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Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
8
LECTURE
Anticipated
Inflation
Effects of
Inflation on
Output
Introduction to Economic
Growth and Instability
Key Terms
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8-1
Copyright McGraw-Hill/Irwin, 2002
ECONOMIC GROWTH
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
1) An increase in real GDP over some time
period
2) An increase in real GDP per capita over
some time period
•
for comparing living standards, however, the 2nd
definition is superior
•
eg: China’s GDP & Denmark’s GDP was $980 bil &
$170 bil respectively in 1999 but Denmark’s GDP per
capita was $32,030 compared to China’s $780
•
With either definition, economic growth is calculated
as a percentage rate of growth per year (eg: RGDP
was $200 bil last year & $210 this year)
Key Terms
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Copyright McGraw-Hill/Irwin, 2002
ECONOMIC GROWTH
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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• Technology can increase the
economy’s production capabilities.
• Improvements in and greater stocks
of land, labor, and capital can shift
out the production possibilities
curve.
• Another way of saying that economic
growth has shifted the production
possibilities curve out is to say that
growth has increased potential
output.
Copyright McGraw-Hill/Irwin, 2002
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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8-4
Copyright McGraw-Hill/Irwin, 2002
ECONOMIC GROWTH
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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• widely held economic goal
• enable economy to better meet
people’s wants & resolve
socioeconomic problems
• growth lessens the burden of
scarcity
• a growing economy can
consume more today while
increasing its capacity to
produce more in the future
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8-5
Copyright McGraw-Hill/Irwin, 2002
SOURCES OF GROWTH
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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• Increases in Resources
* increases in land, labor, capital &
entrepreneurial resources yield additional
output
• Increases in Productivity
* productivity = real output per unit of input
* rises when
a) the health, training, education and
motivation of workers are improved
b) workers have more & better machinery &
natural resources to work with
c) production is better organized & managed
Copyright McGraw-Hill/Irwin, 2002
SOURCES OF GROWTH
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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• Technological Knowledge
* stem from human ingenuity & creativity in
developing new ways of combining the
resources to enhance the amount of output
from a given quantity of resources
* the process of invention & innovation
* Permit savings of labor when a new
machine does the work of many workers
* Reduce in transportation time
* Ease communication etc
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8-7
Copyright McGraw-Hill/Irwin, 2002
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Total
Population
275,400,000
Effects of
Inflation on
Output
Under 16
and/or
institutionalized
65,800,000
Not in
labor
force
68,800,000
135,200,000
Key Terms
Employed
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8-8
Unemployed
Copyright McGraw-Hill/Irwin, 2002
Labor
force
140,800,000
5,600,000
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Unemployment
rate
unemployed
=
labor force
The below understate the
unemployment rate:
Effects of
Inflation on
Output
Key Terms
Part-Time Employment
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Discouraged Workers
Copyright McGraw-Hill/Irwin, 2002
x 100
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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Types of Unemployment
 Frictional
Unemployment
 Structural
Unemployment
 Cyclical
Unemployment
Copyright McGraw-Hill/Irwin, 2002
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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 Frictional Unemployment
• At any given time some workers are ‘between
jobs’
• Some moving voluntarily from one job to another,
others will be fired & will be seeking employment.
In addition, many young workers will be
searching for their 1st jobs
• Consist of ‘search unemployment’ & ‘wait
unemployment’
• Is inevitable & sometimes desirable (for workers
who are moving from low-paying, low-productivity
jobs to higher-paying, higher-productivity
positions)
• Greater income leads to better allocation of labor
resources & a larger RGDP for the economy
Copyright McGraw-Hill/Irwin, 2002
UNEMPLOYMENT
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
End
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8 - 12
• Changes over time in consumer demand & in
technology alter the ‘structure’ of the total
demand for labor, both occupationally &
geographically
• Frictional unemployment = short term while
structural unemployment is more serious
 Cyclical Unemployment
•
Cause by a decline in total spending & is
Key Terms
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 Structural Unemployment
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likely to
occur in the recession phase of the
business cycle
•
As the demand for goods & services
decreases, unemployment rises
•
Also called deficient-demand unemployment
Copyright McGraw-Hill/Irwin, 2002
FULL EMPLOYMENT
Economic Growth
The Business
Cycle

Unemployment
Inflation
Redistributive
Effects of
Inflation

Anticipated
Inflation
Effects of
Inflation on
Output

Key Terms
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
Since frictional & structural unemployment are
unavoidable in a dynamic economy, full
employment is something < 100% employment
of the labor force
An economy is fully employed’ when
experiencing only frictional & structural
unemployment. In other words, full
employment occurs when there is no cyclical
unemployment
Economists describe the unemployment rate
that is consistent with full employment as the
Full-Employment Rate of Unemployment or
Natural Rate of Unemployment (NRU)
Occurs when job seekers = job vacancies
Copyright McGraw-Hill/Irwin, 2002
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Key Terms
End
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8 - 14
Economic Costs of Unemployment
= potential production of goods &
services that is forgone
GDP Gap
Effects of
Inflation on
Output
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UNEMPLOYMENT
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* measures sacrificed output
* the amount by which actual
GDP falls short of potential GDP
Copyright McGraw-Hill/Irwin, 2002
Economic Growth
The Business
Cycle
OKUN’S LAW
Economic Costs of Unemployment
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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• By Arthur Okun
• Quantify the relationship
between the unemployment rate
& the GDP gap
• ‘For every 1% unemployment
exceeds the natural rate,
approximately a 2% GDP Gap
occurs’
Copyright McGraw-Hill/Irwin, 2002
INFLATION
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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Defined and Measurement
• A rising general level of
prices
• Rate of inflation
calculated using index
numbers
• Rule of 70
•Shortcut to determine
doubling time
Copyright McGraw-Hill/Irwin, 2002
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
• Fixed-Income
• Savers
Key Terms
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Who is Hurt by Inflation?
Receivers
Effects of
Inflation on
Output
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REDISTRIBUTIVE EFFECTS
OF INFLATION
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• Creditors
Copyright McGraw-Hill/Irwin, 2002
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
Effects of
Inflation on
Output
Key Terms
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End
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REDISTRIBUTIVE EFFECTS
OF INFLATION
Who is Unaffected or
Helped by Inflation?
• Flexible-Income
Receivers
• Debtors
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Copyright McGraw-Hill/Irwin, 2002
ANTICIPATED INFLATION
Economic Growth
The Business
Cycle
Unemployment
Inflation
Redistributive
Effects of
Inflation
Anticipated
Inflation
11%
=
Effects of
Inflation on
Output
+
5%
Key Terms
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Nominal
Interest
Rate
Copyright McGraw-Hill/Irwin, 2002
Real
Interest
Rate
6%
Inflation
Premium