1. Introduction to Economic Growth and Instability
Chapter 25 & 26
Introduction to Economic Growth and Instability

2. Economic Growth Definitions of Economic Growth
Increase in real GDP over some time period, or
Increase real GDP per capita over some time period.
Economic Growth is a percentage rate of growth.
Economists define and measure economic growth two different ways. The first is as an increase in real GDP over some time period and the second is as an increase in real GDP per capita over some time period. It typically is measured as a percentage rate of growth either on a quarterly or yearly basis.
During periods of recession, the growth rate will be negative instead of positive. Whether the first or second measure of determining growth is used depends on the circumstances. Looking at GDP per capita allows one to compare countries of different sizes. For country-to-country comparisons, real GDP is more useful. Generally speaking, growth in GDP is considered an economic goal. The expansion of total output relative to population results in higher standards of living. It lessens the burden of scarcity.
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3. Real GDP and Real GDP per Capita
Economic Growth
Real GDP and Real GDP per Capita
(1)
Year
(2)
Real GDP,
Billions of 2
2005$
(3)
Population,
Millions
(4)
Per Capita,
(2) ÷ (3)
1950 $
152
$12,197
1960
2831
181
15,640
1970
4270
205
20,829
1980
5839
228
25,610
1990
8034
250
32,136
2000
11,226
282
39,809
2009
12,987
307
42,303
This table presents the growth in real GDP and real GDP per capita in the United States since Due to the population increase, real GDP per capita has increased at a slower pace than real GDP. Since the population has doubled, the rate of increase in real GDP per capita has been about half that of real GDP.
Source: Bureau of Economic Analysis, and U.S. Census Bureau,
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4. Economic Growth
Countries determine economic growth as a goal. It is one of the most important economic goals - To raise total outputs relative to population
- This will lead to raising real wages and income and standards of living: More goods and services, leisure, higher educations…
Growth can reduce the effect of scarcity

5. annual percentage rate
Economic Growth
Why the rate of growth is important? Because it matters!
In the USA, a 1% growth rate increase means $100 billion more outputs.
We use the “rule of 70” : we can find the number of years for some measure to double:
Arithmetic of growth: Rule of 70
Economists define and measure economic growth two different ways. The first is as an increase in real GDP over some time period and the second is as an increase in real GDP per capita over some time period. It typically is measured as a percentage rate of growth either on a quarterly or yearly basis.
During periods of recession, the growth rate will be negative instead of positive. Whether the first or second measure of determining growth is used depends on the circumstances. Looking at GDP per capita allows one to compare countries of different sizes. For country-to-country comparisons, real GDP is more useful. Generally speaking, growth in GDP is considered an economic goal. The expansion of total output relative to population results in higher standards of living. It lessens the burden of scarcity.
Approximate
number of years
required to double
real GDP 70 =
annual percentage rate
of growth
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6. Economic Growth An example for “rule of 70” ;
i.e a 3% annual rate of growth will double real GDP in 23 years. How !!
Also, “rule of 70” can be used to compare 2 countries, How !!
While both real GDP and real GDP per capita have increased over the past 60 years, this must be qualified in several ways. Because the numbers do not fully account for improvements in products and services, they tend to understate the growth of economic well-being. They also do not take into account that growth has occurred at the same time as there has been an increase in the amount of leisure time, so economic well-being is even further understated. The numbers fail to account for any environmental or quality of life impacts as well.
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7. Economic Growth Main Sources of Growth
Can increase real outputs in two main ways:
Increasing inputs of resources
Increasing the productivity of these resources
Note: Productivity is the real output per unit of inputs and it increases when health, training, education, and motivation of workers are improved (technology).

8. The Business Cycle Definition of Business Cycle :
Alternating rises and declines in the level of economic activity over periods of times.
Usually, level of outputs (Real GDP) increases to a peak then declines to a trough.
There are four phases of the business cycle are identified over a several‑year period.
These includes a peak, a recession, a trough, and finally a recovery.

