Download A. Unemployment

Chapter 25 & 26
Introduction to
Economic Growth and
Instability
Economic Growth
Definitions of Economic Growth
LO1
•
Increase in real GDP over some time period, or
•
Increase real GDP per capita over some time
period.
•
Economic Growth is a percentage rate of growth.
Economic Growth
Real GDP and Real GDP per Capita
(4)
Real GDP,
Per Capita,
2005$
(2) ÷ (3)
(1)
Year
(2)
Real GDP,
Billions of 2
2005$
1950
$ 2006
152
$12,197
1960
2831
181
15,640
1970
4270
205
20,829
1980
5839
228
25,610
1990
8034
250
32,136
2000
11,226
282
39,809
2009
12,987
307
42,303
(3)
Population,
Millions
Source: Bureau of Economic Analysis, http://www.bea.gov
and U.S. Census Bureau, http://www.census.gov
LO1
Economic Growth
• Countries determine economic growth as a goal.
It is one of the most important economic goals
- To raise total outputs relative to population
- This will lead to raising real wages and
income and standards of living: More
goods and services, leisure, higher
educations…
• Growth can reduce the effect of scarcity
Economic Growth
• Why the rate of growth is important? Because it
matters!
• In the USA, a 1% growth rate increase means
$100 billion more outputs.
• We use the “rule of 70” : we can find the number
of years for some measure to double:
Arithmetic of growth: Rule of 70
Approximate
number of years
required to double
real GDP
LO1
70
=
annual percentage rate
of growth
Economic Growth
LO1
•
An example for “rule of 70” ;
i.e a 3% annual rate of growth will double real
GDP in 23 years. How !!
•
Also, “rule of 70” can be used to compare 2
countries, How !!
Economic Growth
Main Sources of Growth
Can increase real outputs in two main ways:
A. Increasing inputs of resources
B. Increasing the productivity of these resources
Note: Productivity is the real output per unit of inputs
and it increases when health, training, education,
and motivation of workers are improved
(technology).
The Business Cycle
Definition of Business Cycle :
Alternating rises and declines in the level of
economic activity over periods of times.

