1. Introduction to Economic Growth and Instability8
C H A P T E R
Introduction to Economic Growth and Instability

2. ECONOMIC GROWTH Growth as a Goal Arithmetic of Growth Rule of 70
An increase in real GDP over some time period
An increase in real GDP per capita over some time period
Growth as a Goal
Arithmetic of Growth
Rule of 70
Main Sources of Growth
Increases in Resources
Increases in Productivity
Per capita = GDP ÷ population.
Growth lessens the burden of scarcity by providing enough for those who need.
Rule of 70: take the % and ÷ it into 70 which reflects how long it will take for that % to double.
Main source: 1/3 increases in inputs and 2/3 increase in productivity.

3. Growth in the United States Improved Products and Services
ECONOMIC GROWTH
Growth in the United States
Improved Products and Services
Added Leisure
Other Impacts
Relative International Growth Rates
GDP risen 6 fold growth since Per capita GDP risen 4 fold
Since 1950, 3.1% inc. GDP and 2% inc. per capita GDP.
Yet, growth doesn’t measure
quality of improvements
increased leisure time
adverse effects on environment or human security
Most industrialized countries continue to grow yet in spurts or in varying rates. Japan exceeded U.S. until the 1990’s then U.S. far surpassed Japan.

4. THE BUSINESS CYCLE Phases of the Business Cycle GROWTH TREND Time PEAK
RECESSION
TROUGH
RECOVERY
GROWTH
TREND
Level of business activity
Peak = business activity reaches temporary maximum with full employment and near capacity.
Recession = decline in total output, income, employment and trade lasting 6 months or more.
Trough = bottom of the recession period.
Recovery = when output and employment are expanding toward full-employment.
Time

5. THE BUSINESS CYCLE Many Causation Theories Cyclical Impact
Causation: A First Glance
Many Causation Theories
Cyclical Impact
Capital Goods
Consumer Durables
Service Industries
Nondurable Consumer Goods
Innovations trigger new investment and/or consumption spending. Computers/games
Government creates too much money.
Cyclical impact – spending on captial/durable goods vis a vis consumer/nondurable goods. Producers of captial/durable benefit during expansion and suffer during recession.
Service industries along with consumer/nondurable goods a rather insulated form effects of recession. We need to have them.

6. UNEMPLOYMENT Measurement of Unemployment, 2000 Under 16 and/or
institutionalized
65,800,000
Not in
labor
force
68,800,000
Total
Population
275,400,000
Employed
135,200,000
Not in labor force = homemakers, retirees, full time students, discouraged workers, (homeless) – those not actively seeking work. By not counting them we get a distorted picture of NRU.
Labor
force
140,800,000
Unemployed
5,600,000

7. UNEMPLOYMENT x = Part-Time Employment Discouraged Workers
Measurement of Unemployment, 2000
Unemployment
rate
unemployed
labor force x
100 =
Part-Time Employment
Discouraged Workers
Part timers are considered as full time employees.
Discouraged workers – those people who have been unsuccessful in finding work and give up looking.
FULL EMPLOYMENT DOES NOT = 0 UNEMPLOYMENT.

8. UNEMPLOYMENT Frictional Unemployment Structural Unemployment
Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Full-Employment Rate of Unemployment
Natural Rate of Unemployment (NRU)
Frictional = those searching or in between jobs.
Structural = those displaced due to obsolescence or geographic shift in job availability.
Computers replacing workers
Coal mine play out.
Mergers
Foreign competition
Cyclical = unemployment due to changes in the business cycle. 1933/82/ %, 9.7%, and 6.7%
Full-Employment Rate of Unemployment = NRU the Natural Rate of Unemployment.
Occurs when the number of job seekers find employment.
Takes into consideration the structurally and frictionally unemployed.
Varies over time ’s was about 6% now 4% – 5%. Decline do to, > prison pop., middle aged/less unemployment, improved information via temp agencies and internet, change in welfare laws.

9. UNEMPLOYMENT GDP Gap and Okun’s Law Approximately a 2% GDP Gap occurs
Economic Costs of Unemployment
GDP Gap and Okun’s Law
The amount by which actual GDP
falls short of potential GDP
For every 1% unemployment
exceeds the natural rate...
Approximately a
2% GDP Gap occurs

10. UNEMPLOYMENT Occupation Age Race and Ethnicity Gender Education
Unequal Burdens of Unemployment
Occupation
Age
Race and Ethnicity
Gender
Education
Duration
Noneconomic Costs – idleness means loss of: skills, self respect, low morale, family problems, social and political unrest. Hitler’s campaign.
Noneconomic Costs
International Comparisons

11. GLOBAL PERSPECTIVE
Unemployment Rates in Five Industrial Nations 15 10 5
France
U.K.
Germany
U.S.
Japan
1990
1995
2000
Source: Economic Report of the President

12. INFLATION Defined and Measurement A rising general level of prices
Rate of inflation calculated using index numbers
Rule of 70
Shortcut to determine doubling time
Facts of Inflation
1970’s ’s double digit. Now basically under control. How? Fed, money policy. Govt. public policy.

