GROWTH BUSINESS CYCLES UNEMPLOYMENT INFLATION

Economic Growth Measurement Gross Domestic Product (GDP) Market value of final goods and services produced Details later

Economic Growth Nominal GDP (OK measure) Real GDP (Better measure) Goods and services valued at their current prices Real GDP (Better measure) Goods and services valued in prices of a base or reference year. Real Per capita GDP (Best measure) GDP divided by population

Per Capita Income by Region Growth Rate: 1950-2009 Income: 1950 Income: 2009 China 4.4% $ 439 $ 6,050 Jqpan 4.8% $1,900 $22,500 North America 2.0% $9,500 $31,000 Latin America 1.6% $2,500 $ 6,500 Western Europe 2.6% $6,500 $21,200 Eastern Europe 2.2% $3,100 $ 7,600 Africa 1.1% $1,300 $ 1,700 World 2.1% $2,100 $ 7,300

Benefits and Costs of Growth If real per capita GDP increases, everyone in society will on average, have more. Governments avoid hard choices Costs Pollution Resource exhaustion Destruction of natural habitat Materialism

Four Phases of the Business Cycle 2 qtrs decline 2 qtrs rise Jan.- Mar Total Output Apr.- June July- Sept. Oct.- Dec. Expansion Recession Expansion Boom Peak Upturn Downturn Secular growth trend Trough

U.S. Business Cycles

Business Cycles Important terms Recession: 6 months of declining real output 2002, 2008 to ? Depression: Long period of declining output and high unemployment 1930s and ???

Changes in Business Cycles Over Time Duration (in months) Business Cycles Pre-World War II Post-World War II (1854-1945) (1945-2006) Average length of expansions 29 57 Average length of recessions 21 10 Length of shortest recession 7 6 Length of longest recession 65 (1933-39) 16+ (2007-2009)

Leading Indicators Average work week Unemployment claims Index of consumer expectations New orders for capital goods Building permits Stock prices

Unemployment Types Frictional Structural Cyclical Seasonal Underemployment

Measuring Unemployment Monthly interviews Criteria 16 years or older Available for work Tried to find work

Calculating Unemployment Labor force Able to work Have a job Don’t have a job, but looking for a job Number unemployed Don’t have a job, but looking for a job

Unemployment Rates since 1900

Unemployment by Microeconomic Subcategories See Text, p. 171

Accuracy of the Unemployment Rate Discouraged workers Under-employed Survey bias

Target Rate of Unemployment Used to be called “Full Employment” The lowest sustainable rate achievable under existing conditions. Currently considered to be about 5% Can change due to: Population demographics Social and institutional structures Government programs

Unemployment and Potential Output Potential output – output at: Target rate of unemployment and Target rate of capacity utilization Okun’s rule of thumb: Unemployment rate up by 1% → Output down by 2%

Inflation $ General increase in prices Cause: Too much money chasing too few goods

Effects of Inflation Unanticipated inflation: Who is harmed? Lenders People with fixed incomes Anybody making decisions Anticipated inflation

Measurement of Inflation Monthly interviews

Measurement of Inflation Market Basket 2009 Price $3.00/gal $4.50/lb 2010 Price 4.00/gal $6.00/lb 100 gal gas 10 lbs steak Total Cost 2009 Cost $300 $45 $345 2010 Cost $400 $60 $460 Inflation Rate (460-345/345) = 33%

Real World Price Indexes GDP Deflator Consumer Price Index Producer Price Index (PPI)

Composition of CPI Food and beverage (15.0%) Housing (42.7%) Apparel (3.7%) Transportation (17.2%) Other (3.5%) Medical care (6.3%) Education and Communication (6.0%) Recreation (5.6%)

Price Indices and the “Base Year” Base year selected Currently, 1982 for the CPI Price index is always 100 for the base year Rate of inflation is the % change in the price index from one period to the next

Calculating the Rate of Inflation YEAR PRICE INDEX ANNUAL RATE OF INFLATION 2007 96 2008 100 4.17% 2009 104 4.00% 2010 114 9.62% Inflation Rate = Change in Price Index Earlier Year Price Index

Real Verses Nominal Output Nominal output is measured at current prices. Real output is nominal output: Adjusted for price level changes from a “Base Year.”

Real Versus Nominal Prices Suppose that the nominal price of gasoline is $3.25 per gallon. The CPI (1982 base year) is 190%. Find the real price of a gallon of gasoline.

HYPERINFLATION Definition: > 50%/month Jan 1.00 Feb 1.50 Mar 2.25 April 3.38 May 5.06 June 7.60 July 11.39 Aug 17.09 Sept 25.62 Oct 38.44 Nov 57.67 Dec 86.50 Jan 129.74

HYPERINFLATION (cont) Germany (after WWI) 1 egg Marks Pre-War Price .08 Nov/1923 Price 80,000,000,000

HYPERINFLATION (cont) Hungary (after WWII) Inflation rate: 3,810,000,000,000,000,000,000,000,000,000

HYPERINFLATION (cont) Bolivia (1985) 118,000%

HYPERINFLATION (cont) Turkey exchange rate

HYPERINFLATION (cont) Cause: Turning on the printing presses People’s reaction?

Deflation Continuing decrease in prices Distributional impacts (reverse of inflation) Borrowers lose Those on fixed incomes gain Other impacts Consumers postpone purchases Asset values (e.g., stocks and real estate) decline The dangers Demand decreases, so businesses produce less Financial institutions may become insolvent Deflationary spiral