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Economic Growth and Instability Alomar_111_8 1 Economic Growth Economic growth can be define as: An increase in real GDP over some time period, or: An increase in real GDP per capita over some time period. Which to use? Alomar_111_8 2 Country (1999) GDP GDP per capita China $980 b $780 Denmark $170 b $32,030 Alomar_111_8 3 With any measure, economic growth is a percentage rate change of growth per year: If GDPr2002=$200 and GDPr2003=$210, then the rate of growth= [(210-200)/(200)] x 100 = 5% Alomar_111_8 4 Growth as a Goal 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… Alomar_111_8 5 growth can reduce the effect of scarcity Growing economy can consume more today while increasing its capacity to produce more in the future. Alomar_111_8 6 Arithmetic of 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: Alomar_111_8 7 Approximate number Of years required to = 70/annual %Δrate Double GDPr of growth Ex. A 3% annual rate of growth will double GDPr in 23 years: (70/3) Alomar_111_8 8 Ex. Growth of 8% per year will double GDPr in 9 years: (70/8) Can be used to compare 2 countries: Country (A)’s GDPr = country’s (B) GDPr, but (A) grows at 4% while 2% for (B), then, it takes (A) 18 years to double while 35 years for (B). Alomar_111_8 9 Main Sources of Growth Can increase real outputs in two main ways: A. Increasing inputs of resources B. Increasing the productivity of these resources Productivity: real output per unit of inputs and increase when health, training, education, and motivation of workers are improved (technology) Alomar_111_8 10 The Business Cycle Economic growth experience periods of instability: Recession and depression: a decline in GDPr and significant increase in unemployment and/or rapid inflation. Alomar_111_8 11 Phases of Business Cycle (BC) BC: Alternating rises and declines in the level of economic activity over periods of times. level of outputs increases to a peak then declines to a trough: Alomar_111_8 12 The BC: Level of outputs Peak Peak Trough time Trough Alomar_111_8 13 At a peak, the economy is at full employment and level of real output is at or close to economy’s full capacity. The price level is more likely to rise during this period. Alomar_111_8 14 A peak is followed by a recession, this is a period of decline in total outputs, income, and employment. Contraction in business activity in many sectors. Because most prices cannot fall immediately, the price level falls only if the recession is severe. Alomar_111_8 15 Trough of the recession or depression: outputs, unemployment, at their lowest levels. Recovery: output and employment rise toward full employment. Business fluctuations? Economy vs. sectors? Alomar_111_8 16