INTRODUCTION TO ECONOMIC GROWTH AND INSTABILITY Pertemuan 5 Matakuliah: J0594-Teori Ekonomi Tahun: 2009

Bina Nusantara University 3 Economic Growth Increase in Real GDP Increase in Real GDP Per Capita Growth as a Goal Arithmetic of Growth - Rule of 70 Approximate number of years required to double real GDP = 70 annual percentage rate of growth

Bina Nusantara University 4 Selected Growth Rates Source: Economic Report of the President, U.S. Germany France Japan U.K. Italy Percentage Change (annual rate) GLOBAL PERSPECTIVE

Bina Nusantara University 5 The Business Cycle Level of Real Output Time Peak Recession Expansion Trough Growth Trend Phases of the Business Cycle

Bina Nusantara University 6 Unemployment Twin Problems of the Business Cycle –Unemployment –Inflation Measurement of Unemployment Labor Force Unemployment Rate –Part-Time Employment –Discouraged Workers Unemployment Rate Unemployed Labor Force = x 100

Bina Nusantara University 7 Unemployment Under 16 And/or Institutionalized (70.5 Million) Labor Force, Employment, and Unemployment, 2005 Total Population (296.6 Million) Not in Labor Force (76.8 Million) Employed (141.7 Million) Labor Force (149.3 Million) Unemployed (7.6 Million)

Bina Nusantara University 8 Unemployment & Full Employment Types of Unemployment –Frictional Unemployment –Structural Unemployment –Cyclical Unemployment Definition of Full Employment Full Employment issomething less than 100 percent of the labor force

Bina Nusantara University 9 Unemployment Economic Cost of Unemployment Potential Output GDP Gap and Okun’s Law GDP Gap Actual GDP Potential GDP = -

Bina Nusantara University 10 Unemployment The Unemployment Rate Unemployment (percent of civilian Labor force) Source: Congressional Budget Office & Bureau of Economic Analysis Actual and Potential GDP and the Unemployment Rate The GDP Gap 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 GDP (billions of 1996 dollars) GDP gap (positive) GDP gap (negative) Potential GDP Actual GDP

Bina Nusantara University 11 Unemployment Unequal Burdens –Occupation –Age –Race and Ethnicity –Gender –Education –Duration Noneconomic Costs

Bina Nusantara University 12 Unemployment Source: Bureau of Labor Statistics U.S. Germany Italy Japan France Unemployment Rate (percent) Unemployment Rates in Five Industrial Nations, GLOBAL PERSPECTIVE

Bina Nusantara University 13 Inflation Inflation Defined Measurement of Inflation –Consumer Price Index CPI Price of the Most Recent Market Basket in the Particular Year Price of the Same Market Basket in = x 100

Bina Nusantara University 14 Inflation Types of Inflation –Demand Pull Inflation –Cost-Push Inflation Per Unit Production Costs Redistributive Effects –Nominal and Real Income –Anticipations Anticipated Inflation Unanticipated Inflation

Bina Nusantara University 15 Inflation Who is Hurt by Inflation? –Fixed-Income Receivers –Savers –Creditors Who is Unaffected or Hurt by Inflation? –Flexible-Income Receivers Cost-of-Living Adjustments (COLAs) –Debtors

Bina Nusantara University 16 Inflation Anticipated Inflation –Nominal Interest Rate –Real Interest Rate –Inflation Premium Nominal Interest Rate Real Interest Rate Inflation Premium 11% 5% 6% =+

Bina Nusantara University 17 Inflation Deflation Mixed Effects Arbitrariness Cost-Push Inflation and Real Output Demand-Pull Inflation and Real Output Hyperinflation