Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Fear of floating wikipedia , lookup
Economic growth wikipedia , lookup
Business cycle wikipedia , lookup
Monetary policy wikipedia , lookup
Nominal rigidity wikipedia , lookup
Post–World War II economic expansion wikipedia , lookup
Transformation in economics wikipedia , lookup
Interest rate wikipedia , lookup
Full employment wikipedia , lookup
Intro to Inflation and Unemployment AP Economics: Macro – Unit II Mr. Griffin MHS Part 1: The Goal of Economic Growth 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 ECONOMIC GROWTH Growth in the United States •Improved Products and Services •Added Leisure •Other Impacts •Relative International Growth Rates THE BUSINESS CYCLE Phases of the Business Cycle RECESSION TROUGH Level of business activity PEAK Time RECOVERY The Capacity to Produce: Potential GDP • Potential GDP = the real GDP that the economy could produce if the labor force and other resources were fully employed • Production Function = Mathematical depiction of the relationship between an economy’s inputs and outputs. The Capacity to Produce: Potential GDP • The growth rate of potential GDP depends on: – The growth rate of the labor force – The growth rate of the nation’s capital stock – The rate of technical progress The Economy’s Production Function B Y1 A Y0 0 K L0 Labor input (hours) (a) Y1 Real GDP Real GDP M K1 A Y0 0 K0 L0 Labor input (hours) (b) The Growth Rate of Potential GDP • Growth rate of potential GDP depends on: – Growth rate of the labor force – Growth rate of the nation’s capital stock – The rate of technical progress • Labor productivity – Labor productivity = total output/total hours – This measures output per hour of work The Growth Rate of Potential GDP • GDP can be expressed as: GDP = Hours of work x Labor productivity • The equation above in growth rates is: Growth rate of potential GDP = Growth rate of labor input + Growth rate of labor productivity Recent Real GDP Growth in the U.S. Part 2: The Goal of Low Unemployment The Human Costs of High Unemployment • Unemployment rate = the number of unemployed people, expressed as a percentage of the labor force • Unemployment entails a loss in output for the society as a whole, a loss that can never be recovered. The Economic Costs of High Unemployment UNEMPLOYMENT Measurement of Unemployment, 2002 Total Population 288,600,000 Under 16 and/or institutionalized 74,700,000 Not in labor force 71,400,000 134,200,000 Employed Unemployed Labor force 142,500,000 8,300,000 UNEMPLOYMENT Measurement of Unemployment, 2002 Unemployment rate unemployed = labor force x 100 Part-Time Employment Discouraged Workers Actual and Potential GDP in the United States 11,000 10,500 10,000 9,500 9,000 Actual GDP 8,500 8,000 7,500 Billions of 2000 Dollars 7,000 6,500 Potential GDP 6,000 5,500 5,000 1982 –1983 Recession 4,500 1974 –1975 Recession 4,000 3,500 1960s Boom 3,000 2,500 1957 –1958 Recession 2,000 1955 1959 1960 –1961 Recession 1963 1967 1971 1975 1979 Year 1983 1987 1991 1995 1999 2004 UNEMPLOYMENT Economic Costs of Unemployment GDP Gap and Okun’s Law The amount by which actual GDP falls short of potential GDP For every 1% unemployment exceeds the natural rate... Approximately a 2% GDP Gap occurs The Human Costs of High Unemployment • Unemployment is a serious personal problem for the unemployed. – Income forgone – Psychological distress The Human Costs of High Unemployment • In good times and bad some groups suffer more than others from unemployment – Below average unemployment rates: • Married men • Well-educated workers – Above average unemployment rates: • Teenagers • Nonwhites • Blue-collar workers Unemployment Rates for Selected Groups, 2004 40 35 31.7 Percent 30 25 20 17.0 Percent 15 10.4 10 5 0 8.0 2.7 3.1 College Graduates Married Men 8.5 Women Adults Blacks Who Who Did Not Maintain Graduate from Families High School Teenagers Black Male Teenagers Counting the Unemployed: The Official Statistics • The BLS