2. Introduction to Economic Growth and Instability Please listen to the audio as you work through the slides.

3. Going to college is a contact sport! You have to be Fierce, Committed, Won’t let go!

4. Or, Here is the result of another approach!

5. Learning objectives Students should be able to thoroughly and completely explain: 1.The Business cycle and its 4 phases. 2.Causes of economic instability, 3.Types of Unemployment 4.The costs of Unemployment and issues associated with the unequal burden of Unemployment. 5.The types of Inflation (including who is hurt and helped by Inflation) 6.The effects of Inflation on output.

6. Topics Economic Growth The Business Cycle Unemployment – what is it and how do you measure it? Inflation – what is it, how do you measure it, and what does it cost us?

7. Economic Growth Measuring: An increase in real GDP over time, or An increase in real GDP per capita over time http://www.measuringworth.com/usgdp/

8. http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 http://www.bea.gov/iTable/index_nipa.cfm Some other data sources Check them out

9. Growth is a Goal – but is it a sustainable goal? Main Sources of Growth Increases in Resources produce 1/3 of growth Contribution of oil since it’s discovery – the UK case Increases in Productivity produce 2/3 of growth Driven by machines, technology, knowledge Economic Growth

10. The Business Cycle 26-9 Level of Real Output Time Peak Recession Expansion Trough Growth Trend Durable goods and nondurable goods industries affected differently

11. Business Cycle - Characteristics Peak – Full employment – Rising National income – Reached output capacity – Demand pull Inflation Recession – 2 consecutive quarters of negative GDP growth – Rising Unemployment – Falling national income – Falling consumer spending

12. Business Cycle - Characteristics Trough – Stability Things have gotten as bad as they are going to get Unemployment stabilizes GDP growth rate stabilizes Expansionary phase – GDP rising – Employment rising – National income rising – Consumer spending rising

13. Some Causes of Business Cycles Shocks and price stickiness – Supply shocks and productivity shocks Monetary shocks – Financial boom and bust Unexpected political events Common link – Unexpected changes in spending 26-12

14. Unemployment Twin problems of the business cycle – Unemployment – Inflation Measurement of Unemployment – Who’s in the labor force 26-13

15. http://www.bls.gov/news.release/empsit.t15.htm The measures of the Unemployment rate Check them out. Why do you suppose we hear very little about the big ugly one?

16. Unemployment rate 1948 – 2012 What do you think your next 60 years will look like? What can you do now to minimize the pain?

18. Unemployment Measurement of Unemployment, 2002 Employed Not in labor force Under 16 and/or institutionalized Total Population 288,600,000 Labor force 142,500,000 74,700,000 71,400,000 Homemakers, full time students, retirees Unemployed 8,300,000 134,200,000

19. Unemployment Measurement of Unemployment Unemployment rate unemployed labor force x 100 = Bureau of labor statistics survey monthly Part-Time Employment - counted at fulltime Discouraged Workers – not counted

20. Unemployment Types of Unemployment Note the role of skills in each 1.Frictional Unemployment -search and wait Unemployment 2.Structural Unemployment - AKA: compositional Unemployment the composition of the labor force is slow to change. skill requirements of employers change faster then worker skills jobs shift geographically

21. Unemployment Types of Unemployment 3. Cyclical Unemployment Caused by decline in total spending Occurs in recession phase of business cycle Demand for goods and services decreases, employment falls, Unemployment rises

22. Unemployment Definition of full employment Occurs when there is no cyclical Unemployment Full-Employment Rate of Unemployment aka the Natural Rate of Unemployment (NRU) 4 to 5 percent Unemployment At this point the economy is said to be producing its potential output Okun’s Law Each 1% above NRU creates negative 3% output gap What happens if full-employment becomes a 6 to 7 percent rate of Unemployment by the time you graduate?

23. Some Unemployment Issues Aging labor force – Age discrimination – Skills exit The driving down of wage rates Fewer good paying jobs Academic preparation – inequality 26-22

24. Prison population has doubled. Over 2 million people and growing. Disproportionately non-white. Connect the dots on this one!

