Chapter 17 In Search of Prosperity and Stability Introduction to Economics (Combined Version) 5th Edition

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.  U.S. growth rate of real GDP is about average for the world. Introduction to Economics (Combined Version) 5th Edition

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 Introduction to Economics (Combined Version) 5th Edition Industrial equipment like these robots increase the productivity of workers.

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 has recently slowed again. Introduction to Economics (Combined Version) 5th Edition

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. Introduction to Economics (Combined Version) 5th Edition

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. Introduction to Economics (Combined Version) 5th Edition

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. Introduction to Economics (Combined Version) 5th Edition

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. Introduction to Economics (Combined Version) 5th Edition

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. Introduction to Economics (Combined Version) 5th Edition

Broad vs. Standard Unemployment Rate  In addition to the standard unemployment rate, the BLS also provides a broader measure, U-6.  The numerator of U-6 includes the following:  Unemployed persons  Marginally attached persons who would like to work but are not looking for personal reasons or because they think there are no jobs  Part-time workers who would prefer full-time work but can’t find it  The denominator includes the labor force plus the marginally attached. Introduction to Economics (Combined Version) 5th Edition

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. Introduction to Economics (Combined Version) 5th Edition

Inflation in the United States  Inflation means a sustained rise in the price level.  Deflation means a sustained fall in the price level.  Inflation, as measured by the rate of change of the Consumer Price Index, often varies greatly from month to month. Introduction to Economics (Combined Version) 5th Edition Follow Ed Dolan’s Econ Blog for monthly updates of inflation data in slideshow format.Ed Dolan’s Econ Blog

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. Introduction to Economics (Combined Version) 5th Edition

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 Introduction to Economics (Combined Version) 5th Edition