13. GLOBAL PERSPECTIVE
Inflation Rates in Five Industrial Nations
U.K. 10 5
U.S.
France
Japan
Germany
1990
1995
2000
Source: Economic Report of the President

14. INFLATION DEMAND-PULL INFLATION Types of Inflation P Q Price level Q
Increases in Total
Spending
Range 3
Price level
Range 2
Spending increases faster than production.
Inflation occurs between range 2 & 3
At range 3 full employment is reached. Continued spending drives prices even higher.
Hoarding,
“buying now rather than later when the prices will be even higher”
Resources shrink driving prices up (cost-push factor), labor is used inefficiently driving cost up even more.
Range 1
Full-
employment
output Q f Q
Real domestic output & employment

15. INFLATION DEMAND-PULL INFLATION COST-PUSH INFLATION
Types of Inflation
DEMAND-PULL INFLATION
COST-PUSH INFLATION
Rising Per-Unit Production Costs
Supply-Side Inflation
Supply Shocks
Complexities
Rise in prices of resources. Per unit of production cost rises. Oil “supply shock”
Wage push because of union strength.
Difficult to distinguish between the two as one can force the other an be a bit disguised in the process.
Excessive demand drives prices up causing reallocation of resources including labor. Which in turn cause increased pricing of resources hence, starting cost-push.

16. REDISTRIBUTIVE EFFECTS
OF INFLATION
Nominal Income
Real Income
Anticipations
Anticipated Inflation
Unanticipated Inflation
Nominal – dollars received as wages, rent, interest, or profit.
Real – a measure of the amount of goods and services nominal income can buy.
Real = nominal ÷ price index (CPI)
Anticipated Inflation – that inflation which a person may avoid. Banks, consumption of capital goods/consumer goods
Unanticipated – unexpected hence unavoidable. Gas? Food, clothing, ?

17. REDISTRIBUTIVE EFFECTS
OF INFLATION
Who is Hurt by Inflation?
Fixed-Income Receivers
Savers
Creditors
Fixed income – show board example
Savers – cash alone looses value. The difference between interest rate and inflation indicated real value of savings.
Banks can loose. So the institute an “inflation premium” via “anticipated inflation”.

18. REDISTRIBUTIVE EFFECTS
OF INFLATION
Who is Unaffected or Helped by Inflation?
Flexible-Income Receivers
Cost of Living Adjustments (COLAs)
Debtors
Debtors – “dear” money borrowed. Paid back with cheap dollars.
Federal debt. Inflation allows the Treasury to pay off its loans with dollars of less purchasing power than the ones originally borrowed.

19. REDISTRIBUTIVE EFFECTS
OF INFLATION
Addenda
Deflation
Mixed Effects
Arbitrariness
Deflation – great for consumers, disaster for an economy. Reduced GDP, especially in the capital/durable goods area, greater unemployment. Growth slows and reverses.
Mixed effects – benefits Flexible incomes hurts fixed incomes. Benefits COLA recipients and debtors, hurts non-COLA and fixed and firms and institutions that have not “anticipated”
Arbitrary – inflation doesn’t discriminate. It lacks a “social conscience”. Affects rich & poor, old and healthy alike.

20. ANTICIPATED INFLATION
11% 6% = + 5%
Inflation
Premium
Nominal
Interest
Rate
Real
Interest
Rate

21. EFFECTS OF INFLATION ON OUTPUT
Cost-Push Inflation and Real Output
Demand-Pull Inflation and Real Output
Hyperinflation & Breakdown
Supply shock from OPEC caused cost-push in and coupled with high unemployment real output was reduced. Cost-push inflation reduces real output because real income is decreased.
Demand-Pull – real output spurred by low levels of inflation is reduced. In a sense, wasted or misdirected resources are used to hedge against anticipated or real inflation. The cost of changing prices, gathering information, saving more and carrying less cash add to non-productivity.
Hyperinflation - Workers demand and get higher wages, excess spending by anticipating shortages and or price increases in basically all areas. Scarcity and/or hoarding resources forces costs of those resources to go up forcing higher end use prices. Inflation starts to feed upon itself. Prices increase so rapidly and sharply that business owners aren’t sure what to charge. Germany, lunch. Hungary 1 to the 27th . Germany 1.3 billion mark inflation.
Chapter Conclusions

22. KEY TERMS GDP gap Okun’s Law inflation 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
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
BACK
END
Copyright McGraw-Hill/Irwin, 2002

23. AGGREGATE EXPENDITURES
BUILDING THE
AGGREGATE EXPENDITURES
MODEL
Chapter 9