1. GROWTH BUSINESS CYCLES UNEMPLOYMENT INFLATION

2. Economic Growth Measurement Gross Domestic Product (GDP)
Market value of final goods and services produced
Details later

3. Economic Growth Nominal GDP (OK measure) Real GDP (Better measure)
Goods and services valued at their current prices
Real GDP (Better measure)
Goods and services valued in prices of a base or
reference year.
Real Per capita GDP (Best measure)
GDP divided by population

4. Per Capita Income by Region
Growth Rate:
Income: 1950
Income: 2009
China
4.4%
$ 439
$ 6,050
Jqpan
4.8%
$1,900
$22,500
North America
2.0%
$9,500
$31,000
Latin America
1.6%
$2,500
$ 6,500
Western Europe
2.6%
$6,500
$21,200
Eastern Europe
2.2%
$3,100
$ 7,600
Africa
1.1%
$1,300
$ 1,700
World
2.1%
$2,100
$ 7,300

5. Benefits and Costs of Growth
If real per capita GDP increases, everyone in society will on average, have more.
Governments avoid hard choices
Costs
Pollution
Resource exhaustion
Destruction of natural habitat
Materialism

6. Four Phases of the Business Cycle
2 qtrs decline
2 qtrs rise
Jan.-
Mar
Total Output
Apr.-
June
July-
Sept.
Oct.-
Dec.
Expansion
Recession
Expansion
Boom
Peak
Upturn
Downturn
Secular growth trend
Trough

7. U.S. Business Cycles

8. Business Cycles Important terms
Recession: 6 months of declining real output
2002, to ?
Depression: Long period of
declining output and high
unemployment
1930s and ???

9. Changes in Business Cycles Over Time
Duration (in months)
Business Cycles Pre-World War II Post-World War II
( ) ( )
Average length of expansions
Average length of recessions
Length of shortest recession
Length of longest recession ( ) ( )

10. Leading Indicators Average work week Unemployment claims
Index of consumer expectations
New orders for capital goods
Building permits
Stock prices

11. Unemployment Types Frictional Structural Cyclical Seasonal
Underemployment

12. Measuring Unemployment
Monthly interviews
Criteria
16 years or older
Available for work
Tried to find work

13. Calculating Unemployment
Labor force
Able to work
Have a job
Don’t have a job, but looking for a job
Number unemployed
Don’t have a job, but looking for a job

14. Unemployment Rates since 1900

15. Unemployment by Microeconomic Subcategories
See Text, p. 171

16. Accuracy of the Unemployment Rate
Discouraged workers
Under-employed
Survey bias

17. Target Rate of Unemployment
Used to be called “Full Employment”
The lowest sustainable rate achievable under existing conditions.
Currently considered to be about 5%
Can change due to:
Population demographics
Social and institutional structures
Government programs

18. Unemployment and Potential Output
Potential output – output at:
Target rate of unemployment
and
Target rate of capacity utilization
Okun’s rule of thumb:
Unemployment rate up by 1%
→ Output down by 2%

19. Inflation $ General increase in prices
Cause: Too much money chasing too few goods

20. Effects of Inflation Unanticipated inflation: Who is harmed?
Lenders
People with fixed incomes
Anybody making decisions
Anticipated inflation

21. Measurement of Inflation
Monthly interviews

22. Measurement of Inflation
Market Basket
2009 Price $3.00/gal $4.50/lb
2010 Price /gal $6.00/lb
100 gal gas lbs steak Total Cost
2009 Cost $ $ $345
2010 Cost $ $ $460
Inflation Rate ( /345) = 33%

23. Real World Price Indexes
GDP Deflator
Consumer Price Index
Producer Price Index (PPI)

24. Composition of CPI Food and beverage (15.0%) Housing (42.7%)
Apparel (3.7%)
Transportation (17.2%)
Other (3.5%)
Medical care (6.3%)
Education and Communication (6.0%)
Recreation (5.6%)

25. Price Indices and the “Base Year”
Base year selected
Currently, 1982 for the CPI
Price index is always 100 for the base year
Rate of inflation is the % change in the
price index from one period to the next

26. Calculating the Rate of Inflation
YEAR
PRICE INDEX
ANNUAL RATE OF
INFLATION
2007 96
2008
100
4.17%
2009
104
4.00%
2010
114
9.62%
Inflation Rate = Change in Price Index
Earlier Year Price Index

27. Real Verses Nominal Output
Nominal output is measured at current prices.
Real output is nominal output:
Adjusted for price level changes from a “Base Year.”

28. Real Versus Nominal Prices
Suppose that the nominal price of gasoline is $3.25 per gallon. The CPI (1982 base year) is 190%. Find the real price of a gallon of gasoline.

29. HYPERINFLATION Definition: > 50%/month Jan 1.00 Feb 1.50 Mar 2.25
April
May
June
July
Aug
Sept
Oct
Nov
Dec
Jan

30. HYPERINFLATION (cont)
Germany (after WWI)
1 egg Marks
Pre-War Price
Nov/1923 Price 80,000,000,000

31. HYPERINFLATION (cont)
Hungary (after WWII)
Inflation rate: 3,810,000,000,000,000,000,000,000,000,000

32. HYPERINFLATION (cont)
Bolivia (1985)
118,000%

33. HYPERINFLATION (cont)
Turkey exchange rate

34. HYPERINFLATION (cont)
Cause: Turning on the printing presses
People’s reaction?

35. Deflation Continuing decrease in prices
Distributional impacts (reverse of inflation)
Borrowers lose
Those on fixed incomes gain
Other impacts
Consumers postpone purchases
Asset values (e.g., stocks and real estate) decline
The dangers
Demand decreases, so businesses produce less
Financial institutions may become insolvent
Deflationary spiral