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Introduction to Economic Growth and Instability

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1 Introduction to Economic Growth and Instability
8 Introduction to Economic Growth and Instability Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2 annual percentage rate
Economic Growth Increase in real GDP or real GDP per capita over some time period Percentage rate of growth Growth as a goal Arithmetic of growth: Rule of 70 Approximate number of years required to double real GDP 70 = annual percentage rate of growth LO1 25-2

3 Growth in U.S. real GDP per capita
Economic Growth Growth in U.S. real GDP Increased 6 fold 3.2% per year Growth in U.S. real GDP per capita Increased more than 3 fold 2% per year Qualifications Improved products and services Added leisure Other impacts LO1 25-3

4 Modern Economic Growth
Began with the Industrial Revolution in late 1700s Ongoing increases in living standards Time for leisure Social change Democracy Human lifespan doubled LO2 25-4

5 Modern Economic Growth
Began in Britain Has spread slowly Starting date main cause of worldwide differences in living standards Catching up is possible Leader countries invent technology Follower countries adopt technology Can grow faster LO2 25-5

6 Modern Economic Growth
Real GDP Real GDP Average annual per capita, per capita, growth rate, Country United States $ 14, $42, % United Kingdom , , France , , Ireland , , Japan , , Singapore , , Hong Kong , , South Korea , , Figures are in 2005 dollars Source: Penn World Table version 6.3, pwt.econ.upenn.edu LO2 25-6

7 Modern Economic Growth
LO3 25-7

8 Institutional Structures of Growth
Strong property rights Patents and copyrights Efficient financial institutions Literacy and widespread education Free trade Competitive market system LO3 25-8

9 Determinants of Growth
Supply factors Increases in quantity and quality of natural resources Increases in quality and quantity of human resources Increases in the supply (or stock) of capital goods Improvements in technology Demand factor Households, businesses, and government must purchase the economy’s expanding output Efficiency factor Must achieve economic efficiency and full employment LO3 25-9

10 Factors affecting productivity growth Technological advance (40%)
Accounting for Growth Factors affecting productivity growth Technological advance (40%) Quantity of capital (30%) Education and training (15%) Economies of scale and resource allocation (15%) LO3 25-10

11 Affects real output, real income, and real wages
Productivity Growth Average rate of growth 1.5% per year 2.8% per year Affects real output, real income, and real wages Pay higher wages without lowering profit LO4 25-11

12 Is economic growth desirable and sustainable? The antigrowth view
Environmental and resource issues In defense of economic growth Higher standard of living Human imagination can solve environmental and resource issues LO5 25-12

13 Growth is the path to greater material abundance
Economic Growth Growth is the path to greater material abundance Results in higher standards of living Increases leisure time Allows for the expansion and application of human knowledge LO5 25-13

14 Global Perspective LO5 25-14

15 Alternating increases and decreases in economic activity over time
The Business Cycle Alternating increases and decreases in economic activity over time Phases of the business cycle Peak Recession Trough Expansion LO1 26-15

16 The Business Cycle Trend Growth Peak Peak Peak Expansion Recession
Level of real output Recession Expansion Trough Recession Trough Time LO1 26-16

17 Causation: A First Glance
Business cycle fluctuations Primary causation is total spending (probably) Affects both capital goods and consumer durables but services and nondurables are somewhat shielded Economic shocks Prices are “sticky” downwards Economic response entails decreases in output and employment LO1 26-17

18 and/or Institutionalized (71.4 million)
Unemployment Under 16 and/or Institutionalized (71.4 million) Unemployment rate = # of unemployed labor force X 100 Not in labor force (81.7 million) Unemployment rate = 14,265,000 154,142,000 Total population (307.3 million) X 100 = 9.3% Employed (139.9 million) Labor force (154.2 million) Unemployed (14.3 million) LO2 26-18

