© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 1 Introduction to Economic Growth, Unemployment, and Inflation

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 2 In this chapter you will learn 6.1 The definition and causes of economic growth 6.2 The nature and cause of the business cycle 6.3 The nature of unemployment and its measurement 6.4 The definition of inflation and how it is measured 6.5 About the redistribution effects of inflation 6.6 About the output effects of inflation

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 3 Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 4 Economic Growth u an increase in real GDP over some time period, OR u an increase in real GDP per capita over some time period

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 5 Economic Growth u Growth as a Goal u Arithmetic of Growth u Main Sources of Growth u Growth in Canada –improved products & services –added leisure –other impacts u Relative Growth Rates

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 6 Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 7 Level of real output Time Phases of the Business Cycle Figure 6-1

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 8 PEAK Time Level of real output Phases of the Business Cycle Figure 6-1

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 9 RECESSION Time Level of real output Phases of the Business Cycle Figure 6-1

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 10 TROUGH Time Level of real output Phases of the Business Cycle Figure 6-1

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 11 RECOVERY Time Level of real output Phases of the Business Cycle Figure 6-1

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 12 GROWTHTRENDGROWTHTREND Time Level of real output provincial variations Phases of the Business Cycle Figure 6-1

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 13 Canadian Recessions Since 1930 Year Change in real GDP % % % % % % Table 6-2

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 14 The Business Cycle u Causation: A First Glance –innovation –changes in productivity –money supply changes –total spending changes u Cyclical Impact: Durables & Non- Durables

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 15 Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 16 labour force 16.7 million million total population 31 million unemployed million Employed (15.4 million) Not in labour force (8.3 million) Under 15 &/or institutionalized (6.0 million)

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 17 Unemploymentrateunemployed labour force x 100 = Unemployment rate 2002 =1,285,00016,700,000 x 100 = 7.7% Measurement of Unemployment

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 18 Measurement of Unemployment Criticisms of the calculation: u part-time employment u discouraged workers

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 19 Types of Unemployment u Frictional Unemployment

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 20 Types of Unemployment u Frictional Unemployment u Structural Unemployment

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 21 Types of Unemployment u Frictional Unemployment u Structural Unemployment u Cyclical Unemployment

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 22 Definition of “Full Employment” u natural rate of unemployment (NRU) u NOT zero unemployment u occurs when there is no cyclical unemployment u not automatic u varies over time

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 23 Economic Cost of Unemployment GDP Gap & Okun’s Law u The amount by which actual GDP falls short of potential GDP u GDP gap = actual GDP – potential GDP u Okun’s Law: –For every 1% unemployment exceeds the natural rate.… –A GDP Gap of about 2% occurs

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 24 Actual & Potential GDP & the Unemployment Rate Figure 6-3

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 25 Economic Cost of Unemployment u Given for 1992: –unemployment rate is 11.3% –natural rate is 7.5% –potential GDP is $770 billion u What is the GDP gap? –11.3%  7.5% = 3.8% (gap in % terms) –3.8% X 2 = 7.6% (apply Okun’s Law) –7.6% of $770 billion = $59 billion

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 26 Unequal Burdens u Occupation u Age u Gender u Education

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 27Unemployment u Non-Economic Costs u Regional Variations

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 28 Regional Variations

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 29 Unemployment rates in five industrial nations Global Perspective 6.2

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 30 Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 31Inflation u Meaning of Inflation –a rise in the general level of prices u Measurement of Inflation –Consumer Price Index

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 32Inflation

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 33 Facts of Inflation The major periods of inflation in Canada were in the 1970s & 1980s Figure 6-4

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 34 GLOBAL PERSPECTIVE 6.3 UK Germany Japan US Canada inflation rates in Canada in the 1990s were relatively low

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 35 Types of Inflation u Demand-Pull Inflation –excess demand u Cost-Push Inflation –per-unit production costs –supply shocks u Complexities

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 36 Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 37 Nominal & Real Income real income = nominal income price index % change in real income  % change in nominal income – % change in price level X100

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 38 Nominal & Real Income u Expectations –redistribution effects of inflation depend on whether or not inflation is expected

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 39 Who is Hurt by Inflation? assuming unanticipated inflation u Fixed-income receivers u Savers u Creditors

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 40 Who is Unaffected or Helped by Inflation? assuming unanticipated inflation u Flexible-Income receivers u Debtors

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 41 Anticipated Inflation u Effects are lessened to the extent inflation is correctly anticipated –COLA clauses –inflation premium on loans

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 42 NominalInterestRate = 11% Inflation Premium Figure 6-5

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 43 NominalInterestRate RealInterestRate = 11% 5% Inflation Premium Figure 6-5

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 44 NominalInterestRate RealInterestRate InflationPremium = 11% 5% 6% + Inflation Premium Figure 6-5

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 45Addenda u Deflation u Mixed effects u Arbitrariness

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 46 Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 47 Effects of Inflation on Output u Cost-Push Inflation & Real Output u Demand-Pull Inflation & Real Output u Hyperinflation & Breakdown

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 48 Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output