LECTURE 8 Economic Growth and Instability

Economic Growth Economic growth is defined as either: (a) An increase in real Gross Domestic Product (GDP) occurring over some time period. (b) An increase in real GDP per capita occurring over some time period. Real GDP per capita = Real GDP Population

Unemployment: Types and Costs The labor force excludes: 1. People less than 16 years old. 2. People who are institutionalized. 3. Adults who are not employed and not seeking for work. From the labor force, there are 2 group divisions: (a) Employed – those who are working. (b) Unemployed – those who are not working but actively seeking for a job.

Types of Unemployment Frictional Unemployment Workers who are “between jobs.” Structural Unemployment Changes over time in consumer demand and in technology alter the “structure” of the total demand for labor, both occupationally and geographically. Cyclical Unemployment This is caused by a decline in total spending and is likely to occur in the recession phase of a business cycle.

Full Employment The economy is “full employed” when it is experiencing only frictional and structural unemployment. That is, full employment occurs when there is no cyclical unemployment.

GDP Gap When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost. GDP Gap = Actual GDP – Potential GDP The GDP gap can be: (a) Positive (Actual GDP > Potential GDP) (b) Negative (Actual GDP < Potential GDP)

GDP (RM billions) GDP Gap (positive) GDP Gap (negative) Potential GDP Actual GDP Year

Inflation Inflation is a rise in the general level of prices. When inflation occurs, each RM of income will buy fewer goods and services than before. Inflation reduces “purchasing power” of money.

Measurement of Inflation The main measure of inflation is the Consumer Price Index (CPI). The CPI reports the price of a “market basket” of some 300 consumer goods and services that presumably are purchased by a typical urban consumer. CPI = Price basket of most recent market basket in the particular year x 100 Price of the same market basket in the base year

Rate of Inflation Rate of inflation is found by comparing, in percentage terms, that year’s index with the index in the previous year. Rate of inflation = Inflation (this year) – Inflation (previous year) x 100 Inflation (previous year)

Excess demand bids up Rising prices in terms of prices. factors that raise per-unit production costs at each level of spending. Types of Inflation Demand-Pull Inflation Cost-Push Inflation

Who are Hurt by Inflation? Fixed-Income Receivers Savers Creditors

Who are Unaffected or Helped by Inflation? Flexible-Income Receivers Debtors