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
8 Introduction to Economic Growth and Instability 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 25-2 • 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 25-3 Modern Economic Growth • Began with the Industrial Revolution • • • • • LO2 in late 1700s Ongoing increases in living standards Time for leisure Social change Democracy Human lifespan doubled 25-4 • • • • LO2 Modern Economic Growth Began in Britain Has spread slowly Starting date main cause of worldwide differences in living standards Catching up is possible –Leader countries invent technology –Follower countries adopt technology –Can grow faster 25-5 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 25-6 Modern Economic Growth LO3 25-7 Institutional Structures of Growth –Strong property rights –Patents and copyrights –Efficient financial institutions –Literacy and widespread education –Free trade –Competitive market system LO3 25-8 Determinants of Growth Supply factors Demand factor • Increases in quantity • Households, businesses, and quality of natural and government must resources purchase the economy’s • Increases in quality and expanding output quantity of human resources Efficiency factor • Increases in the supply • Must achieve economic (or stock) of capital goods efficiency and full • Improvements in employment technology LO3 25-9 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 25-10 • • • LO4 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 wages Pay higher wages without lowering profit 25-11 • • • LO5 Economic Growth Is economic growth desirable and sustainable? The antigrowth view –Environmental and resource issues In defense of economic growth –Higher standard of living –Human imagination can solve environmental and resource issues • • • • LO5 Economic Growth Growth is the path to greater material abundance Results in higher standards of living Increases leisure time Allows for the expansion and application of human knowledge 25-13 Global Perspective LO5 25-14 The Business Cycle • Alternating increases and decreases • LO1 in economic activity over time Phases of the business cycle • Peak • Recession • Trough • Expansion 26-15 The Business Cycle Peak Level of real output Peak Peak Trough Trough Time LO1 26-16 Causation: A First Glance • Business cycle fluctuations Primary causation is total spending (probably) Affects both capital goods and consumer durables but services and nondurables are somewhat shielded Economic shocks Prices are “sticky” downwards Economic response entails decreases in output and employment LO1 26-17 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 26-18 Unemployment • Unemployment – labor force equals about 50% of the total population – Unemployment rate =unemployed/ civilian labor force x 100 • Bureau of the Census – Monthly survey • 60,000 households • Unemployed = people available for work who made a specific effort to find a job during the past month and who, during the most recent survey week, worked less than 1 hour for pay or profit • Bureau of Labor Statistic determines the unemployment rate Unemployment • Criticisms of unemployment • Involuntary part-time workers counted as if full-time (these people are partially employed and partially unemployed) • Discouraged “frustrated” workers are not counted as unemployed LO2 26-20 Types of Unemployment – Frictional Unemployment = workers who are “between jobs” – Cyclical Unemployment = unemployment directly related to swings in the business cycle – “Deficient-demand” unemployment – Effected by recession – Often mixed with other types of unemployment – Affected workers usually get their jobs back » Seasonal Unemployment = resulting from changes in the weather or demand for certain products – Structural Unemployment = fundamental change in the economy reduces the demand for workers and their skills (usually need to be “retrained”) – Consumer taste changes – Industrial operation changes, automation – Geographical changes LO3 26-21 Definition of Full Employment –“Full Employment”--Not Zero employment • Natural Rate of Unemployment (NRU) • Full employment level of unemployment • Can vary over time • Demographic changes • Changing job search methods • Public policy changes • Actual unemployment can be above or fall below the NRU LO3 26-22 Economic Cost of Unemployment • When the economy fails to crate enough • • LO3 jobs for all who are able and willing to work potential production of goods and services is irretrievably lost GDP Gap • GDP gap = actual GDP – potential GDP • Can be negative or positive Okun’s Law • Every 1% of cyclical unemployment creates a 2% GDP gap 26-23 Economic Cost of Unemployment LO3 26-24 Unequal Burdens • Occupation-low skill = high unemployment • Age-Teenage = high unemployment • Race and ethnicity-minority = high unemployment • Gender-men and women very similar • Education-less educated =high unemployment • Duration-unemployed over 15 wks very small % LO3 26-25 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 26-26 LO3 26-28 Inflation • General rise in the price level • Inflation reduces the “purchasing • power” of money Consumer Price Index (CPI) CPI = CPI = LO3 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 26-29 Types of Inflation • Demand-Pull inflation • Excess spending relative to output • Central bank issues too much • LO3 money Cost-Push inflation • Due to a rise in per-unit input costs • Supply shocks 26-30 Redistribution Effects of Inflation • Nominal income • Unadjusted for inflation • Real income = measure of the amount of goods/services nominal income can buy • • • • • • Purchasing power Real income=nominal income/PI (in hundredths) Inflation may redistribute real income Anticipation inflation/unanticipated inflation Nominal income adjusted for inflation Anticipated vs. unanticipated income • “Inflation premium” • Real interest rate = inflation premium LO3 nominal rate – 26-32 Who is Hurt by Inflation? • Fixed-income receivers • Real incomes fall (nominal income doesn’t rise with prices) • Savers • Value of accumulated savings • LO3 deteriorates Creditors • Lenders get paid back in “cheaper dollars” 26-33 Who is Unaffected or Helped by Inflation? • Flexible-income receivers • COLAs (cost-of-living adjustments) • Social Security recipients • Union members • Debtors • Pay back the loan with “cheaper dollars” LO3 26-34 Does Inflation Affect Output? • Cost-push inflation • Reduces real output • Redistributes a decreased level of • LO3 real income Demand-pull inflation • One view is that zero inflation is best • Another view is that mild inflation is best 26-35