1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

2 Chapter 24 Economic Growth, Business Cycles, & Countercyclical Fiscal Policy 11/21/2015 © ©1999 South-Western College Publishing

3 This chapter discusses principles associated with Countercyclical Fiscal Policy © ©1999 South-Western College Publishing The Interaction of the Multiplier & Accelerator External & Internal Theories of the Business Cycle Saving, Investment, & Economic Growth Labor Productivity & Economic Growth Technology & Labor Productivity Capital-Labor & Capital-Output Ratios

4 What is Economic Growth? An increase in real GDP, typically expressed as an annual rate of real GDP growth © ©1999 South-Western College Publishing

5 According to Adam Smith, what 4 principles contribute to growth? 1. Size of the labor force 2. Specialization of labor 3. Size of capital stock 4. Level of technology © ©1999 South-Western College Publishing

6 For GDP data: /gdp/gdp © ©1999 South-Western College Publishing

7 What is the Capital-Labor Ratio? The ratio of capital to labor, reflecting the quantity of capital used by each laborer in production © ©1999 South-Western College Publishing

8 If we have $20,000 worth of capital and 100 workers, what is the ratio? K/L = $20,000/100 = $200 © ©1999 South-Western College Publishing

9 What is Labor Productivity? The quantity of GDP produced per worker, typically measured in quantity of GDP per hour of labor © ©1999 South-Western College Publishing

10 What happens when we increase the capital stock per worker? By deepening capital, productivity increases © ©1999 South-Western College Publishing

11 How do we measure labor productivity? Real GDP / total employment © ©1999 South-Western College Publishing

12 For example... If real GDP is $16 million and total employment is $2 million, labor productivity is $8 per worker © ©1999 South-Western College Publishing

13 What is the relationship between capital deepening and labor productivity? As capital deepens, labor productivity increases, but at a diminishing rate. © ©1999 South-Western College Publishing

14 The Per-Worker Production Function (With Technological Change) Capital per worker Output per worker PF’ PF 14 © ©1999 South-Western College Publishing

15 What has been the relationship between saving and economic growth in the U.S., ? A positive correlation between the rate of saving and the rate of economic growth © ©1999 South-Western College Publishing

16 Can there be an increase in productivity without a change in the value of capital stock? Yes, by improving technology © ©1999 South-Western College Publishing

17 What are the four stages of the Business Cycle? trough or recession recovery peak or prosperity downturn © ©1999 South-Western College Publishing

18 What does the Business Cycle show ? How economic activity fluctuates around its long term growth trend © ©1999 South-Western College Publishing

19 Aggregate Output Time The Business Cycle Peak Trough 19 © ©1999 South-Western College Publishing

20 What are External Theories of Business Cycles? Sunspot theory War-induced cycles Housing cycle Innovation cycle © ©1999 South-Western College Publishing

21 What is the Accelerator? The relationship between the level of investment and the change in the level of national income © ©1999 South-Western College Publishing

22 What is an example of the Accelerator? Increases in national income induce firms to build motels, gas stations and restaurants © ©1999 South-Western College Publishing

23 What is the Real Business Cycle Theory? Cycles are simply variations in the rate of growth of a full-employment economy © ©1999 South-Western College Publishing

24 What is the Schumpeterian Innovation Cycle Theory? Technological change creates an uneveness in the economy’s growth path © ©1999 South-Western College Publishing

25 What is a Countercyclical Fiscal Policy? Fiscal policy designed to moderate the severity of the business cycle © ©1999 South-Western College Publishing

26 What are examples of Fiscal Policy? Changes in the levels of government spending or taxation © ©1999 South-Western College Publishing

27 What would the government do to stem Unemployment? Increase spending and/or cut taxes © ©1999 South-Western College Publishing

28 What would the government do to stem Inflation? Decrease spending and/or raise taxes © ©1999 South-Western College Publishing

29 What is an administrative lag? The time interval between deciding on an appropriate policy and the execution of that policy © ©1999 South-Western College Publishing

30 What negative effect can an administration lag have on countercyclical policy? Poor timing can exacerbate a business cycle © ©1999 South-Western College Publishing

31 What is Economic Growth? According to Adam Smith what 4 principles contribute to growth?According to Adam Smith what 4 principles contribute to growth? What determines the level of Investment?What determines the level of Investment? What are the four stages of the Business Cycle?What are the four stages of the Business Cycle? What are External Theories of Business Cycles?What are External Theories of Business Cycles?

32 What is the Accelerator? What is the Real Business Cycle Theory?What is the Real Business Cycle Theory? What is the Schumpeterian Innovation Cycle Theory?What is the Schumpeterian Innovation Cycle Theory? What is a Pro-cyclical Policy? What is a Countercyclical Policy? What are three Lag Effects?

33 ENDEND © ©1999 South-Western College Publishing