9. The Business Cycle Trend Growth Peak Peak Peak Expansion Recession
Level of real output
Recession
Expansion
Trough
Figure 26.1 shows the business cycle. Economists distinguish four phases of the business cycle; the duration and strength of each phase may vary. Additionally, individual cycles vary in duration and intensity. You can see that the long run trend is economic growth.
Recession
Trough
Time
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10. The Business Cycle
1. A peak is when business activity reaches a temporary maximum with full employment and near-capacity output.
2. A recession is a decline in total output, income, employment, and trade lasting six months or more.
3. The trough is the bottom of the recession period.
4. Recovery is when output and employment are expanding toward full‑employment level.

11. A. Unemployment
It is one of the problems that arise from economic instability.
Can be defined as the failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force.

12. A. Unemployment < 16 and or in institutions Not in labor force
Employed
“People who are able and willing to work”
Unemployed
Total population
Labor force

13. A. Unemployment Thus Definition of Unemployment is:
The unemployment rate is defined as the percentage of the labor force that is not employed. (Note: Emphasize not the percentage of the population.).
Unemployment can be measured as;
Unemployment
Rate = (unemployed / Labor Force) x 100

14. and/or Institutionalized (71.4 million)
A. 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)
The BLS is the Bureau of Labor Statistics, an agency within the Department of Labor. The unemployment rate is calculated by taking a random survey of 60,000 households nationwide. (Note: Households are in the survey for four months, out for eight, back in for four, and then out for good. Interviewers use the phone or home visits using laptops.)
The population is divided into three groups:
Group 1 consists of those under age 16 or institutionalized. In this country, if you are under 16 you are expected to be in school. If you are in an institution such as a nursing home or prison you obviously cannot present yourself to the labor market.
Group 2 consists of those “not in labor force”. Examples of individuals who are not in the labor force are full-time college students who are not working, stay at home parents, and retirees.
Group 3 consists of those age 16 and over who are willing and able to work, and actively seeking work (individuals who have demonstrated job search activity within the last four weeks).
So, Group 3 is the labor force. The labor force is simply described as those who are either employed or unemployed. To be counted as unemployed you must be a part of the labor force.
Figure 26.2 shows the labor force, employment, and unemployment in The labor force consists of persons 16 years of age or older who are not in institutions and who are employed, or unemployed but seeking employment. The unemployment rate is defined as the percentage of the labor force that is not employed and is found by taking the number of those unemployed and dividing that number by the labor force. Remember to multiply the result by 100 so you can express this as a percentage. The BLS rounds the number to one decimal point.
Labor force (154.2 million)
Unemployed
(14.3 million)
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15. A. Unemployment Types of unemployment:
1. Frictional unemployment: consists of those workers between jobs (searching for better job, fired, laid of b\c of seasonal demand, searching for the first job…) .
2. Structural unemployment: due to changes in the structure of demand for labor; e.g., workers whose skills are not demanded, who lack sufficient skill to obtain employment, or who cannot move to locations where jobs are available.
3. Cyclical unemployment: is caused by the recession phase of the business cycle as demand decreases, employment falls and unemployment increases.
National income accounting does for the economy what private accounting would do for an individual household or business. The Bureau of Economic Analysis, an agency of the Department of Commerce, compiles the data and reports it in National Income and Product Accounts. This information is used by economists and policymakers in formulating decisions for the best interest of the nation.

16. A. Unemployment Definition of Full Employment:
Full employment does not mean zero unemployment.
Therefore, we can say the economy is fully employed ( at Full Employment) even if we have both the structural and frictional unemployment.
Full employment occurs when there is no cyclical unemployment.
National income accounting does for the economy what private accounting would do for an individual household or business. The Bureau of Economic Analysis, an agency of the Department of Commerce, compiles the data and reports it in National Income and Product Accounts. This information is used by economists and policymakers in formulating decisions for the best interest of the nation.

17. A. Unemployment
Since we have unemployment even when we are at full employment.
The full‑employment rate of unemployment is also referred to as the natural rate of unemployment.
The natural rate is achieved when labor markets are in balance; “the number of job seekers” equals “the number of job vacancies”.
The natural rate of unemployment is not fixed but depends on the demographic makeup of the labor force and the laws and customs of the nations.

