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

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

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

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

5. 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?

6. Economic Growth Measuring: An increase in real GDP over time, or
An increase in real GDP per capita over time

7. Some other data sources
Check them out

8. Economic Growth 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

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

10. 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

11. 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

12. 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

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

14. The measures of the Unemployment rate Check them out.
Why do you suppose we hear very little about the big ugly one?

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

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

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

19. Note the role of skills in each
Unemployment
Types of Unemployment
Note the role of skills in each
Frictional Unemployment - search and wait Unemployment, transitional
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

20. 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

21. Unemployment Definition of full employment Okun’s Law
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?

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

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

24. Figure 1: Graph showing the number of people (per 100,000 national population at that time) that is confined in state, local and federal correctional facilities from 1925 to the present. State prisons are the largest part. (See as raw numbers.)

26. Unemployment GDP gap (positive) Potential GDP GDP gap (negative)
The GDP Gap
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
GDP (billions of 1996 dollars)
GDP gap
(positive)
Potential GDP
GDP gap
(negative)
Actual GDP
The Unemployment Rate 10 8 6 4 2
(percent of civilian
Unemployment
Labor force)
Source: Congressional Budget Office & Bureau of Economic Analysis

27. 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

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

29. Unemployment Loss of self-respect Political unrest,
The more difficult to quantify costs of Unemployment
Loss of job skills,
Loss of self-respect
Political unrest,
Racial and ethnic tensions,
Mental and physical illness
Impact on families

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

31. Inflation CPI = x 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 = x
100

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

33. Source: Wall Street Journal

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

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

36. Inflation
Types of Inflation
Demand pull
Cost-push

37. Types of Inflation 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.

38. Types of Inflation 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 and
Complexities – can be driven by demand pull Inflation,
Sustainability – cost push self limiting

39. 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

40. 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

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

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

43. 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.

44. Other Inflation Issues
Deflation – generally falling prices
Stagflation
HyperInflation

45. KEY TERMS
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
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)