Download Economic Growth

Economic Growth
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Our goals for this chapter include:
Understanding economic growth in several ways
Utilizing and understanding the business cycle and
cyclical and non-cyclical fluctuations
Causes and definitions of all types of unemployment
Defining inflation, its causes
Looking at and describing the ranges of inflation
Knowing who is hurt and helped by inflation
Understanding the relationship between
unemployment and inflation
Growth
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Two definitions of economic growth:
A. increase in real GDP over time
B. increase in real GDP per capita over
time
Usually the second is considered a more
accurate measure in comparing living
standards
growth
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Growth is one of the more important
economic goals for an economy
because growth means more goods and
services with which to satisfy needs and
wants. Growth lessens the burdens of
scarcity on a society.
growth
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A simple rule to use in trying to understand
the speed with which economic growth can
take place is called “the rule of 70”.
If you have an annual average growth rate
percentage, dividing it into 70 will give you an
approximate time in which the real GDP of an
economy will double.
For instance, if the US is growing at 3% and
maintains that growth over time, one could
expect the economy to double in 23-24 years
in terms of real GDP.
growth
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So, where does economic growth come from?
Most economist believe that there are 2 main
sources of growth:
A. increasing inputs (growth in resources)
B. increasing productivity of existing inputs
(working more efficiently) Most growth in
modern economies comes from B.
Growth in the US
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While economic growth in the US is unstable,
it has generally been averaging 3% for the
last half century or so.
That being said, we have to keep in mind
that some things are not measured such as
quality of products, increase or loss of leisure
time, environmental effects, or the human
impact of technologies.
The Business Cycle
Causes
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Frankly no one knows what causes business
cycles for sure although we have plenty of
speculation
1. Major innovations in technology or other
areas may spur investment or consumption
spending
2. Changes in productivity may be related to
this and to the instability of the cycle
3. the level of aggregate (total) spending is
important particularly changes in Ig and
purchase of consumer durables
Cycles and fluctuations
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Cyclical fluctuations usually are accompanied
by certain phenomena
Usually durable goods spending is more
volatile and unstable than non durable
spending or service spending as these latter
two are usually non-postponable.
If you see a dip in durable consumption
and/or capital investment (Ig) a cycle is
underway
What instability?
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Capitalism is inherently unstable. This is
actually one of the features that make it
a very adaptable system. Unfortunately
these instabilities have consequences
for human beings.
The two main instabilities in the
capitalist economy are unemployment
and inflation.
Unemployment
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Types of unemployment
1. Frictional: that which occurs as
people search for or wait to take jobs.
May indicate there is mobility in the
work force
Unemployment
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2. Structural: due to changes in the
structure of demand for labor. Perhaps
geographic or caused by obsolescence
in job skills
3. Cyclical: caused by the recession
phase of the business cycle sometimes
called deficient demand unemployment
Full Employment
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Full employment does not mean there is
no unemployment
The full employment rate of
unemployment is equal to the total of
frictional and structural unemployment
This rate is also called the natural rate
of unemployment
Full Employment
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The natural rate occurs when the labor
markets are in balance. At this point
potential output is being achieved in the
economy.
The natural rate is not a fixed point but
fluctuates with changes in the structure
of the economy and of the human
resources contained therein.
How is unemployment
measured?
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Population is divided into 3 groups
Those under 16 or institutionalized
Those persons not in the labor force
over 16 (retirees, those not looking for
work)
Those over 16 who are willing and able
to work
Unemployment Defined
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Unemployment is limited to the largest group:
those who are over 16 and willing and able to
work or THE LABOR FORCE
The unemployment rate is defined as the %
of the labor force that is not employed. By
definition that is those who can and want to
work but aren’t divided by those who are
willing and able to work.
Unemployment
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The actual rate is calculated by survey of a
large number of households and using data
gathered by the states each month
Part time workers are counted as employed
“discouraged workers” who want a job but
are not actively seeking one are not counted
so they do not appear in unemployment
statistics since they are temporarily out of the
labor force
Unemployment
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Like all other statistics, unemployment
data are amenable to manipulation by
anyone. Unless one understands the
definition of what unemployment is and
is not confusion may result. The truth is
that actual unemployment is usually
greater, in some circumstances, much
greater that official statistics imply or
acknowledge.
GDP GAP and Okun’s Law
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The GDP gap is the difference between
POTENTIAL GDP and actual GDP
Potential GDP is that output which would
have been achieved at the full employment
rate of unemployment
According to Okun, for each one per cent of
unemployment over the full employment rate,
2% of potential GDP is lost. This formula is
known as Okun’s law.
Costs of unemployment
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Rates are lower for white collar workers
Teenagers have the highest rate
Minorities tend to have higher rates
Rate for males and females are comparable
Less educated workers tend to have on the
average higher rates of unemployment
Long term unemployment (over 15 weeks) is
usually lower than the overall rate.