1. 7
Introduction to Economic Growth and Instability

2. Chapter Objectives The Business Cycle and its Primary Phases
How Economic Growth is Measured and Why is it Important
How Unemployment and Inflation are Measured
The Types of Unemployment and Inflation and their Various Economic Impacts

3. annual percentage rate
Economic Growth
Increase in Real GDP
Increase in Real GDP Per Capita
Growth as a Goal
Arithmetic of Growth
Rule of 70
W 7.1
Approximate
number of years
required to double
real GDP 70 =
annual percentage rate
of growth

4. Economic Growth Main Sources of Growth Increases in Inputs
Increases in Resource Productivity
Productivity Defined
Productivity in the United States
Improved Products and Services
Added Leisure
Other Impacts

5. Selected Growth Rates GLOBAL PERSPECTIVE U.S. France Germany U.K.
Percentage Change (annual rate)
Japan
Italy
1997
1999
2001
2003
2005
Source: Economic Report of the President, 2006

6. The Business Cycle Phases of the Business Cycle Cyclical Impact:
Peak
Peak
Trend
Peak
Expansion
Growth
Level of Real Output
Recession
Expansion
Trough
Recession
Trough
Time
Cyclical Impact:
Durables and Nondurables

7. Unemployment Twin Problems of the Business Cycle
Inflation
Measurement of Unemployment
Labor Force
Unemployment Rate
Part-Time Employment
Discouraged Workers
W 7.2
Unemployment Rate
Unemployed
Labor Force = x
100

8. Unemployment Labor Force, Employment, and Unemployment, 2005 Under 16
And/or
Institutionalized
(70.5 Million)
Not in
Labor Force
(76.8 Million)
Total
Population
(296.6 Million)
Employed
(141.7 Million)
Labor
Force
(149.3 Million)
Unemployed
(7.6 Million)

9. Unemployment Types of Unemployment Full Employment Defined
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Full Employment Defined
Full-Employment Rate of Unemployment
Natural Rate of Unemployment (NRU)

10. Unemployment Economic Cost of Unemployment Potential Output
GDP Gap and Okun’s Law
W 7.3
GDP
Gap
Actual GDP
Potential GDP = -

11. Unemployment Actual and Potential GDP and the Unemployment Rate
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

12. Unemployment Unequal Burdens Noneconomic Costs Occupation Age
Race and Ethnicity
Gender
Education
Duration
Noneconomic Costs

13. Unemployment GLOBAL PERSPECTIVE
Unemployment Rates in Five Industrial Nations,
France
Italy
Unemployment Rate (percent)
Germany
U.S.
Japan
1995
2000
2005
Source: Bureau of Labor Statistics

14. Inflation Inflation Defined Measurement of Inflation CPI = x
Consumer Price Index
CPI
Price of the Most Recent Market
Basket in the Particular Year
Price of the Same Market
Basket in = x
100

15. Inflation Annual Inflation Rates in the United States, 1960-2005
Inflation Rate (percent)
Source: Bureau of Labor Statistics

16. Inflation GLOBAL PERSPECTIVE
Inflation Rates in Five Industrial Nations,
Italy
U.S.
Inflation Rate (percent)
France
Germany
Japan
1995
2000
2005
Source: Bureau of Labor Statistics

17. Inflation Types of Inflation Redistributive Effects
Demand Pull Inflation
Cost-Push Inflation
Per Unit Production Costs
Redistributive Effects
Nominal and Real Income
Anticipations
Anticipated Inflation
Unanticipated Inflation

18. Inflation Who is Hurt by Inflation?
Fixed-Income Receivers
Savers
Creditors
Who is Unaffected or Hurt by Inflation?
Flexible-Income Receivers
Cost-of-Living Adjustments (COLAs)
Debtors
W 7.4

19. Inflation Anticipated Inflation = + Nominal Interest Rate
Real Interest Rate
Inflation Premium
O 7.2
11% 6% = + 5%
Inflation
Premium
Nominal
Interest
Rate
Real
Interest
Rate

20. Inflation Deflation Mixed Effects Arbitrariness
Cost-Push Inflation and Real Output
Demand-Pull Inflation and Real Output
Hyperinflation

21. The Stock Market and the Economy
Last
Word
Do Stock Prices Affect Macroeconomic Instability?
Supply and Demand in the Stock Market
Collective Expectations of Future Profits and Losses
Dow Jones Industrial Average (DJIA)
Volatility of the Stock Market
Wealth Effect
Investment Effect
Studies Show Consumption and Investment Unaffected
Little Impact on Macroeconomy
Stock Market Bubbles Do Have an Impact
Stock Price Cycle Predictions
Index of Leading Indicators
Stock Prices Not a Reliable Predictor Alone

22. Key Terms economic growth real GDP per capita rule of 70 productivity
business cycle
peak
recession
trough
expansion
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

23. Next Chapter Preview…
Basic
Macroeconomic
Relationships
Chapter 8!