8 - 1 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show ECONOMIC GROWTH An increase in real GDP over some time period An increase in real GDP per capita over some time period Growth as a Goal Arithmetic of Growth Rule of 70 Main Sources of Growth Increases in Resources Increases in Productivity

8 - 2 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show Introduction to Economic Growth and Instability 8 C H A P T E R

8 - 3 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show Growth Defined/Measured Measuring Growth: Increase in Real GDP Increase in Real GDP per Capita Can increase growth in 2 ways: 1.Increase inputs of resources (1/3) 2.Increase the productivity of those inputs ( 2/3) US growth comes from productivity.

8 - 4 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show THE BUSINESS CYCLE Phases of the Business Cycle PEAK Level of business activity Time RECESSION TROUGH RECOVERY GROWTH TREND Recession: Decline in Real GDP for 2 consecutive quarters.

8 - 5 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show THE BUSINESS CYCLE Causation: A First Glance Many Causation Theories Cyclical Impact Capital Goods Consumer Durables Service Industries Nondurable Consumer Goods

8 - 6 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Measurement of Unemployment, 2000 Employed Not in labor force Under 16 and/or institutionalized Total Population 275,400,000 Labor force 140,800,000 65,800,000 68,800,000 Unemployed 5,600, ,200,000 Retirees, Homemakers Willing & able to work

8 - 7 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Measurement of Unemployment, 2000 Unemployment rate unemployed labor force x 100 = Part-Time Employment Discouraged Workers

8 - 8 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Full-Employment Rate of Unemployment Natural Rate of Unemployment (NRU)

8 - 9 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Economic Costs of Unemployment GDP Gap and Okun’s Law Approximately a 2% GDP Gap occurs For every 1% unemployment exceeds the natural rate... The amount by which actual GDP falls short of potential GDP

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Unequal Burdens of Unemployment Occupation Age Race and Ethnicity Gender Education Duration Noneconomic Costs International Comparisons

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show France U.K. Germany U.S. Japan GLOBAL PERSPECTIVE Unemployment Rates in Five Industrial Nations Source: Economic Report of the President

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show INFLATION Defined and Measurement A rising general level of prices Rate of inflation calculated using index numbers Rule of 70 Shortcut to determine doubling time Facts of Inflation

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show France U.K. Germany U.S. Japan 1990 Source: Economic Report of the President GLOBAL PERSPECTIVE Inflation Rates in Five Industrial Nations

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show Increases in Total Spending Price level Real domestic output & employment Q P Q f Range 1 Range 2 Range 3 DEMAND-PULL INFLATION Full- employment output INFLATION Types of Inflation

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show DEMAND-PULL INFLATION INFLATION Types of Inflation COST-PUSH INFLATION Rising Per-Unit Production Costs Supply-Side Inflation Supply Shocks Complexities

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show REDISTRIBUTIVE EFFECTS OF INFLATION Nominal Income Real Income Anticipations Anticipated Inflation Unanticipated Inflation

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show Anticipated Inflation 1 Year loan for 5% interest –Pay back = $1050 –If inflation is 7% (bank loses in purchasing power = $20 ($ ) If bank anticipates: it can “build in” an inflation premium. Real interest rate = 5% Nominal interest rate = 7%

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show REDISTRIBUTIVE EFFECTS OF INFLATION Who is Hurt by Inflation? Fixed-Income Receivers Savers Creditors

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show REDISTRIBUTIVE EFFECTS OF INFLATION Who is Unaffected or Helped by Inflation? Flexible-Income Receivers Cost of Living Adjustments (COLAs) Debtors

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show Nominal Interest Rate Real Interest Rate Inflation Premium = 11% 5% 6% + ANTICIPATED INFLATION

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show The Human Effects of Inflation and Unemployment Write a 2 page paper (MLA) on the social and personal losses incurred by the unemployed. Also, how does inflation help and/or hurt people. You can use research and/or personal experiences to help answer the questions.

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show REDISTRIBUTIVE EFFECTS OF INFLATION Addenda Deflation Mixed Effects Arbitrariness

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show EFFECTS OF INFLATION ON OUTPUT Cost-Push Inflation and Real Output Demand-Pull Inflation and Real Output Hyperinflation & Breakdown Chapter Conclusions

economic growth rule of 70 productivity business cycle peak recession trough recovery labor force unemployment rate discouraged workers frictional unemployment structural unemployment cyclical unemployment full-employment rate of unemployment natural rate of unemployment (NRU) potential output GDP gap Okun’s Law inflation demand-pull inflation cost-push inflation per-unit production costs nominal income real income anticipated inflation unanticipated inflation cost of living adjustments COLAs real interest rate nominal interest rate deflation hyperinflation Copyright McGraw-Hill/Irwin, 2002 ENDBACK

Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show BUILDING THE AGGREGATE EXPENDITURES MODEL Chapter 9