Transcript Document 7529813

Macroeconomics - ECO 2013
Fall 2005 – 1 Term
August 24 – December 16, 2005
Chapter 8: Intro to Economic
Growth & Stability
Economic Growth
Business Cycle
Unemployment
Inflation
Economic Growth
Defined by two ways:


An increase in real GDP occurring over
some time period
An increase in real GDP per capita
occurring over some time period
 Best for comparing living standards between
countries

Calculated as a percentage rate of growth
per year
Growth as a Goal
Expansion of total output v. population
growth results in rising real wages and
incomes  higher SOL

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Better able to meet society’s wants & resolve
socioeconomic problems
Rising real wages & income provide more
opportunities to individuals & families w/o
sacrificing others
Undertake new programs to alleviate poverty or
protect environment
Main Sources of Growth
Increasing Inputs of Resources (1/3)

FFOP: Land, Labor, Capital, & Entrepreneurial
Abilities
Increasing Production of Inputs (2/3)
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Improvements in health, training, education &
motivation of workers
Capital enhancements (machinery)
Better natural resources
Organization & Management
Labor reallocated by efficiency
Results of Economics Growth
in the U.S.
Improved Products & Services
Added Leisure (50 to 40 hrs/week)
Environmental Impacts (Damaging)
Quality of Life (Stress)
The Business Cycle: Four Phases
Peak: Business activity reaches temporary maximum
Recession: Period of decline in Total Output, Income,
Employment, Trade

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Lasts more than 6 months
Depression: a severe & prolonged recession, falling prices
are likely
Trough: Output & employment “bottoms out” at
lowest levels

Can be long or short
Recovery: Expansion phase where output &
employment rise toward full employment

Prices may rise
Causes of Fluctuations
Major innovations can trigger new
investment and/or consumer spending
Changes in Productivity
Monetary Phenomenon

Governments create more/less money
Changes in Total Spending

In the U.S., long-run growth trend is
expansionary
Who is affected by Recessions in
the Business Cycle?
Everyone & Everywhere
Firms & Industries producing Capital &
Consumer Durable Goods are most
affected
Service industries and Nondurable
Consumer Goods are somewhat
“insulated”
Measuring Unemployment
Who is eligible & available to work?
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Ineligible: Those less than 17 years and/or
institutionalized
Not in Labor Force: Those not employed and NOT
SEEKING WORK
Employed
Unemployed: Those not employed and SEEKING
WORK
Labor Force = Employed + Unemployed

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Approximately 50% of U.S. Population
Those “willing and able” to work
Unemployment Rate
Calculated as a Percentage of Labor
Force:
Unemployment Rate = (Unemployed /
Labor Force) * 100
BLS conducts survey of 60,000
households monthly
Unemployment Rate
Part-time Employment underestimates
the true unemployment rate

Many would prefer full-time work but can’t
find it
Discouraged workers understate the
true unemployment rate

Not in labor force but they wish they were
Frictional Unemployment
Those “between jobs”
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Voluntary
Fired
Seasonal shifts in demand
“Unemployment Pool”
Labor market is Imperfect &
Noninstantaneous in matching workers to
jobs
Inevitable & Desirable
Short-term
Structural Unemployment
Changes over time in consumer demand &
technology

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Demand for certain skills may decline or vanish
Demand for other skills intensifies
Change in the COMPOSITION of the Labor
Force
Geography
Long-term, more serious
Cyclical Unemployment
Caused by decline in total spending
during recessions
aka “Deficit Demand Unemployment”
Serious
Full Employment
Occurs when economy is experiencing only
frictional & structural unemployment (i.e., no
cyclical unemployment)
Full Employment Rate of Unemployment or
Natural Rate of Unemployment (NRU)
Economy is producing its Potential Output
NRU occurs when Job Seekers = Job
Vacancies
Reasons for the Decline in NRU
Less younger workers in the labor force
Growth of temp agencies
Improved information technology
Welfare reform
Doubling of U.S. prison population
Economic Costs of
Unemployment: GDP Gap
When the economy fails to create
enough jobs for all who are able and
willing to work, potential production of
goods & services is lost
GDP Gap: Potential GDP – Actual GDP
Potential GDP is at the NRU
Economic Costs of
Unemployment: Unequal
Burdens
Costs are unequally distributed among
different groups
Occupation
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Low-skilled laborers > High-skilled professionals
More frequent & longer unemployment spells
Bear brunt of recessions
Age
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Teenagers > Adults
Lower skills
Less geographical mobility
New in labor market
Economic Costs of
Unemployment: Unequal
Burdens
Race & Ethnicity:
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African-Americans & Hispanics > Caucasian
Lower rates of educational attainment
Greater concentration of low-skilled jobs
Discrimination in the labor market
Education:
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Less educated > More educated
Duration
Inflation
Rise in the general level of prices
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Does NOT mean ALL prices are rising
Prices rise unevenly
Measuring Inflation
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Consumer Price Index
[CPI(2) – CPI(1)]/CPI(1) * 100
Redistribution Effects of Inflation
Who is hurt by Inflation (assuming it is
unanticipated)
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Fixed Income Receivers (e.g., elderly)
Savers
 Value of savings will decline if rate of inflation
is greater than the rate of interest
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Creditors
Who is Unaffected or Benefits
from Inflation?
Flexible-Income Receivers
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Cost of Living Adjustments (COLAs)
Social Security Recipients
Borrowers
Chapter 8 Study Questions
4: Business Cycle
5 & 6: Unemployment