Transcript Chapter 16

08
Economic Growth
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Economic Growth
• Increase in real GDP or real GDP per
•
•
•
capita over some time period
Percentage rate of growth
Growth as a goal
Arithmetic of growth: Rule of 70
Approximate
number of years
required to double
real GDP
LO1
70
=
annual percentage rate
of growth
8-2
Economic Growth
• Growth in U.S. real GDP 1950-2009
• Increased 6 fold
• 3.2% per year
• Growth in U.S. real GDP per capita
• Increased more than 3 fold
• 2% per year
• Qualifications
• Improved products and services
• Added leisure
• Other impacts
LO1
8-3
Economic Growth
Real GDP and Real GDP per Capita
LO1
(4)
Real GDP,
Per Capita,
2005$
(2) ÷ (3)
(1)
Year
(2)
Real GDP,
Billions of 2
2005$
1950
$ 2006
152
$12,197
1960
2831
181
15,640
1970
4270
205
20,829
1980
5839
228
25,610
1990
8034
250
32,136
2000
11,226
282
39,809
2009
12,987
307
42,303
(3)
Population,
Millions
Source: Bureau of Economic Analysis, http://www.bea.gov
and U.S. Census Bureau, http://www.census.gov
8-4
Modern Economic Growth
• Began with the Industrial Revolution in late
•
•
•
•
•
LO2
1700s
Ongoing increases in living standards
Time for leisure
Social change
Democracy
Human lifespan doubled
8-5
Modern Economic Growth
• Began in Britain
• Has spread slowly
• Starting date main cause of worldwide
•
LO2
differences in living standards
Catching up is possible
• Leader countries invent technology
• Follower countries adopt technology
• Can grow faster
8-7
Modern Economic Growth
Country
Real GDP
per capita,
1960
United States
$ 14,766
United Kingdom
11,257
France
9,347
Ireland
6,666
Japan
5,473
Singapore
4,149
Hong Kong
3,849
South Korea
1,765
Real GDP
per capita,
2007
$42,887
32,181
29,663
41,625
30,585
44,619
43,121
23,850
Average annual
growth rate,
1960-2007
2.3%
2.3
2.5
4.0
3.7
5.2
5.3
5.7
Figures are in 2005 dollars
Source: Penn World Table version 6.3, pwt.econ.upenn.edu
LO2
8-8
Modern Economic Growth
LO3
8-10
Institutional Structures of Growth
• Strong property rights
• Patents and copyrights
• Efficient financial institutions
• Literacy and widespread education
• Free trade
• Competitive market system
LO3
8-11
Determinants of Growth
• Supply factors
• Increases in quantity and quality of
natural resources
• Increases in quality and quantity of
human resources
• Increases in the supply (or stock) of
capital goods
• Improvements in technology
LO3
8-13
Determinants of Growth
• Demand factor
• Households, businesses, and
•
LO3
government must purchase the
economy’s expanding output
Efficiency factor
• Must achieve economic efficiency and
full employment
8-14
Production Possibilities
Capital Goods
C
A
Economic
Growth
c
b
a
B
D
Consumer Goods
LO3
8-15
Labor and Productivity
Real GDP = hours of work x labor productivity
• Size of
employed
labor force
Labor
Inputs
(hours of
work)
• Average
hours of
work
x
• Technological
advance
• Quantity of
capital
• Education and
training
• Allocative
efficiency
• Other
LO3
=
Real
GDP
Labor
Productivity
(average
output per
hour)
8-16
U.S. Economic Growth
Accounting for the Growth of U.S. Real GDP,
1953-2007, Plus Projection from 2009-2020
Item
1953 Q2
To 1973 Q4
Increase in real GDP
1973 Q4
To 1995 Q4
1995 Q4
To 2001 Q1
2001 Q1
To 2007 Q3
Projected
2009 Q1
To 2020 Q4
3.6
2.8
3.8
2.6
2.5
Increase in quantity of labor
1.1
1.3
1.4
-0.1
0.2
Increase in labor productivity
2.5
1.5
2.4
2.7
2.3
(Average Percent Changes)
Source: Derived from Economic Report of the President, 2008, p. 45;
and Economic Report of the President, 2010, p. 76
LO3
8-17
Accounting for Growth
• Factors affecting productivity growth
• Technological advance (40%)
• Quantity of capital (30%)
• Education and training (15%)
• Economies of scale and resource
allocation (15%)
LO3
8-18
Productivity Growth
• Average rate of growth
• 1.5% per year 1973-1995
• 2.8% per year 1995-2009
• Affects real output, real income, and real
•
LO4
wages
Pay higher wages without lowering profit
8-20
Productivity Growth
LO5
8-21
Economic Growth in China
• Growth averages past 25 years:
• 9% annual growth output
• 8% annual growth output per capita
• Labor more productive
• More international trade
• Transition to market economy
• Joined WTO 2001
• Financial system remains weak
• Income inequality across areas
LO5
8-22
09
Business Cycles, Unemployment, and Inflation
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Business Cycle
•
•
Alternating increases and decreases in economic
activity over time
Phases of the business cycle
•
•
•
•
LO1
Peak
Recession
Trough
Expansion
9-24
The Business Cycle
Peak
Level of real output
Peak
Peak
Trough
Trough
Time
LO1
9-25
The Business Cycle
U.S. Recessions since 1950
Period
Duration,
Months
Depth
(Decline in Real
Output)
1953-54
10
-2.6%
1957-58
8
-3.7
1960-61
10
-1.1
1969-70
11
-0.2
1973-75
16
-3.2
1980
6
-2.2
1981-82
16
-2.9
1990-91
8
-1.4
2001
8
-0.4
2007-09
18
-3.7
Source: National Bureau of Economic Research, http://www.nber.org and Minneapolis Federal Reserve
