2. 8 - 1 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show Introduction to Economic Growth and Instability 8 C H A P T E R

3. 8 - 2 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show ECONOMIC GROWTH An increase in real GDP over time An increase in real GDP per capita over time Growth as a Goal Arithmetic of Growth Rule of 70 Main Sources of Growth Increases in Resources Increases in Productivity

4. 8 - 3 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show ECONOMIC GROWTH Growth in the United States Improved Products and Services Added Leisure Other Impacts Relative International Growth Rates

5. 8 - 4 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show THE BUSINESS CYCLE Phases of the Business Cycle PEAK Level of business activity Time RECESSION TROUGH RECOVERY GROWTH TREND

6. 8 - 5 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show THE BUSINESS CYCLE Causation: A First Glance Many Causation Theories Cyclical Impact Capital Goods Consumer Durables Service Industries Nondurable Consumer Goods

7. 8 - 6 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Measurement of Unemployment, 2002 Employed Not in labor force Under 16 and/or institutionalized Total Population 288,600,000 Labor force 142,500,000 74,700,000 71,400,000 Unemployed 8,300,000 134,200,000

8. 8 - 7 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Measurement of Unemployment, 2002 Unemployment rate unemployed labor force x 100 = Part-Time Employment Discouraged Workers

9. 8 - 8 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment Full-Employment Rate of Unemployment Natural Rate of Unemployment (NRU)

10. 8 - 9 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Economic Costs of Unemployment GDP Gap and Okun’s Law Approximately a 2% GDP Gap occurs For every 1% unemployment exceeds the natural rate... The amount by which actual GDP falls short of potential GDP

11. 8 - 10 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Unequal Burdens of Unemployment Occupation Age Race and Ethnicity Gender Education Duration Noneconomic Costs International Comparisons

12. 8 - 11 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show 1997 15 10 5 0 France U.K. Germany U.S. Japan 1992 2002 GLOBAL PERSPECTIVE Unemployment Rates 5 Industrial Nations 1992 - 2002 Source: Economic Report of the President, 2003

13. 8 - 12 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show INFLATION Defined and Measurement A rising general level of prices Rate of inflation calculated using index numbers Consumer Price Index = Price of the same market basket in 1982-1984 x 100 CPI Price of most recent market basket in the particular year

14. 8 - 13 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show 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%

15. 8 - 14 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show 10 5 0 France Italy Germany U.S. Japan Source: Bureau of Labor Statistics GLOBAL PERSPECTIVE Inflation Rates in Five Industrial Nations 1992 - 2002 1997 1992 2002

16. 8 - 15 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show DEMAND-PULL INFLATION INFLATION Types of Inflation COST-PUSH INFLATION Rising Per-Unit Production Costs Supply-Side Inflation Supply Shocks Complexities

17. 8 - 16 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show REDISTRIBUTIVE EFFECTS OF INFLATION Nominal Income Real Income Anticipations Anticipated Inflation Unanticipated Inflation

18. 8 - 17 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show REDISTRIBUTIVE EFFECTS OF INFLATION Who is Hurt by Inflation? Fixed-Income Receivers Savers Creditors

19. 8 - 18 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show REDISTRIBUTIVE EFFECTS OF INFLATION Who is Unaffected or Helped by Inflation? Flexible-Income Receivers Cost of Living Adjustments (COLAs) Debtors

20. 8 - 19 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show REDISTRIBUTIVE EFFECTS OF INFLATION Addenda Deflation Mixed Effects Arbitrariness

21. 8 - 20 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show Nominal Interest Rate Real Interest Rate Inflation Premium = 11% 5% 6% + ANTICIPATED INFLATION

22. 8 - 21 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show EFFECTS OF INFLATION ON OUTPUT Cost-Push Inflation and Real Output Demand-Pull Inflation and Real Output Hyperinflation & Breakdown

23. economic growth real GDP per capita 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 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 Copyright McGraw-Hill/Irwin, 2005 ENDBACK

24. 8 - 23 Copyright McGraw-Hill/Irwin, 2005 Economic Growth The Business Cycle Unemployment Inflation CPI Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show BASIC MACROECONOMIC RELATIONSHIPS Chapter 9