Economic Growth & Instability

Defining Growth ► Increase in Real GDP ► Increase in GDP per capita – Important because GDP numbers can be deceptive based on population sizes

Growth as a Goal ► Means more abundance of materials and ability to answer the economizing problem – reduces scarcity ► “Rule of 70” – Used by economists to determine how long it will take a measure to double ► Ex = 70 / % OF Growth = Years to Double ► Growth accomplished by increasing inputs or increasing productivity

The Growth of the United States ► Real GDP has increased 6X since 1940 ► Per Capita GDP has increased has risen almost 4X ► Problems in measuring growth include the lack of solid measure for quality improvements, increased leisure time, and harm towards the environment

Business Cycle ► US record of growth certainly seen periods of economic instability ► Inflation often follows rapid growth and unemployment and decline in output following recession & depression

4 Phases of Business Cycle ► Peak – “Full Employment” & Near Capacity Output ► Recession – Decline in Output, Income, Employment, and Trade lasting 6 months or more ► Trough – Bottom of a recession period ► Recovery – Out is expanding towards Peak Level

Causation & the Business Cycle ► Causation – Fluctuation in Business Cycle ► Innovations & Technological Advancement may trigger consumer spending ► Productivity Changes ► Consumer spending ► Instability of durable goods

Unemployment ► Frictional unemployment – Consists of those searching for jobs, indicates mobility, and is good for the economy ► Structural unemployment – due to changes in structure or geographic ► Cyclical – Caused by changes in the business cycle

Full Employment ► Understood that 100% employment cannot be achieved. 4-6% is the desired goal ► Full employment = Structural + Frictional ► Referred to as the natural rate of unemployment ► Natural rate is achieved when markets are in balance, when the number job seekers = the number of vacancies

Categorizing Unemployment ► Under 16 and/or institutionalized ► Not in the labor force and not seeking employment ► Those working and/or willing to work ► Natural rate now approx 5.5% due to increases in competition in markets and age of work force

Unemployment Rate ► % of labor force that is not employed ► Part-time workers are counted as employed ► Discouraged or “under employed” not figured in to the unemployment statistic

Okun’s Law ► For every 1% that the unemployment rate exceeds the natural rate, GDP will fall 2% of output potential

Inflation ► Inflation is measured by comparing price indexes from a given year and the one before it.

Types of Inflation ► Demand Pull Inflation – An excess of consumer spending creates a shortage of goods which causes prices to rise ► Cost-push inflation –Prices rise to due per unit cost increases ► Tough to distinguish which is which in a real world setting

Inflation Redistribution ► Fixed income groups are hurt because their purchasing power and disposable income has decreased ► Savers hurt because their dollars are worth less ► Debtors helped because their debts have decreased

Additional Information ► Inflation Premium – amount interest rates are increased to cover inflation ► Hyperinflation – occurs when inflation is not handled properly, usually met with severe socioeconomic consequences i.e Post-War Japan, Germany after WWI