 billion

Real GDP2005 = $11,134.8 billion

Rate of economic growth =

($11,134.8 billion – $10,755.7 billion)

$10,755.7 billion

= 3.5% growth rate

economic growth change in real gdp per capita
Economic GrowthChange in Real GDP Per Capita

$10,755.7 billion

293.9 million

$11,134.8 billion

296.6 million

($37,541 - $36,596)

$36,596

X 100 = 2.6%

Real GDP per capita is GDP per person

Real Per Capita GDP2004== $36,596

Real Per Capita GDP2005 = = $37,541

Growth in Per Capita GDP =

economic growth change in real gdp per capita1
Economic GrowthChange in Real GDP Per Capita

Per capita is more useful than percentage change in GDP for understanding changes and comparisons in standard of living.

    • Poverty is not caused by population growth, but by population growth rates greater than GDP growth rates.
    • If population increases faster than real GDP, per capita GDP falls.
  • US family income at poverty level shown below for 2008
economic growth change in real gdp per capita2
Economic GrowthChange in Real GDP Per Capita

* Number deaths of infants under 1 year old per year per 1,000 live births

Source: CIA World Factbook, Jan 2008 (www.indexmundi.com)

International comparisons

economic growth rule of 70
Economic GrowthRule of 70

Approximate number of years required to double real GDP

70

annual percentagerate of growth

=

  • Examples:
  • At annual growth rate of 3%, real GDP will double in 70/3, or 23.3 years (assuming no change in growth rate).
  • Rule of 70 can also be used to estimate time to double in compounding savings account.
  • If you deposit $100,000 in a savings account earning 4% interest, you will have $200,000 in that account in 70/4, or 17.5 years.
      • Will your purchasing power have doubled? Why or why not?
economic growth rule of 701
Economic GrowthRule of 70

Approximate number of years required to double real GDP

70

annual percentagerate of growth

=

  • Examples:
  • China: Average annual growth rate 2001 – 2007 = 10%
    • At this rate, China’s GDP doubled in about 70/10 = 7 years.
  • US: Average annual growth rate 2001 – 2007 = 2.58%
    • At this rate, US GDP will double in about 70/2.58 = 27 years.
economic growth what causes growth
Economic GrowthWhat Causes Growth?
  • Main Sources of Growth
    • Increases in inputs (⅓ of US growth)
    • Increases in productivity of those inputs (⅔ of US growth)

Productivity = output per unit of input

  • Productivity increases when:
    • Health, training, education and motivation of workers increase
    • Machinery, resources, technology that workers use improve
    • Production is better organized and managed
    • Labor is reallocated from less efficient industries to more efficient industries
economic growth the u s record
Economic GrowthThe U. S. Record

Real GDP grew at average annual rate of about 3.5% between 1950 and 2005.

Real GDP per capita increased 2.3% per year over the same time period.

Raw growth numbers understate or overstate improvements in economic well-being during this time period for a variety of reasons.

economic growth interpretation
Economic GrowthInterpretation
  • Under or overstatement of economic well-being.
    • No accounting for improvement in goods and services (ice boxes and record albums vs refrigerators and CD’s)
    • Standard workweek decreased from average of 50 hours to current average 35 hours (excluding overtime), giving us more leisure time, but leisure is not included in GDP or in growth calculations.
    • GDP growth does not account for impact of growth on environment and quality of life (stress at work, pollution, crowding, etc).
the business cycle
The Business Cycle

Peak

Peak

Expansion

Trend

Peak

Recession

Expansion

Growth

Level of Real Output

Recession

Trough

Trough

Time

A business cycle is periodic expansion or contraction of the economy.

  • Disturbs the economy from its long-term growth trend.
the business cycle phases
The Business CyclePhases

Phases of the business cycle

  • PeakTemporary maximum, at or near full employment, production; the economy is operating at or near full capacity.
  • RecessionGDP and income decrease; unemployment increases. Two consecutive quarters of negative growth.
  • TroughOutput and employment “bottom out” at lowest levels; this is the beginning of the recovery.
  • ExpansionGDP and income rise; unemployment falls, and inflation may occur.
business cycles causes of expansions
Business CyclesCauses of Expansions

C 

Expansions are usually led by increased consumer spending

  • Households demand more goods and services
  • Firms increase production to meet higher demand
  • Firms hire more workers or pay overtime
  • Incomes increase, setting off another cycle of rising consumer demand, increased sales, and increased employment.
business cycles causes of expansions1
Business CyclesCauses of Expansions

Consumer spending begins a cycle of expanding output, employment, and income.

business cycles causes of expansions2
Business CyclesCauses of Expansions
  • I

G 

Business and government spending change in an expansion.

