1. Introduction to Economic Growth and Stability
CHAPTER 8
Introduction to Economic Growth and Stability
Economic Growth means an increase in real GDP has occurred or there has been an increase in real GDP per capita.
There are two ways to grow:
An increase in real GDP over time
An increase in real GDP per capita over time

2. ECONOMIC GROWTH Growth as a Goal Arithmetic of Growth Rule of 70
Main Sources of Growth
Increases in Resources
Increases in Productivity

3. Productivity is real output per unit of input.
Long-run economic growth in all capitalist societies has been interrupted by periods of economic instability. This instability takes the form of upturns and downturns in the business cycle.
The Business Cycle refers to alternating rises and declines in the level of economic activity.

4. THE BUSINESS CYCLE Phases of the Business Cycle GROWTH TREND Time PEAK
RECESSION
TROUGH
RECOVERY
GROWTH
TREND
Level of business activity
Time

5. There are many causes of the business cycle: innovations, changes in productivity, too little money in the banks, and the level of total spending (C+Ig+G+Xn).
Durable goods are more likely affected by the swings in the business cycle.
The problem with the business cycle is that unemployment follows the business cycle.
Unemployment rate=(unemployed/labor force)*100
This rate may be too low because it does not include part-time employment or discouraged workers.

7. Types of unemployment:
Frictional: people between jobs
Structural: the demand for the products in certain industries has declined
Cyclical: general decline in demand
Full employment rate of unemployment or natural rate = frictional and structural. Anything over this is cyclical unemployment.
The economic cost of unemployment: Okun’s Law indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, there will be a GDP gap of 2 percent.

8. UNEMPLOYMENT Noneconomic Costs:Suicide,Crime,Abuse
Unequal Burdens of Unemployment
Occupation
Age
Race and Ethnicity
Gender
Education
Duration
Noneconomic Costs:Suicide,Crime,Abuse
International Comparisons

9. GLOBAL PERSPECTIVE
Unemployment Rates 5 Industrial Nations 15 10 5
France
U.K.
Germany
U.S.
Japan
1992
1997
2002
Source: Economic Report of the President, 2003

10. INFLATION = CPI x 100 Defined and Measurement Consumer Price Index
A rising general level of prices
Rate of inflation calculated using index numbers
Consumer Price Index =
Price of the same market
basket in
x 100
CPI
Price of most recent market basket in the particular year

11. INFLATION Rule of 70 - Applied Facts of Inflation
U.S. Double-Digit Inflation in Late 70s and Early 80s
Currently Relatively Mild
Other Nations in 2002
Romania – 23%
Belarus – 43%
Turkey – 45%
Myanmar – 57%

12. INFLATION Types of Inflation DEMAND-PULL INFLATION
Results from any situation that increases demand
beyond the capacity of the economy to meet the
demand
COST-PUSH INFLATION
Rising Per-Unit Production Costs
Supply-Side Inflation
Supply Shocks

13. REDISTRIBUTIVE EFFECTS
OF INFLATION
Nominal Income: Number of $ received
Real Income:Nominal Income/Price Index
Who is Hurt? Fixed Incomes, Savers, Creditors
Effect Depends Upon Anticipations
Anticipated Inflation
Unanticipated Inflation

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

15. REDISTRIBUTIVE EFFECTS
OF INFLATION
Who is Unaffected or Helped by Inflation?
Flexible-Income Receivers
Cost of Living Adjustments (COLAs)
Debtors

16. Inflation affects output
Inflation affects output. When oil prices increase, that input now is more expensive for firms that use oil, so their prices increase and higher prices are associated with reduced output.
Hyperinflation has occurred in some economies. This means that the prices increase so fast and that people may return to a barter economy to cope. It can cause economic collapse.