1. 8 - 1 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation 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 LECTURE

2. 8 - 2 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show ECONOMIC GROWTH 1)An increase in real GDP over some time period 2)An increase in real GDP per capita over some time period for comparing living standards, however, the 2 nd definition is superior eg: China’s GDP & Denmark’s GDP was $980 bil & $170 bil respectively in 1999 but Denmark’s GDP per capita was $32,030 compared to China’s $780 With either definition, economic growth is calculated as a percentage rate of growth per year (eg: RGDP was $200 bil last year & $210 this year)

3. 8 - 3 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show Technology can increase the economy’s production capabilities. Improvements in and greater stocks of land, labor, and capital can shift out the production possibilities curve. Another way of saying that economic growth has shifted the production possibilities curve out is to say that growth has increased potential output. ECONOMIC GROWTH

4. 8 - 4 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show

5. 8 - 5 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show ECONOMIC GROWTH widely held economic goal enable economy to better meet people’s wants & resolve socioeconomic problems growth lessens the burden of scarcity a growing economy can consume more today while increasing its capacity to produce more in the future

6. 8 - 6 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show SOURCES OF GROWTH Increases in Resources * increases in land, labor, capital & entrepreneurial resources yield additional output Increases in Productivity * productivity = real output per unit of input * rises when a) the health, training, education and motivation of workers are improved b) workers have more & better machinery & natural resources to work with c) production is better organized & managed

7. 8 - 7 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show SOURCES OF GROWTH Technological Knowledge * stem from human ingenuity & creativity in developing new ways of combining the resources to enhance the amount of output from a given quantity of resources * the process of invention & innovation * Permit savings of labor when a new machine does the work of many workers * Reduce in transportation time * Ease communication etc

8. 8 - 8 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Employed Not in labor force Under 16 and/or institutionalized Total Population 275,400,000 Labor force 140,800,000 65,800,000 68,800,000 Unemployed 5,600,000 135,200,000

9. 8 - 9 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Unemployment rate unemployed labor force x 100 = The below understate the unemployment rate:  Part-Time Employment  Discouraged Workers

10. 8 - 10 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation 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

11. 8 - 11 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT  Frictional Unemployment At any given time some workers are ‘between jobs’ Some moving voluntarily from one job to another, others will be fired & will be seeking employment. In addition, many young workers will be searching for their 1 st jobs Consist of ‘search unemployment’ & ‘wait unemployment’ Is inevitable & sometimes desirable (for workers who are moving from low-paying, low-productivity jobs to higher-paying, higher-productivity positions) Greater income leads to better allocation of labor resources & a larger RGDP for the economy

12. 8 - 12 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT  Structural Unemployment Changes over time in consumer demand & in technology alter the ‘structure’ of the total demand for labor, both occupationally & geographically Frictional unemployment = short term while structural unemployment is more serious  Cyclical Unemployment Cause by a decline in total spending & is likely to occur in the recession phase of the business cycle As the demand for goods & services decreases, unemployment rises Also called deficient-demand unemployment

13. 8 - 13 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show FULL EMPLOYMENT  Since frictional & structural unemployment are unavoidable in a dynamic economy, full employment is something < 100% employment of the labor force  An economy is fully employed’ when experiencing only frictional & structural unemployment. In other words, full employment occurs when there is no cyclical unemployment  Economists describe the unemployment rate that is consistent with full employment as the Full-Employment Rate of Unemployment or Natural Rate of Unemployment (NRU)  Occurs when job seekers = job vacancies

14. 8 - 14 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show UNEMPLOYMENT Economic Costs of Unemployment = potential production of goods & services that is forgone GDP Gap * measures sacrificed output * the amount by which actual GDP falls short of potential GDP

15. 8 - 15 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation Redistributive Effects of Inflation Anticipated Inflation Effects of Inflation on Output Key Terms Previous Slide Next Slide End Show OKUN’S LAW Economic Costs of Unemployment By Arthur Okun Quantify the relationship between the unemployment rate & the GDP gap ‘For every 1% unemployment exceeds the natural rate, approximately a 2% GDP Gap occurs’

16. 8 - 16 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation 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 Rule of 70 Shortcut to determine doubling time

17. 8 - 17 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation 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

18. 8 - 18 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation 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 Debtors

19. 8 - 19 Copyright McGraw-Hill/Irwin, 2002 Economic Growth The Business Cycle Unemployment Inflation 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