Dolan, Economics Combined Version 4e, Ch. 17 Survey of Economics Edwin G. Dolan and Kevin C. Klein Best Value Textbooks 4 th edition Chapter 7 In Search of Prosperity and Stability updated Feb 2010

Dolan and Klein, Survey of Economics 4e, Ch. 7 Economic Growth  The growth rate of real Gross Domestic Product (GDP) per capita is the most common measurement of increasing prosperity.  Nominal GDP is stated in terms of prices at which goods are actually bought and sold.  Real GDP is adjusted to remove the effects of inflation.  US growth rate of real GDP is about average for the world.

Dolan and Klein, Survey of Economics 4e, Ch. 7 Sources of Growth  Growth of population and increased labor force participation  Growth of productivity (output per worker)  Increase in capital per worker  Increase in total factor productivity

Dolan, Economics Combined Version 4e, Ch. 17 Productivity Growth in the United States Productivity growth varies from year to year. In the 1970s, U.S. productivity growth slowed down. It revived again during the hi- tech boom of the 1990s, but it has recently slowed again.

Dolan and Klein, Survey of Economics 4e, Ch. 7 Growth and the Environment  In early stages of economic development, increasing production of material goods often leads to reduced environmental quality (A to B).  In later stages, properly managed growth can increase both production of material goods and environmental quality.

Dolan, Economics Combined Version 4e, Ch. 17 Actual and Natural GDP Growth Because of increasing population and productivity, the nation’s natural or potential GDP increases steadily over time. As it does so, actual real output is sometimes above and sometimes below the natural level. The difference is called the output gap.

Dolan and Klein, Survey of Economics 4e, Ch. 7 The Business Cycle  The movement of GDP above and below the long-run trend is called the business cycle.  Phases of the business cycle:  peak  contraction  trough  expansion  A contraction lasting six months or more is called a recession.

Dolan and Klein, Survey of Economics 4e, Ch. 7 Employment and Unemployment  A person is considered to be employed if he or she works at least 1 hour per week for pay or at least 15 hours per week as an unpaid worker in a family business.  A person who is not currently employed but is actively looking for work is said to be unemployed.  The employed plus the unemployed—that is, those who are either working or looking for work—constitute the labor force.  The unemployment rate is the ratio of unemployed people to the labor force.

Dolan and Klein, Survey of Economics 4e, Ch. 7 Unemployment in the United States The unemployment rate rises during contractions and falls during expansions. Because some people are always entering the labor force or changing jobs, it never falls to zero.

Dolan, Economics Combined Version 4e, Ch. 17 Unemployment: US vs Europe The natural rate of unemployment varies from country to country, depending on cultural factors and labor laws. The natural rate has fallen over time in the United States while it has risen in Europe.

Dolan and Klein, Survey of Economics 4e, Ch. 7 Unemployment by Duration During a recession, more people are unemployed, and the average duration of unemployment also increases. Even during a recession, many of the unemployed are out of work for 14 weeks or less. Social costs of unemployment fall most heavily on the long- term unemployed, whose numbers increase greatly during a recession.

Dolan and Klein, Survey of Economics 4e, Ch. 7 Inflation in the United States  Inflation means a sustained rise in the price level.  Deflation means a sustained fall in the price level.  During 2009, the United States experienced several months of deflation, but prices began to rise again late in the year.

Dolan and Klein, Survey of Economics 4e, Ch. 7 World Inflation Averages  Inflation was much higher in the 1970s and 1980s than it is now.  During the 1990s, inflation fell, first in advanced countries and then in developing countries.

Dolan and Klein, Survey of Economics 4e, Ch. 7 Inflation and Interest Rates  Inflation affects interest rates as well as prices.  The nominal rate of interest is expressed in the ordinary way, in current dollars.  The real rate of interest is the nominal rate adjusted by subtracting the rate of inflation. Let  R = nominal rate of interest  r = real rate of interest  π = rate of inflation Then r = R - π

Dolan, Economics Combined Version 4e, Ch. 17 Inflation and Growth Inflation of more than a few percent per year tends to undermine economic growth. On average, countries with more than 100 percent annual inflation have negative economic growth.

Dolan and Klein, Survey of Economics 4e, Ch. 7 Consumer Price Index for a Simple Economy  To calculate the consumer price index, divide the value of base- year prices valued at current-year prices by the value of base-year goods valued at base-year prices.  In this case, the CPI is 170. Insert image of Table 6A3 from p. 165 of macro 3/e