1. Copyright 2008 The McGraw-Hill Companies 7-1 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show 7 Introduction to Economic Growth and Instability

2. Copyright 2008 The McGraw-Hill Companies 7-2 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show 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. Copyright 2008 The McGraw-Hill Companies 7-3 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show 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 W 7.1

4. Copyright 2008 The McGraw-Hill Companies 7-4 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show 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. Copyright 2008 The McGraw-Hill Companies 7-5 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Selected Growth Rates Source: Economic Report of the President, 2006 U.S. Germany France Japan U.K. Italy 19971999200120032005 Percentage Change (annual rate) GLOBAL PERSPECTIVE

6. Copyright 2008 The McGraw-Hill Companies 7-6 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show The Business Cycle Level of Real Output Time Peak Recession Expansion Trough Growth Trend O 7.1 Phases of the Business Cycle Cyclical Impact: Durables and Nondurables

7. Copyright 2008 The McGraw-Hill Companies 7-7 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Unemployment Twin Problems of the Business Cycle –Unemployment –Inflation Measurement of Unemployment Labor Force Unemployment Rate –Part-Time Employment –Discouraged Workers Unemployment Rate Unemployed Labor Force = x 100 W 7.2

8. Copyright 2008 The McGraw-Hill Companies 7-8 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Unemployment Under 16 And/or Institutionalized (70.5 Million) Labor Force, Employment, and Unemployment, 2005 Total Population (296.6 Million) Not in Labor Force (76.8 Million) Employed (141.7 Million) Labor Force (149.3 Million) Unemployed (7.6 Million)

9. Copyright 2008 The McGraw-Hill Companies 7-9 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Unemployment Types of Unemployment –Frictional Unemployment –Structural Unemployment –Cyclical Unemployment Full Employment Defined Full-Employment Rate of Unemployment Natural Rate of Unemployment (NRU)

10. Copyright 2008 The McGraw-Hill Companies 7-10 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Unemployment Economic Cost of Unemployment Potential Output GDP Gap and Okun’s Law GDP Gap Actual GDPPotential GDP = - W 7.3

11. Copyright 2008 The McGraw-Hill Companies 7-11 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Unemployment Actual and Potential GDP and the Unemployment Rate 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 The GDP Gap 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 GDP (billions of 1996 dollars) 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 The Unemployment Rate 10 8 6 4 2 0 Unemployment (percent of civilian Labor force) Source: Congressional Budget Office & Bureau of Economic Analysis GDP gap (positive) GDP gap (negative) Potential GDP Actual GDP

12. Copyright 2008 The McGraw-Hill Companies 7-12 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Unemployment Unequal Burdens –Occupation –Age –Race and Ethnicity –Gender –Education –Duration Noneconomic Costs

13. Copyright 2008 The McGraw-Hill Companies 7-13 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Unemployment Source: Bureau of Labor Statistics U.S. Germany Italy Japan France 199520002005 Unemployment Rate (percent) Unemployment Rates in Five Industrial Nations, 1995-2005 GLOBAL PERSPECTIVE

14. Copyright 2008 The McGraw-Hill Companies 7-14 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Inflation Inflation Defined Measurement of Inflation –Consumer Price Index CPI Price of the Most Recent Market Basket in the Particular Year Price of the Same Market Basket in 1982-1984 = x 100

15. Copyright 2008 The McGraw-Hill Companies 7-15 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Inflation Annual Inflation Rates in the United States, 1960-2005 Inflation Rate (percent) Source: Bureau of Labor Statistics

16. Copyright 2008 The McGraw-Hill Companies 7-16 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Inflation Source: Bureau of Labor Statistics U.S. Germany Italy Japan France 199520002005 Inflation Rate (percent) Inflation Rates in Five Industrial Nations, 1995-2005 GLOBAL PERSPECTIVE

17. Copyright 2008 The McGraw-Hill Companies 7-17 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show 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. Copyright 2008 The McGraw-Hill Companies 7-18 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show 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 W 7.4

19. Copyright 2008 The McGraw-Hill Companies 7-19 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Inflation Anticipated Inflation –Nominal Interest Rate –Real Interest Rate –Inflation Premium Nominal Interest Rate Real Interest Rate Inflation Premium 11% 5% 6% =+ O 7.2

20. Copyright 2008 The McGraw-Hill Companies 7-20 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Inflation Deflation Mixed Effects Arbitrariness Cost-Push Inflation and Real Output Demand-Pull Inflation and Real Output Hyperinflation

21. Copyright 2008 The McGraw-Hill Companies 7-21 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show The Stock Market and the Economy 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 Last Word Do Stock Prices Affect Macroeconomic Instability?

22. Copyright 2008 The McGraw-Hill Companies 7-22 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show 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 rate of unemploymentfull-employment rate of unemployment natural rate of unemployment (NRU)natural rate of unemployment (NRU) potential output GDP gap Okun’s law inflation Consumer Price Index (CPI)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)cost-of-living adjustments (COLAs) real interest rate nominal interest rate deflation hyperinflation

23. Copyright 2008 The McGraw-Hill Companies 7-23 Economic Growth The Business Cycle Unemployment Labor Force Composition Types of Unemployment Unequal Burdens Inflation Consumer Price Index (CPI) Types of Inflation Premium Last Word Key Terms End Show Next Chapter Preview… Basic Macroeconomic Relationships