19 Unemployment Unemployment – labor force equals about 50% of the total population Unemployment rate =unemployed/ civilian labor force x 100 Bureau of the Census Monthly survey 60,000 households Unemployed = people available for work who made a specific effort to find a job during the past month and who, during the most recent survey week, worked less than 1 hour for pay or profit Bureau of Labor Statistic determines the unemployment rate

20 Criticisms of unemployment
Involuntary part-time workers counted as if full-time (these people are partially employed and partially unemployed) Discouraged “frustrated” workers are not counted as unemployed LO2 26-20

21 Types of Unemployment Frictional Unemployment = workers who are “between jobs” Cyclical Unemployment = unemployment directly related to swings in the business cycle “Deficient-demand” unemployment Effected by recession Often mixed with other types of unemployment Affected workers usually get their jobs back Seasonal Unemployment = resulting from changes in the weather or demand for certain products Structural Unemployment = fundamental change in the economy reduces the demand for workers and their skills (usually need to be “retrained”) Consumer taste changes Industrial operation changes, automation Geographical changes LO3 26-21

22 Definition of Full Employment
“Full Employment”--Not Zero employment Natural Rate of Unemployment (NRU) Full employment level of unemployment Can vary over time Demographic changes Changing job search methods Public policy changes Actual unemployment can be above or fall below the NRU LO3 26-22

23 Economic Cost of Unemployment
When the economy fails to crate enough jobs for all who are able and willing to work potential production of goods and services is irretrievably lost GDP Gap GDP gap = actual GDP – potential GDP Can be negative or positive Okun’s Law Every 1% of cyclical unemployment creates a 2% GDP gap LO3 26-23

24 Economic Cost of Unemployment
26-24

25 Occupation-low skill = high unemployment
Unequal Burdens Occupation-low skill = high unemployment Age-Teenage = high unemployment Race and ethnicity-minority = high unemployment Gender-men and women very similar Education-less educated =high unemployment Duration-unemployed over 15 wks very small % LO3 26-25

26 Loss of skills and loss of self-respect Plummeting morale
Noneconomic Costs Loss of skills and loss of self-respect Plummeting morale Family disintegration Poverty and reduced hope Heightened racial and ethnic tensions Suicide, homicide, fatal heart attacks, mental illness Can lead to violent social and political change LO3 26-26

27

28 LO3 26-28

29 CPI = x CPI = x Inflation General rise in the price level
Inflation reduces the “purchasing power” of money Consumer Price Index (CPI) CPI Price of the Most Recent Market Basket in the Particular Year Price estimate of the Market Basket in = x 100 CPI 201.6 = x 100 = 2.8% LO3 26-29

30 Demand-Pull inflation Excess spending relative to output
Types of Inflation Demand-Pull inflation Excess spending relative to output Central bank issues too much money Cost-Push inflation Due to a rise in per-unit input costs Supply shocks LO3 26-30

31

32 Redistribution Effects of Inflation
Nominal income Unadjusted for inflation Real income = measure of the amount of goods/services nominal income can buy Purchasing power Real income=nominal income/PI (in hundredths) Inflation may redistribute real income Anticipation inflation/unanticipated inflation Nominal income adjusted for inflation Anticipated vs. unanticipated income “Inflation premium” Real interest rate = nominal rate – inflation premium LO3 26-32

33 Who is Hurt by Inflation?
Fixed-income receivers Real incomes fall (nominal income doesn’t rise with prices) Savers Value of accumulated savings deteriorates Creditors Lenders get paid back in “cheaper dollars” LO3 26-33

34 Who is Unaffected or Helped by Inflation?
Flexible-income receivers COLAs (cost-of-living adjustments) Social Security recipients Union members Debtors Pay back the loan with “cheaper dollars” LO3 26-34

35 Does Inflation Affect Output?
Cost-push inflation Reduces real output Redistributes a decreased level of real income Demand-pull inflation One view is that zero inflation is best Another view is that mild inflation is best LO3 26-35

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