1. Macroeconomics - ECO 2013 Fall 2005 – 1 Term August 24 – December 16, 2005

2. Chapter 8: Intro to Economic Growth & Stability Economic Growth Business Cycle Unemployment Inflation

3. Economic Growth Defined by two ways: An increase in real GDP occurring over some time period An increase in real GDP per capita occurring over some time period  Best for comparing living standards between countries Calculated as a percentage rate of growth per year

4. Growth as a Goal Expansion of total output v. population growth results in rising real wages and incomes  higher SOL Better able to meet society’s wants & resolve socioeconomic problems Rising real wages & income provide more opportunities to individuals & families w/o sacrificing others Undertake new programs to alleviate poverty or protect environment

5. Growth as a Goal Growth lessens the burden of SCARCITY Society can consume more today while increasing capacity to produce more in the future Relaxes society’s constraints on production

6. Mathematical Growth Approximation: Rule of 70 Number of years required to Double GDP: 70 ÷ Annual % Growth

7. Main Sources of Growth Increasing Inputs of Resources (1/3) FFOP: Land, Labor, Capital, & Entrepreneurial Abilities Increasing Production of Inputs (2/3) Improvements in health, training, education & motivation of workers Capital enhancements (machinery) Better natural resources Organization & Management Labor reallocated by efficiency

8. Results of Economics Growth in the U.S. Improved Products & Services Added Leisure (50 to 40 hrs/week) Environmental Impacts (Damaging) Quality of Life (Stress)

9. The Business Cycle: Four Phases Peak: Business activity reaches temporary maximum Recession: Period of decline in Total Output, Income, Employment, Trade Lasts more than 6 months Depression: a severe & prolonged recession, falling prices are likely Trough: Output & employment “bottoms out” at lowest levels Can be long or short Recovery: Expansion phase where output & employment rise toward full employment Prices may rise

10. Causes of Fluctuations Major innovations can trigger new investment and/or consumer spending Changes in Productivity Monetary Phenomenon Governments create more/less money Changes in Total Spending In the U.S., long-run growth trend is expansionary

11. Who is affected by Recessions in the Business Cycle? Everyone & Everywhere Firms & Industries producing Capital & Consumer Durable Goods are most affected Service industries and Nondurable Consumer Goods are somewhat “insulated”

12. Measuring Unemployment Who is eligible & available to work? Ineligible: Those less than 17 years and/or institutionalized Not in Labor Force: Those not employed and NOT SEEKING WORK Employed Unemployed: Those not employed and SEEKING WORK Labor Force = Employed + Unemployed Approximately 50% of U.S. Population Those “willing and able” to work

13. Unemployment Rate Calculated as a Percentage of Labor Force: Unemployment Rate = (Unemployed / Labor Force) * 100 BLS conducts survey of 60,000 households monthly

14. Unemployment Rate Part-time Employment underestimates the true unemployment rate Many would prefer full-time work but can’t find it Discouraged workers understate the true unemployment rate Not in labor force but they wish they were

15. Frictional Unemployment Those “between jobs” Voluntary Fired Seasonal shifts in demand “Unemployment Pool” Labor market is Imperfect & Noninstantaneous in matching workers to jobs Inevitable & Desirable Short-term

16. Structural Unemployment Changes over time in consumer demand & technology Demand for certain skills may decline or vanish Demand for other skills intensifies Change in the COMPOSITION of the Labor Force Geography Long-term, more serious

17. Cyclical Unemployment Caused by decline in total spending during recessions aka “Deficit Demand Unemployment” Serious

18. Full Employment Occurs when economy is experiencing only frictional & structural unemployment (i.e., no cyclical unemployment) Full Employment Rate of Unemployment or Natural Rate of Unemployment (NRU) Economy is producing its Potential Output NRU occurs when Job Seekers = Job Vacancies

19. Reasons for the Decline in NRU Less younger workers in the labor force Growth of temp agencies Improved information technology Welfare reform Doubling of U.S. prison population

20. Economic Costs of Unemployment: GDP Gap When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods & services is lost GDP Gap: Potential GDP – Actual GDP Potential GDP is at the NRU

21. Economic Costs of Unemployment: Okun’s Law For every 1% by which actual unemployment rate exceeds the natural rate of unemployment, GDP gap of 2% occurs

22. Economic Costs of Unemployment: Unequal Burdens Costs are unequally distributed among different groups Occupation Low-skilled laborers > High-skilled professionals More frequent & longer unemployment spells Bear brunt of recessions Age Teenagers > Adults Lower skills Less geographical mobility New in labor market

23. Economic Costs of Unemployment: Unequal Burdens Race & Ethnicity: African-Americans & Hispanics > Caucasian Lower rates of educational attainment Greater concentration of low-skilled jobs Discrimination in the labor market Education: Less educated > More educated Duration

24. Inflation Rise in the general level of prices Does NOT mean ALL prices are rising Prices rise unevenly Measuring Inflation Consumer Price Index [CPI(2) – CPI(1)]/CPI(1) * 100

25. Redistribution Effects of Inflation Who is hurt by Inflation (assuming it is unanticipated) Fixed Income Receivers (e.g., elderly) Savers  Value of savings will decline if rate of inflation is greater than the rate of interest Creditors

26. Who is Unaffected or Benefits from Inflation? Flexible-Income Receivers Cost of Living Adjustments (COLAs) Social Security Recipients Borrowers

27. Anticipated Inflation If inflation is anticipated, the effects of inflation may be less severe Wage & pension contracts may have clauses (COLAs) Interest rates will be high enough to cover cost of inflation to savers & lenders (“Inflation Premium”) Real Interest Rate = Nominal Rate + Inflation Premium

28. Hyperinflation Extremely rapid inflation Impact on real output & employment is devastating Actions based on inflationary expectations intensifies the pressure on prices Inflation feeds on itself May cause economic collapse

29. Chapter 8 Study Questions 4: Business Cycle 5 & 6: Unemployment

30. Next Class Review Chapters 7 & 8 Review Results of Take-Home Assignment (Chapters 4 & 5) Submit Second Article Summaries