estimates the labor force, the employed, and the unemployed. – These distinctions cannot deal very well with the problems of discouraged workers and of “hidden” or “disguised” unemployment. – Discouraged Worker: An unemployed person who gives up looking for work and is therefore no longer counted as part of the labor force. Types of Unemployment • Frictional unemployment is the normal movement of workers from one job to another. • Structural unemployment exists when workers’ characteristics do not fit with employers’ requirements. • Cyclical unemployment occurs when the level of economic activity declines How Much Unemployment is “Full Employment”? • It was once thought that 4% was a good target. • Events from the early 1990s through 2002 have left economists uncertain of the fullemployment unemployment rate. – Government reports estimate full employment unemployment is slightly above 5 percent. Unemployment Insurance: The Invaluable Cushion • Unemployment insurance cushions (but does not completely prevent) the monetary loss to some (but not all) unemployed people. • Payroll taxes and unemployment benefits – Spread the costs of unemployment over the entire population – Do not eliminate its basic economic cost GLOBAL PERSPECTIVE Unemployment Rates 5 Industrial Nations 1992 - 2002 15 France U.K. 10 Germany U.S. Japan 5 0 1992 1997 2002 Source: Economic Report of the President, 2003 Part 3: The Goal of Low Inflation Inflation: The Myth and the Reality • The costs of inflation are less obvious than those of unemployment, yet people certainly fear it. • Inflation and Real Wages: Inflation does not typically erode real wages, because increases in nominal wages compensate for the rising prices. Rates of Change of Wages and Prices in the U.S. 11 11 10 10 Wages 9 9 8 8 7 7 6 6 5 5 4 4 3 3 Prices 2 2 Percentage Change in Wages 1 1 0 0 1950 1960 1955 1970 1965 1975 Year 1980 1990 1985 2000 1995 Percentage Change i Reasons for Wages to Increase Amount Higher productivity 2% Compensation for higher prices 3% Total 5% Inflation: The Myth and the Reality • The Importance of Relative Prices: Inflation is not usually to blame when some goods become more expensive relative to others. Inflation as a Redistributor of Income and Wealth • Because inflation does not proceed evenly, it redistributes income and wealth in arbitrary, unfair ways. • It systematically discriminates against people on fixed incomes, and it may favor borrowers at the expense of lenders. Real versus Nominal Interest Rates • Real rate of interest = percentage increase in purchasing power that the borrower pays the lender in exchange for the loan. • Nominal rate of interest = Real interest rate + expected rate of inflation Real versus Nominal Interest Rates • Inflation that is accurately anticipated need not redistribute wealth between borrowers and lenders. – The nominal interest rate will include an adequate inflation premium, above the real interest rate. • If the actual inflation rate turns out to be different from the expected rate unanticipated redistribution will occur. Inflation Distorts Measurements • Confusing Real and Nominal Interest Rates – Hides true economic cost of borrowing money. • Many Americans viewed the 12% mortgage interest rates that banks charged in 1980 as scandalously high while they saw the 6% mortgage rates of 2004 as a great bargain. • In truth, however, the real interest rate in 2004 (about 4%) was well above the bargain-basement real rates in 1980 (about 2%). ANTICIPATED INFLATION 11% = + 5% Nominal Interest Rate Real Interest Rate 6% Inflation Premium The Costs of Low versus High Inflation • Inflation creates fewer social problems if – It is low rather than high. – It is steady (and therefore relatively predictable) rather than variable. Low Does Not Necessarily Lead to High Inflation • Low inflation does not necessarily lead to high inflation – Creeping inflation sometimes accelerates, but it sometimes decelerates. – While creeping inflations