Economic Growth Our goals for this chapter include: Understanding economic growth in several ways Utilizing and understanding the business cycle and cyclical and non-cyclical fluctuations Causes and definitions of all types of unemployment Defining inflation, its causes Looking at and describing the ranges of inflation Knowing who is hurt and helped by inflation Understanding the relationship between unemployment and inflation

Growth Two definitions of economic growth: A. increase in real GDP over time B. increase in real GDP per capita over time Usually the second is considered a more accurate measure in comparing living standards

growth Growth is one of the more important economic goals for an economy because growth means more goods and services with which to satisfy needs and wants. Growth lessens the burdens of scarcity on a society.

growth A simple rule to use in trying to understand the speed with which economic growth can take place is called “the rule of 70”. If you have an annual average growth rate percentage, dividing it into 70 will give you an approximate time in which the real GDP of an economy will double. For instance, if the US is growing at 3% and maintains that growth over time, one could expect the economy to double in 23-24 years in terms of real GDP.

growth So, where does economic growth come from? Most economist believe that there are 2 main sources of growth: A. increasing inputs (growth in resources) B. increasing productivity of existing inputs (working more efficiently) Most growth in modern economies comes from B.

Growth in the US While economic growth in the US is unstable, it has generally been averaging 3% for the last half century or so. That being said, we have to keep in mind that some things are not measured such as quality of products, increase or loss of leisure time, environmental effects, or the human impact of technologies.

Recent US Economic Growth Unlike the 20th century, the 21st century has posed growth problems for the US (as well as most industrialized nations) Growth since 2005 has averaged about half of the prior 60 year average of 3%. The bigger issue is why; for that no answer has yet been found.

21st Century realities It may be that large economics grow more slowly as they mature It may be that we are entering a paradigm change; that is, a shift in the very fundamentals of production and distribution as well as consumption. The last major shift occurred during and after the Great Depression.

21st Century Realities Unfortunately, no one can tell if a paradigm is shifting until after it has done so. This leaves policy makers, economists, and people like us confused and leads to risky strategies to counter what may not be able to be countered.

The Business Cycle

Causes Frankly no one knows what causes business cycles for sure although we have plenty of speculation 1. Major innovations in technology or other areas may spur investment or consumption spending 2. Changes in productivity may be related to this and to the instability of the cycle 3. the level of aggregate (total) spending is important particularly changes in Ig and purchase of consumer durables

Cycles and fluctuations Cyclical fluctuations usually are accompanied by certain phenomena Usually durable goods spending is more volatile and unstable than non durable spending or service spending as these latter two are usually non-postponable. If you see a dip in durable consumption and/or capital investment (Ig) a cycle is underway

What instability? Capitalism is inherently unstable. This is actually one of the features that make it a very adaptable system. Unfortunately these instabilities have consequences for human beings. The two main instabilities in the capitalist economy are unemployment and inflation.

Unemployment Types of unemployment 1. Frictional: that which occurs as people search for or wait to take jobs. May indicate there is mobility in the work force (exists at all levels of employment)

Unemployment 2. Structural: due to changes in the structure of demand for labor. Perhaps geographic or caused by obsolescence in job skills (exists at all levels of employment) 3. Cyclical: caused ONLY by the recession phase of the business cycle sometimes called deficient demand unemployment. (Will exist below FE)

Full Employment Full employment does not mean there is no unemployment The full employment rate of unemployment is equal to the total of frictional and structural unemployment This rate is also called the natural rate of unemployment

Full Employment The natural rate occurs when the labor markets are in balance. At this point potential output is being achieved in the economy. The natural rate is not a fixed point but fluctuates with changes in the structure of the economy and of the human resources contained therein.

How is unemployment measured? Population is divided into 3 groups Those under 16 or institutionalized Those persons not in the labor force over 16 (retirees, those not looking for work) Those over 16 who are willing and able to work

Unemployment Defined Unemployment is limited to the largest group: those who are over 16 and willing and able to work or THE LABOR FORCE The unemployment rate is defined as the % of the labor force that is not employed. By definition that is those who can and want to work but aren’t divided by those who are willing and able to work.

Unemployment The actual rate is calculated by survey of a large number of households and using data gathered by the states each month Part time workers are counted as employed “discouraged workers” who want a job but are not actively seeking one are not counted so they do not appear in unemployment statistics since they are temporarily out of the labor force

Unemployment Like all other statistics, unemployment data are amenable to manipulation by anyone. Unless one understands the definition of what unemployment is and is not confusion may result. The truth is that actual unemployment is usually greater, in some circumstances, much greater that official statistics imply or acknowledge.

Underemployment Underemployment generally refers to those who do jobs that do not make use of all of their potential. This is particularly true in developing nations although developed nations also have this. UE statistics in the US have been developed to mask underemployment.

GDP GAP and Okun’s Law The GDP gap is the difference between POTENTIAL GDP and actual GDP Potential GDP is that output which would have been achieved at the full employment rate of unemployment According to Okun, for each one per cent of unemployment over the full employment rate, 2% of potential GDP is lost. This formula is known as Okun’s law.

Costs of unemployment Rates are lower for white collar workers Teenagers have the highest rate Minorities tend to have higher rates Rate for males and females are comparable Less educated workers tend to have on the average higher rates of unemployment Long term unemployment (over 15 weeks) is usually lower than the overall rate.