25. Unemployment 26-24 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 The GDP Gap 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 GDP (billions of 1996 dollars) 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 The Unemployment Rate 10 8 6 4 2 0 Unemployment (percent of civilian Labor force) Source: Congressional Budget Office & Bureau of Economic Analysis GDP gap (positive) GDP gap (negative) Potential GDP Actual GDP

26. Unemployment The Case of Unequal Burdens Occupation – low vs high skilled Age - teenagers Race and Ethnicity – education, in lower skilled jobs, labor mkt discrimination. Gender – similar Unemployment rates, differences in pay Education – less education / higher Unemployment Duration – the percentage of persons experiencing long term Unemployment lower than general Unemployment rate

27. Economic Costs of Unemployment Foregone output or Potential output Reduced national spending – Leads to reduced output Reduced tax revenue (at all levels) 26-26

28. Unemployment The more difficult to quantify costs of Unemployment 1. Loss of job skills, 2.Loss of self-respect 3.Political unrest, 4.Racial and ethnic tensions, 5.Mental and physical illness 6.Impact on families

29. Inflation Defined and Measurement A rising general level of prices Reduction in purchasing power Rate of Inflation calculated using index numbers

30. Inflation Consumer Price Index Consumer price index (CPI) Market basket of 300 goods and services Typical urban consumer 2 year updates CPI Price of the Most Recent Market Basket in the Particular Year Price estimate of the Market Basket in 1982-1984 = x 100

31. An Example  In 2002 CPI was 119 and in 2001 CPI was 116.4  The rate of Inflation from 2001 to 2002 is

32. Inflation 26-31 Annual Inflation Rates in the United States, 1960-2007 Inflation Rate (percent) Source: Bureau of Labor Statistics

33. Consumer Price Index - All Urban Consumers 1913 – 2012 Note the difference before and after 1959 What do you think happened? Bls.gov

34. Inflation 26-33 Source: Bureau of Labor Statistics Inflation Rates in Five Industrial Nations, 1995-2005

35. Inflation Types of Inflation – Demand pull – Cost-push 26-34

36. Demand-Pull Inflation Excess spending beyond the economy’s capacity to produce. Bids up prices Will exist as long as there is excess total spending. Types of Inflation

37. Cost-Push Inflation Rising Per-Unit Production Costs  Per unit cost = (total input cost / units of output) AKA - Supply-Side Inflation – sharp increases in raw materials prices Supply Shocks – abrupt increases in raw material costs, shortages of raw materials, natural disasters Example - oil price in 1973-74 and 1979-80. Complexities – can be driven by demand pull Inflation, Sustainability – cost push self limiting

38. Redistributive effects of Inflation Who is Hurt by Inflation and how? Fixed-Income Receivers Social security, pension recipients Purchasing power drops Savers - purchasing power drops Creditors – are repaid in dollars with less purchasing power

39. Redistributive effects of Inflation Who is Unaffected or Helped by Inflation and how? Flexible-Income Receivers –receive Inflation adjustments Cost of Living Adjustments (COLAs) – some union workers Debtors – pay back with cheaper dollars

40. Nominal Interest Rate Real Interest Rate Inflation Premium = 11% 5% 6% + Anticipated Inflation

41. Effects of Inflation on output Cost-Push Inflation and Real Output 1. As prices rise, 2. Quantity of goods & services demanded fall, 3. Firms produce less, 4. Output and employment fall

42. Effects of Inflation on output Demand-Pull Inflation and Real Output Inflation increase, higher profit for firms, expansion of plants and equipment, more output, more employment. Once economy is at full employment as demand increases, output does not increase, employment does not increase, just the level of Inflation increases. In general, demand-pull Inflation leads to reduction in real output.

43. Other Inflation Issues Deflation – generally falling prices Stagflation HyperInflation 26-42

44. Economic Growth real GDP per capita 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 Consumer Price Index (CPI) 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