# Alomar_111_81 Economic Growth and Instability. Alomar_111_82 Economic Growth Economic growth can be define as: An increase in real GDP over some time.

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Alomar_111_81 Economic Growth and Instability

Alomar_111_82 Economic Growth Economic growth can be define as: An increase in real GDP over some time period, or: An increase in real GDP over some time period, or: An increase in real GDP per capita over some time period. An increase in real GDP per capita over some time period. Which to use? Which to use?

Alomar_111_83 Country(1999)GDP GDP per capita China \$980 b \$780 Denmark \$170 b \$32,030

Alomar_111_84 With any measure, economic growth is a percentage rate change of growth per year: With any measure, economic growth is a percentage rate change of growth per year: If GDP r 2002 =\$200 and GDP r 2003 =\$210, then the rate of growth= [(210-200)/(200)] x 100 = 5%

Alomar_111_85 Growth as a Goal One of the most important economic goals One of the most important economic goals To raise total outputs relative to population To raise total outputs relative to population This will lead to raising real wages and income and standards of living: This will lead to raising real wages and income and standards of living: More goods and services, leisure, higher educations…

Alomar_111_86 growth can reduce the effect of scarcity growth can reduce the effect of scarcity Growing economy can consume more today while increasing its capacity to produce more in the future. Growing economy can consume more today while increasing its capacity to produce more in the future.

Alomar_111_87 Arithmetic of Growth Why the rate of growth is important? Because it matters! Why the rate of growth is important? Because it matters! In the USA, a 1% growth rate increase means \$100 billion more outputs. In the USA, a 1% growth rate increase means \$100 billion more outputs. We use the “rule of 70” : we can find the number of years for some measure to double: We use the “rule of 70” : we can find the number of years for some measure to double:

Alomar_111_88 Approximate number Approximate number Of years required to = 70/annual %Δrate Double GDP r of growth Ex. A 3% annual rate of growth will double GDP r in 23 years: (70/3)

Alomar_111_89 Ex. Growth of 8% per year will double GDP r in 9 years: (70/8) Ex. Growth of 8% per year will double GDP r in 9 years: (70/8) Can be used to compare 2 countries: Can be used to compare 2 countries: Country (A)’s GDP r = country’s (B) GDP r, but (A) grows at 4% while 2% for (B), then, it takes (A) 18 years to double while 35 years for (B).

Alomar_111_810 Main Sources of Growth Can increase real outputs in two main ways: Can increase real outputs in two main ways: A. Increasing inputs of resources B. Increasing the productivity of these resources Productivity: real output per unit of inputs and increase when health, training, education, and motivation of workers are improved (technology)

Alomar_111_811 The Business Cycle Economic growth experience periods of instability: Economic growth experience periods of instability: Recession and depression: a decline in GDP r and significant increase in unemployment and/or rapid inflation. Recession and depression: a decline in GDP r and significant increase in unemployment and/or rapid inflation.

Alomar_111_812 Phases of Business Cycle (BC) BC: Alternating rises and declines in the level of economic activity over periods of times. BC: Alternating rises and declines in the level of economic activity over periods of times. level of outputs increases to a peak then declines to a trough: level of outputs increases to a peak then declines to a trough:

Alomar_111_813 The BC: Level of outputs Peak Peak Peak Peak Trough Trough Trough time Trough time

Alomar_111_814 At a peak, the economy is at full employment and level of real output is at or close to economy’s full capacity. The price level is more likely to rise during this period. At a peak, the economy is at full employment and level of real output is at or close to economy’s full capacity. The price level is more likely to rise during this period.

Alomar_111_815 A peak is followed by a recession, this is a period of decline in total outputs, income, and employment. A peak is followed by a recession, this is a period of decline in total outputs, income, and employment. Contraction in business activity in many sectors. Contraction in business activity in many sectors. Because most prices cannot fall immediately, the price level falls only if the recession is severe. Because most prices cannot fall immediately, the price level falls only if the recession is severe.

Alomar_111_816 Trough of the recession or depression: outputs, unemployment, at their lowest levels. Trough of the recession or depression: outputs, unemployment, at their lowest levels. Recovery: output and employment rise toward full employment. Recovery: output and employment rise toward full employment. Business fluctuations? Business fluctuations? Economy vs. sectors? Economy vs. sectors?

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