Macro Chapter 7 Presentation 1- Economic Growth

Consumer Price Index (CPI) CPI reports inflation each month and year Reports the price of a basket of 300 consumer goods a typical urban consumer would buy Includes foreign goods CPI Price of the Most Recent Market Basket in the Particular Year Price of the Same Market Basket in = x 100

GDP per Capita Divide GDP by the size of the pop. US GDP 2010 was 14.3 Trillion Population of US was 310 million Per Capita = 14.3 trillion/310 million = $46,860 US #13 (1. Luxembourg 2. Norway 3. Qatar 4. Switzerland 5. UAE)

Economic Growth 1.An increase in real GDP over some time period 2.An increase in real GDP per capita occurring over some period of time

Main Sources of Growth Society can grow through: 1. Increasing inputs of resources 2. Increasing the productivity of the resources used Productivity- real output per unit of input

Rule of 70 Approx number of years required to double GDP = 70/annual percentage rate of growth Ex- If China’s growth rate is 8%, it will take their economy about 9 years to double GDP = 70/8= appx. 9

The Business Cycle

Downturn Recession / Contraction – 6 months or more of decline in total output, income and unemployment – The period of time during which aggregate economic activity is falling If the recession is particularly severe, it becomes a depression. During a recession – Many sectors of the economy experience declining sales and production – Workers are laid off or forced to work only part-time Peak: the point in which output starts to decline

Upturn After reaching the low point of the contraction (the trough), aggregate economic activity begins to increase. The period of time during which aggregate economic activity grows is an expansion or a boom. The high point of the expansion is called a peak.

Demand-Pull Inflation When resources are fully employed, the business sector cannot respond to excess demand by increasing output Excess demand causes an increase in cost “too much spending chasing too few goods”

Cost-Push Inflation Rising per-unit costs of production lower profits and force the prices up Supply Shock- abrupt increases in the cost of raw materials Ex. Skyrocketing prices of oil in and Per unit cost= total input cost/# of units of output

Hyperinflation An extremely high and fast inflation rate Ex- Germany in post-WW1 Serbia in 1994 the inflation rate went up 1.56 million %

COLA Cost of Living Adjustment An increase in benefits as inflation occurs EX- Retirement of Firemen increases by 3% each to keep up with the increased cost of living

Who is Hurt by Inflation? 1. Fixed Income Receivers- not adjusted for cost-of-living 2. Savers- real purchasing power of a saved account deteriorates 3. Creditors- lenders are repaid with money that has less purchasing power

Who is Not Hurt by Inflation? 1. Flexible income receivers- cost-of-living adjustments 2. Debtors- pay back loans with less valuable money