  • Firms
    • Firms increase investment to increase productive capacity to meet increased consumer demand (create more capital)
    • New capital creates more employment, more income, etc.
  • Government
    • Higher income and production yields higher tax revenue
    • Government purchases increase
business cycles causes of recessions
Business CyclesCauses of Recessions

C

Generally led by decreased consumer activity.

    • Expansion pushed prices up so households demand fewer goods and services.
  • Firms reduce production and layoff workers, no overtime
  • Falling incomes set off cycle of further reduced consumer demand as production decreases and unemployment rate increases.
  • Increased unemployment yields decreased incomes.
  • Decreased incomes yield even less consumer demand .
business cycles causes of recessions1
Business CyclesCauses of Recessions

Consumer spending begins a cycle of decreased output, employment, and income.

business cycles causes of recessions2
Business CyclesCauses of Recessions

I

G?

  • Firms
    • Firms decrease investment AND employment
  • Government
    • Lower income and production yields less tax revenue
    • Government spending does not generally decrease – spending likely to continue in spite of reduction in tax revenue
the business cycle twin problems of the cycle
The Business CycleTwin Problems of the Cycle

Peak

Peak

Expansion

Trend

Recession brings higher unemployment.

Peak

Recession

Expansion

Growth

Recession

Level of Real Output

Trough

Trough

Time

Expansion brings inflation.

unemployment measuring unemployment
UnemploymentMeasuring Unemployment

US Bureau of Labor Statistics (BLS) conducts survey of 60,000 households/month

  • Divides population into three groups:
    • Under 16 or institutionalized - not considered potential members of labor force (military, prisons, hospitals etc.)
    • Not in labor force – adults who are potential workers but are not employed and not looking for work (homemakers, full-time students, retirees, etc)
    • Labor Force – People who are able and willing to work. This group contains both the employed and the unemployed.
unemployment measuring unemployment1
UnemploymentMeasuring Unemployment

Population Ages 16+

Out of the Labor Force

Unemployed

Employed

Labor Force

Labor force = employed + unemployed

Unemployment rate = unemployed / labor force

Participation rate = labor force / population 16+

unemployment measuring unemployment2
UnemploymentMeasuring Unemployment
  • To be unemployed, one must be in labor force, not working, and either actively seeking work, waiting to start a job, or waiting to be called back from a temporary lay-off.
    • If you choose to attend school full-time and do not work a job, you are NOT unemployed (your moms would be happy to know that).
        • You are NOT in the labor force.
    • When you graduate and start sending your resume out, THEN you will be counted among the unemployed.
unemployment measuring unemployment3
UnemploymentMeasuring Unemployment

people in labor force

+ people NOT in labor force

Working-age population

people employed

+ people NOT employed

Labor Force

  • Anyone who does not meet criteria for being classified as “employed” or “unemployed” is NOT in the labor force.
  • Examples:
      • Homemaker
      • Retired w/o job
      • Disabled
      • FT student
slide30

Must be IN LABOR FORCE to be counted as unemployed!

  • Example: My parents do not work paying jobs, they don’t want to work paying jobs, and they aren’t looking for paying jobs. Are they in the labor force? Are they unemployed?
  • Not in Labor Force:
    • 16 and under
    • Armed forces
    • Disabled, retired, hospitalized
    • Those that choose not to work or look for work for pay:
      • Homemakers
      • College students
      • Already rich enough
      • Me when I win Powerball
slide31

Must be IN LABOR FORCE to be counted as unemployed!

  • Example: My uncle was fired from his job last month for burning the fries. He has been putting applications in all over town every day since. Is he in the labor force? Is he unemployed?
  • Not in Labor Force:
    • 16 and under
    • Armed forces
    • Disabled, retired, hospitalized
    • Those that choose not to work or look for work for pay:
      • Homemakers
      • College students
      • Already rich enough
      • Me when I win Powerball
slide32

Must be IN LABOR FORCE to be counted as unemployed!

