Growth and the Business Cycle Chapter 8 Time period: 1 week

Topics Covered Rule of 70, productivity, components and patterns of the business cycles, types of unemployment, unemployment rates, Okun’s Law, GDP gap, rates of inflation, demand-pull, cost push, nominal income vs real and unanticipated inflation of unemployment, unemployment rates, Okun’s Law, GDP gap, rates of inflation, demand-pull, cost push, nominal income vs real and unanticipated inflation

Objectives 1. Define two measures of economic growth. 2. Explain why growth is a desirable goal. 3. Identify two main sources of growth. 4. Explain the “rule of 70.” 5. Give the average long-term growth rates for the U.S. for the U.S. 6. Understand the global perspective 8-1

Growth as a Goal Two definitions 1. the increase in GDPr over time 1. the increase in GDPr over time 2. the increase in GDPr per capita over time 2. the increase in GDPr per capita over time Better to compare standard of living Example: China’s GDP is $744 billion Example: China’s GDP is $744 billion Denmark’s is $155 billion Denmark’s is $155 billion --China’s per capita GDP is $620 --Denmark's per capita GDP is $29,890

Growth as a Goal Important because it means more material abundance and ability to meet the economizing problem Growth lessens the burden of scarcity Growth lessens the burden of scarcity

Rule of 70 Approximate # of years to double the real GDP = 70 / annual % rate of growth Examples: with a growth of 2% annually it would take 35 years for GDP to double Examples: with a growth of 2% annually it would take 35 years for GDP to double With a growth of 4% annually it would only take 18 years for GDP to double With a growth of 4% annually it would only take 18 years for GDP to double The US has a $10 trillion dollar GDP with a growth rate of 3% The US has a $10 trillion dollar GDP with a growth rate of 3% How long will it take to double? 23.3 years 23.3 years

China has a GDP of $744 billion with a 9% growth rate How long will it take for China to have a GDP of a trillion and a half? How long will it take for China to have a GDP of a trillion and a half? 7.7 years!

Main Sources of Growth 1. increasing inputs About 1/3 of the US growth About 1/3 of the US growth 2. increasing productivity of existing inputs About 2/3 of the US growth About 2/3 of the US growth

Growth record of the US Rate of growth record shows that GDPr has grown 3.1% per year since 1950 and real per capita GDP has grown at about 2% each year Remember growth doesn’t measure Remember growth doesn’t measure Quality improvements Increased leisure time Adverse effects on the environment