1. Agenda 12/5 1. Discuss the Cost of Economic Instability
2. Economic Misery and Presidential Elections
HW- PBL Due 12/7

2. The Cost of Economic Instability

3. Instability Indicators
Indicators that hinder growth:
Recession (GDP fall two straight quarters)
High unemployment (5% +)
Inflation w/o increase in wages
Stagflation (low growth w/ inflation)
Has a human cost

4. GDP Gap Difference between actual GDP and potential
Business cycles impact this
U.S. GDP 2003 $10.8 trillion
Loss .25% = $27 billion in economy
What is the human cost of this $27 billion?
What is the business cost of this $27 billion?
Federal corporate tax rate 35%, effective tax rate is 12.6%

5. The Misery Index & Uncertainty
M.I. = monthly inflation + unemployment %
Gives data for consumer suffering
Only relevant over long periods because of volatile month to month swings
People less certain to buy/splurge if uncertain about finances
How would individual consumer uncertainty effect businesses?

6. The Social Costs
Economist are interested in mental & social health of society
If labor is wasted, basic human need to being productive member of a society not met
Also leads to capital goods & natural resources being unused
Incumbent politicians feel voters wrath during periods of instability
Too much can lead to radical social & political changes

7. Crime and Family Values
If an economy is unstable:
High crime rates
Few econ. opportunities for minorities
Decreased indiv buying power & freedom
Fewer taxes collected
Companies less willing to spend resources to train & hire disadvantaged persons

8. Some Key Economic Factors
Unemployment rate: the percentage of people in the labor force who are unemployed
Inflation rate: The percentage increase in the overall price level
Real GDP: The value of all final goods and services produced in a year, expressed in terms of constant dollars
Two statistics based on these indicators
Misery Index: The sum of the unemployment rate and the inflation rate
Growth rate in real GDP per capita: The percentage change in real GDP per person

9. Economic Rules An Economic Rule That Does Not Work Very Well:
The incumbent party wins if…
The growth rate of Real GDP per capita is greater then 0%
Economic Rules that Work Well:
The incumbent party usually wins if:
Growth Rate of real GDP is equal to or greater then 2.5% during election year
The Misery Index has not increased from the year prior to the election

10. A Guaranteed Loss Rule The incumbent party has ALWAYS lost if…
1. Real GDP per capita growth is less then 2.5%
AND
2. The misery index has increased from the year prior to the election to the year of the election