  • Example: My cousin quit her job because she thought her boss was mean. She looked for a job for a day or two but got tired and stopped. That was 3 months ago. Is she in the labor force? Is she unemployed?
  • Not in Labor Force:
    • 16 and under
    • Armed forces
    • Disabled, retired, hospitalized
    • Those that choose not to work or look for work for pay:
      • Homemakers
      • College students
      • Already rich enough
      • Me when I win Powerball
unemployment us labor force data
UnemploymentUS Labor Force Data

Source: Bureau of Labor Statistics

slide34

Statistics for June 2009 (in thousands)

Unemployment rate = #4 / #2

Source: www.bls.gov

slide35

Statistics for June 2009 (in thousands)

Unemployment rate = #4 / #2

Source: www.bls.gov

unemployment measuring unemployment4

Number of

people unemployed

Unemploymentrate =

x 100

Labor force

UnemploymentMeasuring Unemployment

Calculating Unemployment Rate

  • Unemployment rate - percentage of people in the labor force who are unemployed.

In June 2009, the unemployment rate was 9.5 %.

14.8 mill/ 154.9 mill= 0.095 x 100 = 9.5%

unemployment august 2009
UnemploymentAugust 2009

Employed139.6 million

Unemployed14.9 million

Not in the Labor Force81.5 million

Under 16 or Institutionalized

68.3 million

US population was 304.0 million

unemployment measuring unemployment5
UnemploymentMeasuring Unemployment
  • Unemployment rate is not a perfect measure.
    • Understates unemployment because part-time employees are counted as employed, though about 16% want to work full-time but cannot find full-time work.
    • The workers are called under-employed.
unemployment measuring unemployment6
UnemploymentMeasuring Unemployment
  • Unemployment rate is not a perfect measure.
    • Understates unemployment because of discouraged worker effect – workers who have actively sought work drop out of labor force (stop looking) because they cannot find work.
      • Dropping out decreases the size of the labor force, decreases the number of unemployed, and decreases unemployment rate.
      • Excluding discouraged workers makes economy look better than it is.
      • What happens to unemployment rate when discouraged workers start feeling hopeful again?
unemployment measuring unemployment7
UnemploymentMeasuring Unemployment
  • Unemployment rate is not a perfect measure.

Under-employed

+ Discouraged workers

Hidden Unemployed

slide41

UnemploymentMeasuring Unemployment

How many discouraged workers are there?

“About 2.2 million persons (not seasonally adjusted) were marginally attached to the labor force in June, 618,000 more than a year earlier. These individuals wanted and were available for work and had looked for a job sometime in the past 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.Among the marginally attached, there were 793,000 discouraged workers in June, up by 373,000 from a year earlier. Discouraged workers are persons not currently looking for work because they believe no jobs are available for them.”

Source: Bureau of Labor Statistics, June Release

unemployment categories of unemployment
UnemploymentCategories of Unemployment

Frictional Unemployment

  • Structural Unemployment
  • Caused by workers voluntarily changing jobs, between jobs, or temporarily laid off
  • This type of unemployment is inevitable, and usually desirable, as people voluntarily move to better jobs.
  • Example, a college student who starts looking for work after graduation.
  • Workers whose skills are not demanded by employers, who lack sufficient job skills, or who cannot move to where the jobs are.
  • Example, auto workers in Detroit.
  • Cyclical Unemployment
  • Unemployment caused by recessions, business cycles, decline in spending.
unemployment full employment
UnemploymentFull Employment
  • Economy can NEVER be at 0% unemployment because we always have some frictional and structural.
  • Full employment (fully employed) is when economy experiences only frictional and structural unemployment (no cyclical unemployment).
    • Also called “natural rate of unemployment” (NRU).
  • When economy is fully employed, real GDP = potential GDP (all resources are fully employed).
  • Today, full employment rate is 4%-5%.
unemployment international comparisons 1998 2007
UnemploymentInternational Comparisons, 1998 - 2007

Source: Bureau of Labor Statistics

inflation the basics
InflationThe Basics
  • Inflation is a rise in the general price level.
    • Does not mean every single price increases, just prices in general (on average).
    • Inflation reduces “purchasing power” of money, as each dollar of income buys fewer goods and services than before.
    • Value of money decreased.
inflation measurement

