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

The Cost of Economic Instability

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

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%

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?

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

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

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

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

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