Bank, http://www.minneapolisfed.org Output data are in 2000 dollars
LO1
9-26
Causation: A First Glance
•
Business cycle fluctuations
• Economic shocks
• Prices are “sticky” downwards
• Economic response entails decreases in output and
employment
LO1
9-27
Causation: A First Glance
•
Causes of shocks
• Irregular innovation
• Productivity changes
• Monetary factors
• Political events
• Financial instability
• Recession of 2007
LO1
9-28
Unemployment
Total
population
(307.3
million)
Under 16
and/or
Institutionalized
(71.4 million)
Unemployment rate =
# of unemployed
X 100
labor force
Not in
labor
force
(81.7 million)
Unemployment rate =
Employed
(139.9 million)
14,265,000
X 100 = 9.3%
154,142,000
Labor
force
(154.2
million)
Unemployed
(14.3 million)
LO2
9-31
Unemployment
•
Criticisms of unemployment
• Involuntary part-time workers counted as if full-time
• Discouraged workers are not counted as unemployed
LO2
9-32
Types of Unemployment
•
Frictional unemployment
•
•
Structural unemployment
•
•
Occurs due to changes in the structure of the demand for
labor
Cyclical unemployment
•
LO3
Individuals searching for jobs or waiting to take jobs soon
Caused by the recession phase of the business cycle
9-33
Definition of Full Employment
•
Natural Rate of Unemployment (NRU)
•
•
6%
Can vary over time
• Demographic changes
• Changing job search methods
• Public policy changes
•
LO3
Actual unemployment can be above or below the natural
rate
9-34
Economic Cost of Unemployment
•
GDP Gap
• GDP gap = actual GDP – potential GDP
• Can be negative or positive
•
Okun’s Law
•
LO3
Every 1% of cyclical unemployment creates a 2% GDP gap
9-35
Economic Cost of Unemployment
Economic Cost of Unemployment
LO3
9-36
Economic Cost of Unemployment
LO3
9-37
Unequal Burdens
• Occupation
• Age
• Race and ethnicity
• Gender
• Education
• Duration
LO3
9-38
Unequal Burdens
Unemployment Rates by Demographic Group: Full Employment Year (2007) and Recession Year (2009)*
Unemployment Rate
Demographic Group
Overall
Occupation:
Managerial and professional
Construction and extraction
Age:
16-19
African American, 16-19
White, 16-19
Male, 20+
Female, 20+
Race and ethnicity:
African American
Hispanic
White
Gender:
Women
Men
**
Education:
Less than high school diploma
High school diploma only
College degree or more
Duration:
15 or more weeks
LO3
2007
2009
4.6%
9.3%
2.1
4.6
7.6
19.7
15.7
24.3
29.4
39.5
13.9
21.8
4.1
9.6
4.0
7.5
8.3
14.8
5.6
12.1
4.1
8.5
4.5
8.1
4.7
10.3
7.1
14.6
4.4
9.7
2.0
4.6
1.5
4.7
9-39
Noneconomic Costs
• Loss of skills and loss of self-respect
• Plummeting morale
• Family disintegration
• Poverty and reduced hope
• Heightened racial and ethnic tensions
• Suicide, homicide, fatal heart attacks,
•
LO3
mental illness
Can lead to violent social and political
change
9-40
Global Perspective
LO3
9-41
U.S. Manufacturing Employment 1920-1940
Inflation
•
•
•
General rise in the price level
Inflation reduces the “purchasing power” of money
Consumer Price Index (CPI)
CPI =
CPI =
LO2
Price of the Most Recent Market
Basket in the Particular Year
Price estimate of the Market
Basket in 1982-1984
207.3
-
201.6
x
100
x
100 = 2.8%
201.6
9-43
Inflation
Inflation Rates in Five Industrial Nations
LO2
9-45
Inflation
LO2
9-47
Types of Inflation
•
Demand-Pull inflation
•
•
•
Excess spending relative to output
Central bank issues too much money
Cost-Push inflation
• Due to a rise in per-unit input costs
• Supply shocks
LO3
9-49
Inflation
•
•
Difficult to distinguish inflation types
Types differ in sustainability
•
•
•
Core inflation
•
•
LO3
Demand-pull continues as long as the excess spending
continues
Cost-push ends in a recession
Without food and energy goods
Focuses on more stable prices
9-50
Who is Hurt by Inflation?
•
Fixed-income receivers
•
•
Savers
•
•
Real incomes fall
Value of accumulated savings deteriorates
Creditors
• Lenders get paid back in “cheaper dollars”
LO3
9-51
Who is Unaffected by Inflation?
•
Flexible-income receivers
• COLAs
• Social Security recipients
• Union members
•
Debtors
•
LO3
Pay back the loan with “cheaper dollars”
9-52
Anticipated Inflation
6%
11%
=
+
5%
Nominal
Interest
Rate
LO3
Inflation
Premium
Real
Interest
Rate
9-53
Does Inflation Affect Output?
•
Cost-Push inflation
•
•
•
Reduces real output
Redistributes a decreased level of real income
Demand-Pull inflation
• One view is that zero inflation is best
• Another view is that mild inflation is best
• Demand-pull inflation causes recessions
LO3
9-54
Hyperinflation
•
•
•
•
•
•
LO3
Extraordinarily rapid inflation
Devastates an economy
Businesses don’t know what to charge
Consumers don’t know what to pay
Money becomes worthless
Zimbabwe’s 14.9 billion percent inflation in 2008
9-56
The Stock Market and the Economy
•
Stock prices changing
• Wealth effect
• Investment effect
• Typical changes lead to weak effects
•
Stock market bubbles
•
•
•
Huge unwarranted rises in stock prices
Excessive optimism and frenzied buying
Can be detrimental to an economy
9-57