Price of the Most Recent Market

Basket in the Particular Year

CPI

=

x

100

Price of the Same Market

Basket in base year,1982-1984

InflationMeasurement
  • Consumer Price Index (CPI)
    • Reports the price of “market basket” of goods and services purchased by typical consumer
      • Remember that the GDP price index in Ch 6 also includes price of capital and government purchases along with consumer goods and services.
    • Market basket is kept constant, prices are allowed to change
      • With real GDP, prices are kept constant while market basket is allowed to change.
inflation measurement1

Price of the Most Recent Market

Basket in the Particular Year

CPI

=

x

100

Price of the Same Market

Basket in base year,1982-1984

InflationMeasurement
  • Consumer Price Index (CPI)
    • Goods in market basket are not allowed to change much so price comparisons will make sense.
    • For example, to compare prices between Harris Teeter and Lowe's Foods, you would need the shopping carts to have EXACTLY THE SAME ITEMS, then measure the price difference.
inflation calculate the cpi
InflationCalculate the CPI

Calculate the CPI for 2008 using 1982 as the base year:

$6,500

$2,863

$5,109

$2,863

CPI2008 =

CPI2008 =

x 100 = 2.27 x 100 = 227

x 100 = 1.78 x 100 = 178

Calculate the CPI for 2000 using 1982 as the base year:

inflation calculation

CPI2008

-

CPI2000

227 - 178

x 100 = 0.275 x 100

=

178

CPI2000

InflationCalculation

Calculate the inflation rate between 2000 and 2008:

= 27.5%

inflation us 1914 2008
InflationUS, 1914 - 2008

1918

1947

1980

1942

1975

1951

1990

1938

1949

1932

1921

Source: Bureau of Labor Statistics

inflation us 1989 2008
InflationUS, 1989 - 2008

Source: Bureau of Labor Statistics

inflation sometimes redistributes income

% change in

price level

% change in

nominal income

% change in

real income

InflationSometimes Redistributes Income
  • Nominal income = number of dollars received for trading factors of production (e.g., wages)
  • Real income = purchasing power of nominal income, or amount of goods and services the nominal income can buy (income adjusted for inflation).
inflation sometimes redistributes income1
InflationSometimes Redistributes Income
  • Assume we experience 6% inflation.
    • If you get a 6% raise at work (nominal), your real income will not change.
    • But if you only get a 4% raise, your real income decreased by 2%.
  • Everyone’s nominal income does not keep up with changes in prices.
    • If yours does but mine doesn’t, real income (purchasing power) will redistribute from me to you (you have more purchasing power than me).
inflation sometimes redistributes income2
InflationSometimes Redistributes Income

Who is Hurt by Inflation?

  • Fixed-Income Receivers
  • Savers
  • Creditors (Lenders)
    • Dollars they lend are worth less than dollars they get back.

Who is Unaffected by Inflation?

  • Flexible-Income Receivers
    • Cost-of-Living Adjustments (COLAs)
  • Debtors (Borrowers)
    • Dollars they borrow are worth more than dollars they pay back.
inflation anticipated inflation
InflationAnticipated Inflation

Anticipated Inflation: How banks protect themselves from being harmed by inflation:

  • Nominal Interest Rate = percentage increase in money we pay bank (what we actually pay the bank)
  • Real Interest Rate = percentage increase in purchasing power we pay bank for loaning us money.
  • Inflation Premium = percentage added to real interest rate to protect bank against inflation
inflation anticipated inflation1
InflationAnticipated Inflation

11%

6%

=

+

5%

Inflation

Premium

Nominal

Interest

Rate

Real

Interest

Rate

Anticipated Inflation: How banks protect themselves from being harmed by inflation

key terms
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

natural rate of unemployment

hidden unemployed

potential GDP

inflation

Consumer Price Index (CPI)

demand-pull inflation

cost-push inflation

nominal income

real income

anticipated inflation

unanticipated inflation

cost-of-living adjustments (COLAs)

real interest rate

nominal interest rate

Key Terms
growth and instability wrap up
Growth and InstabilityWrap-Up

Economic Growth

Business Cycle

Unemployment

Inflation

Measuring Inflation

Labor Force Measures

Measuring Growth

Phases

Types of Inflation

Benefits of Growth

Causes of Expansion

Unemploy-ment Rate

Income Redistribution

Interpret Data

Causes of Recession

Types of Unemploy-ment

Nominal & Real Interest Rates