Usually, level of outputs (Real GDP) increases to a
peak then declines to a trough.
 There are four phases of the business cycle are
identified over a several-year period.
 These includes a peak, a recession, a trough, and
finally a recovery.
The Business Cycle
Peak
Level of real output
Peak
Peak
Trough
Trough
Time
LO1
The Business Cycle
1. A peak is when business activity reaches a
temporary maximum with full employment and
near-capacity output.
2. A recession is a decline in total output, income,
employment, and trade lasting six months or
more.
3. The trough is the bottom of the recession
period.
4. Recovery is when output and employment are
expanding toward full-employment level.
A. Unemployment
• It is one of the problems that arise from economic
instability.
• Can be defined as the failure to use all available
economic resources to produce desired goods and
services; the failure of the economy to fully employ
its labor force.
A. Unemployment
< 16 and or in
institutions
Not in labor force
Total population
Employed
Labor
force
“People who are able and willing to
work”
Unemployed
“People who are able and willing to
work”
A. Unemployment
Thus Definition of Unemployment is:
• The unemployment rate is defined as the percentage
of the labor force that is not employed. (Note:
Emphasize not the percentage of the population.).
• Unemployment can be measured as;
Unemployment
Rate
= (unemployed / Labor Force) x 100
A. 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)
Unemployed
(14.3 million)
LO2
14,265,000
X 100 = 9.3%
154,142,000
Labor
force
(154.2
million)
A. Unemployment
Types of unemployment:
• 1. Frictional unemployment: consists of those workers
between jobs (searching for better job, fired, laid of b\c
of seasonal demand, searching for the first job…) .
• 2. Structural unemployment: due to changes in the
structure of demand for labor; e.g., workers whose skills
are not demanded, who lack sufficient skill to obtain
employment, or who cannot move to locations where
jobs are available.
• 3. Cyclical unemployment: is caused by the recession
phase of the business cycle as demand decreases,
employment falls and unemployment increases.
A. Unemployment
Definition of Full Employment:
• Full employment does not mean zero unemployment.
• Therefore, we can say the economy is fully employed (
at Full Employment) even if we have both the structural
and frictional unemployment.
• Full employment occurs when there is no cyclical
unemployment.
A. Unemployment
• Since we have unemployment even when we are at
full employment.
• The full-employment rate of unemployment is also
referred to as the natural rate of unemployment.
• The natural rate is achieved when labor markets are in
balance; “the number of job seekers” equals “the
number of job vacancies”.
• The natural rate of unemployment is not fixed but
depends on the demographic makeup of the labor
force and the laws and customs of the nations.
A. Unemployment
Economic cost of unemployment:
(1)
• GDP gap and Okun’s Law: GDP gap is the difference
between potential and actual GDP.
• Economist Arthur Okun quantified the relationship
between unemployment and GDP as follows: For every
1 percent of unemployment above the natural rate, a
negative GDP gap of about 2 percent occurs. This is
known as “Okun’s law”.
• The forgone outputs in this case when the economy fails
to create enough jobs for all who are able and willing to
work, potential production of goods and services is lost.
A. Unemployment
(2)
• Unequal Burden: Level of skill, nature of occupation,
certain age and race and ethnicity, gender, and education.
Noneconomic cost of unemployment:
(1)
• Noneconomic costs include loss of self-respect and
social and political unrest.
B. Inflation
Definition of Inflation:
• Inflation is a rising general level of prices (not all prices
rise at the same rate, and some may fall).
• Not necessary that all prices are increasing
• In periods of inflation, some prices are rising while some
are declining
• The most important: general price level, and the increase
to have an affect
B. Inflation
Measuring of Inflation:
• The main index used to measure inflation is the
Consumer Price Index (CPI).
• Using CPI when price index measures the general
level of prices in the economy as :
CPIyear A=(basket yearA)/(basket in base year) X100
• Therefore,
inflation rate2000 =
CPI2000- CPI1999
CPI1999
X 100
B. Inflation
Types of Inflation
1. Demand Pull Inflation:
• Assume that the economy is at its full capacity of
production. Then, Assume that total spending is
greater than production level… what will happen to
price level?
• Since all resources are fully employed, production
cannot respond to this increase in demand.
• Therefore, outputs cannot be expanded to meet
demand, This excess demand will bid up prices,
causing “demand-pull inflation”.
• “Too much spending for too few goods”
B. Inflation
2. Cost-Push Inflation:
• This is an increase in per-unit production costs.
• Per-unit production cost =
Total input cost / units of outputs
• This will reduce profits and reduce outputs firms
willing to produce.
• Thus, the economy’s supply of goods and services
declines and the price level rises.
• Costs are pushing the price level upward
• Sources: supply shocks: increase in costs or raw
materials, energy inputs, wages…
B. Inflation
Redistribution Effects of Inflation
• Inflation hurts some, leaves others unaffected
• Inflation redistributes real income from some to
others
• Who benefits and who gets hurt?
B. Inflation
Redistribution Effects of Inflation
Terminology; Recall;
• Real income = nominal income/price index
• Real wage: purchasing power of nominal wage
(number of $$ received as wages, rent, interest, or
profits)
• Some people will be affected more than others as
inflation occurs (redistribution effect).
• The following rule tells us approximately by how
much real income will change:
%ΔReal in Income =%Δ nominal income - %Δ in
price level
B. Inflation
Redistribution Effects of Inflation
Who is affected by Inflation;
Unanticipated inflation has stronger impacts; those
expecting inflation may be able to adjust their work or
spending activities to avoid or lessen the effects.

1.
2.
3.

1.
2.
Unanticipated inflation hurts:
Fixed income receivers
Savers
Creditors
Unanticipated inflation is unaffected to:
Flexible income receivers
Debtors
B. Inflation
 Anticipated inflation
• The redistribution effects of inflation are less
sever or can be eliminated when people can
expect inflation (inflation is anticipated )and can
adjust their nominal incomes to reflect the
expected price-level increases.
• The lender can avoid the anticipated inflation by
charging inflation premium;
Nominal interest rate = Real interest rate + Inflation Premium
B. Inflation
Hyperinflation;
• Is an extremely high rate of inflation.
• Individuals expect inflation rate to even gets higher,
leading them to “spend now”.
• Business owners do not know what to charge for their
products.
• May cause economic collapse
• Uncertainty about future prices