Presentation on theme: "Introduction to Economic Growth and Stability"— Presentation transcript:
1 Introduction to Economic Growth and Stability CHAPTER 8Introduction to Economic Growth and StabilityEconomic Growth means an increase in real GDP has occurred or there has been an increase in real GDP per capita.There are two ways to grow:An increase in real GDP over timeAn increase in real GDP per capita over time
2 ECONOMIC GROWTH Growth as a Goal Arithmetic of Growth Rule of 70 Main Sources of GrowthIncreases in ResourcesIncreases in Productivity
3 Productivity is real output per unit of input. Long-run economic growth in all capitalist societies has been interrupted by periods of economic instability. This instability takes the form of upturns and downturns in the business cycle.The Business Cycle refers to alternating rises and declines in the level of economic activity.
4 THE BUSINESS CYCLE Phases of the Business Cycle GROWTH TREND Time PEAK RECESSIONTROUGHRECOVERYGROWTHTRENDLevel of business activityTime
5 There are many causes of the business cycle: innovations, changes in productivity, too little money in the banks, and the level of total spending (C+Ig+G+Xn).Durable goods are more likely affected by the swings in the business cycle.The problem with the business cycle is that unemployment follows the business cycle.Unemployment rate=(unemployed/labor force)*100This rate may be too low because it does not include part-time employment or discouraged workers.
7 Types of unemployment: Frictional: people between jobsStructural: the demand for the products in certain industries has declinedCyclical: general decline in demandFull employment rate of unemployment or natural rate = frictional and structural. Anything over this is cyclical unemployment.The economic cost of unemployment: Okun’s Law indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, there will be a GDP gap of 2 percent.
8 UNEMPLOYMENT Noneconomic Costs:Suicide,Crime,Abuse Unequal Burdens of UnemploymentOccupationAgeRace and EthnicityGenderEducationDurationNoneconomic Costs:Suicide,Crime,AbuseInternational Comparisons
9 GLOBAL PERSPECTIVEUnemployment Rates 5 Industrial Nations15105FranceU.K.GermanyU.S.Japan199219972002Source: Economic Report of the President, 2003
10 INFLATION = CPI x 100 Defined and Measurement Consumer Price Index A rising general level of pricesRate of inflation calculated using index numbersConsumer Price Index=Price of the same marketbasket inx 100CPIPrice of most recent market basket in the particular year
11 INFLATION Rule of 70 - Applied Facts of Inflation U.S. Double-Digit Inflation in Late 70s and Early 80sCurrently Relatively MildOther Nations in 2002Romania – 23%Belarus – 43%Turkey – 45%Myanmar – 57%
12 INFLATION Types of Inflation DEMAND-PULL INFLATION Results from any situation that increases demandbeyond the capacity of the economy to meet thedemandCOST-PUSH INFLATIONRising Per-Unit Production CostsSupply-Side InflationSupply Shocks
13 REDISTRIBUTIVE EFFECTS OF INFLATIONNominal Income: Number of $ receivedReal Income:Nominal Income/Price IndexWho is Hurt? Fixed Incomes, Savers, CreditorsEffect Depends Upon AnticipationsAnticipated InflationUnanticipated Inflation
15 REDISTRIBUTIVE EFFECTS OF INFLATIONWho is Unaffected or Helped by Inflation?Flexible-Income ReceiversCost of Living Adjustments (COLAs)Debtors
16 Inflation affects output Inflation affects output. When oil prices increase, that input now is more expensive for firms that use oil, so their prices increase and higher prices are associated with reduced output.Hyperinflation has occurred in some economies. This means that the prices increase so fast and that people may return to a barter economy to cope. It can cause economic collapse.