CHAPTER 8: INTRODUCTION TO ECONOMIC GROWTH AND INSTABILITY

ECONOMIC GROWTH

• An increase in real GDP occurring over some time period.
• An increase in real GDP per capita occurring over some time period.

Real GDP per capita – found by dividing real GDP by the size of the population.

•  Growth as a Goal

Growth lessens the burden of scarcity.

• Arithmetic of Growth

Approximate number of years required to double GDP = 70/annual percentage rate of growth 

• Main Sources of Growth

2 Fundamental ways society can increase its real output and income

1.       By increasing its inputs of resources

2.       By increasing the productivity of these inputs

• Growth in the United States

·         Improved products and services

·         Added leisure

·         Other impacts

THE BUSINESS CYCLE – refers to alternating rises and declines in the level of economic activity, sometimes extending over several ways.

•  Phases of the Business Cycle

·         Peak – has reached the temporary maximum.

·         Recession – period of decline in total output, income, employment and trade.

·         Trough – bottom out at their lowest levels.

·         Recovery – output and employment rise toward full employment.

UNEMPLOYMENT

• Measurement of Unemployment

Unemployment rate = unemployed /labor force x 100

·         Part-time employment

·        Discouraged workers

•  Types of Unemployment

·         Frictional Unemployment – consisting of search unemployment and wait unemployment for workers who are either searching for jobs or waiting to take jobs in the near future.

·         Structural Unemployment – its workers find it hard to obtain new jobs without retraining, gaining additional education, or relocating.

·         Cyclical Unemployment – is caused by a decline in total spending and is likely to occur in the recession phase of the business cycle.

• Definition of Full Employment

Natural Rate of Unemployment – it occurs when the number of job seekers equals the number of job vacancies.

• Economic Cost of Unemployment

·         GDP Gap and Okun’s Law

When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost.

GDP Gap – the difference between actual and potential GDP.

Okun’s Law – indicates that for every 1 percentage point by which the actual employment rate exceeds the natural rate.

·         Unequal Burdens

-Occupation – Workers in lower-skilled occupations have higher unemployment rates than workers in higher-skilled occupations.

-Age – Teenagers have much higher unemployment rates than adults.

-Race and ethnicity – The unemployment rates for blacks and Hispanics is higher than that for whites.

-Gender – the unemployment rates for men and women are very similar.

-Education – Less educated workers, on average have higher unemployment rates than workers with more education.

-Duration – The number of persons unemployed for long periods – 15 weeks or more –as a percentage of the labor force is much lower than the overall unemployment rate.

INFLATION – is the rise in the general level of prices.

• Measurement of Inflation

Consumer Price Index (CPI) – main measure of inflation in the United States compiled by the Bureau of Labor Statistics (BLS).

CPI = price of the most recent market basket in a particular year/ price of the same market basket in 1982-1984 x 100

• Types of Inflation

·         Demand – pull inflation – results from an excess of total spending relative to the economy’s capacity to produce

·         Cost-push inflation – explains rising prices in terms of factors that raise per-unit production costs at each level of spending.

Per-unit production cost = total input cost/units of output

REDISTRIBUTION EFFECTS OF INCOME

• Nominal and Real Income

Nominal Income – is the number of dollars received as wages, rents, interest or profits.

Real Income – is a measure of the amount of goods and services nominal income can

Real Income – nominal income/price index (in hundredths)

Percentage change in real income = percentage change in nominal income – percentage change in price level

• Anticipations

Anticipated Inflation – an income receives may be able to avoid or lessen the adverse effects of inflation or real income.

Unanticipated Inflation – inflation whose full extent was not expected.

• Who is hurt by Inflation?

• Fixed – Income Receivers – people whose incomes are fixed see their real incomes fall when inflation occurs.
• Savers – As prices rise, the real value, or purchasing power, of an accumulation of savings deteriorates.
• Creditors

• Who is Unaffected by Inflation?

• Flexible – Income receivers
• Debtors

• Addenda

• Deflation
• Mixed Effects
• Arbitrariness

EFFECTS OF INFLATION ON OUTPUT

Cost-push Inflation – reduces real output and employment. Proponents of zero inflation argue that even mild demand pull inflation (1-3 percent) reduces the economy’s real output.

Hyperinflation – caused by highly imprudent expansions of the money supply, may undermine the monetary system and cause severe declines in real output.