have many causes, galloping inflations have occurred only when the government has printed incredible amounts of money. Index Numbers for Inflation • The price index is a measure of the cost of a basket of goods in a current year, relative to the cost of the same basket in a base year. • There is no perfect price index. The Consumer Price Index • The Consumer Price Index (CPI), often known as "the cost of living," is the most widely cited index. • Nominal values can be deflated by the CPI in order to estimate real changes. Prices in 2004 INFLATION Defined and Measurement • A rising general level of prices • Rate of inflation calculated using index numbers Consumer Price Index CPI = Price of most recent market basket in the particular year Price of the same market basket in 1982-1984 x 100 How to Use a Price Index to “Deflate” Monetary Figures • The GDP deflator is somewhat different from the CPI, in that its basket includes all the components of GDP, not just consumer goods. – It is usually, although not always, very close to the CPI. GLOBAL PERSPECTIVE Inflation Rates in Five Industrial Nations 1992 - 2002 10 Italy 5 Germany U.S. France Japan 0 1992 1997 2002 Source: Bureau of Labor Statistics Types of Inflation 1)DEMAND-PULL INFLATION - Consumption - = shift in D 2) COST-PUSH INFLATION - Rising Per-Unit Production Costs - = Shift in S - Supply Shocks REDISTRIBUTIVE EFFECTS OF INFLATION Nominal Income Real Income Anticipations • Anticipated Inflation • Unanticipated Inflation REDISTRIBUTIVE EFFECTS OF INFLATION Who is Hurt by Inflation? • Fixed-Income Receivers • Savers • Creditors REDISTRIBUTIVE EFFECTS OF INFLATION Who is Unaffected or Helped by Inflation? • Flexible-Income Receivers • Cost of Living Adjustments (COLAs) • Debtors EFFECTS OF INFLATION ON OUTPUT •Cost-Push Inflation and Real Output •Demand-Pull Inflation and Real Output •Hyperinflation & Breakdown When Inflation Strikes! (and Deflation too) Mr. Griffin – AP Macro - MHS Source: Mint.com and WallStats.com Source: Mint.com and WallStats.com WARM UP • Demonstrate Cost Push Inflation • Demonstrate Demand Pull Inflation • Demonstrate Recessionary Deflation The Inflation Game •Who is most hurt by inflation? –Record your response on the score card. Review of CPI and the GDP Deflator Mr. Griffin MHS – AP ECON INFLATION Defined and Measurement • A rising general level of prices • Rate of inflation calculated using index numbers Consumer Price Index CPI = Price of most recent market basket in the particular year Price of the same market basket in 1982-1984 x 100 How to Use a Price Index to “Deflate” Monetary Figures • The GDP deflator is somewhat different from the CPI, in that its basket includes all the components of GDP, not just consumer goods. – It is usually, although not always, very close to the CPI. NOMINAL GDP vs. REAL GDP • Adjustment Process • GDP Price Index Price of market basket in specific year Price Index in a given year = Real GDP Price of same market basket in base year = Nominal GDP Price Index (in hundredths) An Alternative Method Price Index (in hundredths) = Nominal GDP Real GDP x 100 If 2000 were made the base year for the GDP price deflator index, the value of the index number for 1990 (rounded to the nearest whole number) would be a. zero b. 42. c. 142. d. 212. e. 256. • b The value of the gross domestic product in 2000, in terms of 1990 prices, was a.$600. d. b.$700. e. c.$1,000. $1,200. $1,300. • a If the price index in a country were 100 for the year 2000 and 120 for 2003 and nominal gross domestic product in 2003 were $480 billion, then real gross domestic product for 2003 in2000 dollars would be a. about $360 billion. d. billion b. about $380 billion. e. with the given information. c. about $400 billion. about $600 indeterminate • c If your wages increase by 12 percent at the same time the CPI increases by 3 percent, then the increase in your real wages is equal to a. 12 percent. b. 9 percent. c. 6 percent. d. 3 percent. e. 4 percent • b • e