18. A. Unemployment Economic cost of unemployment: (1)
GDP gap and Okun’s Law: GDP gap is the difference between potential and actual GDP.
Economist Arthur Okun quantified the relationship between unemployment and GDP as follows: For every 1 percent of unemployment above the natural rate, a negative GDP gap of about 2 percent occurs. This is known as “Okun’s law”.
The forgone outputs in this case when the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is lost.
National income accounting does for the economy what private accounting would do for an individual household or business. The Bureau of Economic Analysis, an agency of the Department of Commerce, compiles the data and reports it in National Income and Product Accounts. This information is used by economists and policymakers in formulating decisions for the best interest of the nation.

19. A. Unemployment
(2)
Unequal Burden: Level of skill, nature of occupation, certain age and race and ethnicity, gender, and education.
Noneconomic cost of unemployment:
(1)
Noneconomic costs include loss of self‑respect and social and political unrest.
National income accounting does for the economy what private accounting would do for an individual household or business. The Bureau of Economic Analysis, an agency of the Department of Commerce, compiles the data and reports it in National Income and Product Accounts. This information is used by economists and policymakers in formulating decisions for the best interest of the nation.

20. B. Inflation Definition of Inflation:
Inflation is a rising general level of prices (not all prices rise at the same rate, and some may fall).
Not necessary that all prices are increasing
In periods of inflation, some prices are rising while some are declining
The most important: general price level, and the increase to have an affect
National income accounting does for the economy what private accounting would do for an individual household or business. The Bureau of Economic Analysis, an agency of the Department of Commerce, compiles the data and reports it in National Income and Product Accounts. This information is used by economists and policymakers in formulating decisions for the best interest of the nation.

21. B. Inflation Measuring of Inflation:
The main index used to measure inflation is the Consumer Price Index (CPI).
Using CPI when price index measures the general level of prices in the economy as :
CPIyear A=(basket yearA)/(basket in base year) X100
Therefore,
inflation rate2000 = CPI2000- CPI X CPI1999

22. B. Inflation Types of Inflation Demand Pull Inflation:
Assume that the economy is at its full capacity of production. Then, Assume that total spending is greater than production level… what will happen to price level?
Since all resources are fully employed, production cannot respond to this increase in demand.
Therefore, outputs cannot be expanded to meet demand, This excess demand will bid up prices, causing “demand-pull inflation”.
“Too much spending for too few goods”

23. Total input cost / units of outputs
B. Inflation
2. Cost-Push Inflation:
This is an increase in per-unit production costs.
Per-unit production cost =
Total input cost / units of outputs
This will reduce profits and reduce outputs firms willing to produce.
Thus, the economy’s supply of goods and services declines and the price level rises.
Costs are pushing the price level upward
Sources: supply shocks: increase in costs or raw materials, energy inputs, wages…

24. B. Inflation Redistribution Effects of Inflation
Inflation hurts some, leaves others unaffected
Inflation redistributes real income from some to others
Who benefits and who gets hurt?

25. B. Inflation Redistribution Effects of Inflation Terminology; Recall;
Real income = nominal income/price index
Real wage: purchasing power of nominal wage (number of $$ received as wages, rent, interest, or profits)
Some people will be affected more than others as inflation occurs (redistribution effect).
The following rule tells us approximately by how much real income will change:
%ΔReal in Income =%Δ nominal income - %Δ in price level

26. B. Inflation Redistribution Effects of Inflation
Who is affected by Inflation;
Unanticipated inflation has stronger impacts; those expecting inflation may be able to adjust their work or spending activities to avoid or lessen the effects.
Unanticipated inflation hurts:
Fixed income receivers
Savers
Creditors
Unanticipated inflation is unaffected to:
Flexible income receivers
Debtors

27. B. Inflation Anticipated inflation
The redistribution effects of inflation are less sever or can be eliminated when people can expect inflation (inflation is anticipated )and can adjust their nominal incomes to reflect the expected price-level increases.
The lender can avoid the anticipated inflation by charging inflation premium;
Nominal interest rate = Real interest rate + Inflation Premium

28. B. Inflation Hyperinflation; Is an extremely high rate of inflation.
Individuals expect inflation rate to even gets higher, leading them to “spend now”.
Business owners do not know what to charge for their products.
May cause economic collapse
Uncertainty about future prices