Copyright 2008 The McGraw-Hill Companies 7-1 Economic Growth The Business Cycle Unemployment Labor...
23
Copyright 2008 The McGraw-Hill Companies 7-1 Economic Gro wth The Business Cycle Unemployment Labor Force Composition Types of Une mployment Unequal Burd ens Inflation Consumer Pri ce Index (CP I) Types of Inf lation Inflation Pr emium Last Word Key Terms End Show 7 Introduction to Economic Growth and Instability
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Transcript of Copyright 2008 The McGraw-Hill Companies 7-1 Economic Growth The Business Cycle Unemployment Labor...
Copyright 2008 The McGraw-Hill Companies7-1
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
7Introduction to Economic Growth and Instability
Copyright 2008 The McGraw-Hill Companies7-2
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Chapter Objectives• The Business Cycle and its
Primary Phases
• How Economic Growth is Measured and Why is it Important
• How Unemployment and Inflation are Measured
• The Types of Unemployment and Inflation and their Various Economic Impacts
Copyright 2008 The McGraw-Hill Companies7-3
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Economic Growth• Increase in Real GDP• Increase in Real GDP Per
Capita• Growth as a Goal• Arithmetic of Growth
– Rule of 70Approximatenumber of yearsrequired to doublereal GDP
=70
annual percentage rateof growth
W 7.1
Copyright 2008 The McGraw-Hill Companies7-4
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Economic Growth• Main Sources of Growth• Increases in Inputs• Increases in Resource
Productivity• Productivity Defined• Productivity in the United
States– Improved Products and
Services– Added Leisure– Other Impacts
Copyright 2008 The McGraw-Hill Companies7-5
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Selected Growth Rates
Source: Economic Report of the President, 2006
-4
-2
0
2
4
6
U.S.
Germany
France
Japan
U.K.
Italy
1997 1999 2001 2003 2005
Per
cen
tag
e C
han
ge
(an
nu
al r
ate)
GLOBAL PERSPECTIVE
Copyright 2008 The McGraw-Hill Companies7-6
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
The Business Cycle
Lev
el o
f R
eal O
utp
ut
Time
Peak
Peak
Peak
Recession
Recession
Expa
nsio
n Exp
ansi
on
Trough
Trough
Growth
Trend
O 7.1Phases of the Business Cycle
Cyclical Impact:Durables and Nondurables
Copyright 2008 The McGraw-Hill Companies7-7
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Unemployment• Twin Problems of the Business
Cycle– Unemployment– Inflation
• Measurement of Unemployment• Labor Force• Unemployment Rate
– Part-Time Employment– Discouraged Workers
Unemployment RateUnemployed
Labor Force= x 100
W 7.2
Copyright 2008 The McGraw-Hill Companies7-8
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Unemployment
Under 16And/or
Institutionalized(70.5 Million)
Labor Force, Employment, and Unemployment, 2005
TotalPopulation
(296.6 Million)
Not inLabor Force(76.8 Million)
Employed(141.7 Million)
LaborForce(149.3 Million)
Unemployed(7.6 Million)
Copyright 2008 The McGraw-Hill Companies7-9
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Unemployment• Types of Unemployment
–Frictional Unemployment–Structural Unemployment–Cyclical Unemployment
• Full Employment Defined• Full-Employment Rate of
Unemployment• Natural Rate of
Unemployment (NRU)
Copyright 2008 The McGraw-Hill Companies7-10
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Unemployment
• Economic Cost of
Unemployment• Potential Output• GDP Gap and Okun’s Law
GDPGap Actual GDP Potential GDP= -
W 7.3
Copyright 2008 The McGraw-Hill Companies7-11
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
UnemploymentActual and Potential GDP and the Unemployment Rate
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
The GDP Gap12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000GD
P (
bil
lio
ns
of
1996
do
lla
rs)
0
2
4
6
8
10
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
The Unemployment Rate10
8
6
4
2
0
Un
emp
loy
men
t(p
erce
nt
of
civi
lian
Lab
or
forc
e)
Source: Congressional Budget Office & Bureau of Economic Analysis
GDP gap(positive)
GDP gap(negative)
Potential GDP
Actual GDP
Copyright 2008 The McGraw-Hill Companies7-12
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Unemployment• Unequal Burdens
–Occupation–Age–Race and Ethnicity–Gender–Education–Duration
• Noneconomic Costs
Copyright 2008 The McGraw-Hill Companies7-13
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Unemployment
Source: Bureau of Labor Statistics
0
5
10
15
U.S.Germany
Italy
Japan
France
1995 2000 2005
Un
emp
loym
ent
Rat
e (p
erce
nt)
Unemployment Rates in Five Industrial Nations,1995-2005
GLOBAL PERSPECTIVE
Copyright 2008 The McGraw-Hill Companies7-14
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Inflation• Inflation Defined
• Measurement of Inflation
–Consumer Price Index
CPIPrice of the Most Recent Market
Basket in the Particular Year
Price of the Same MarketBasket in 1982-1984
= x 100
Copyright 2008 The McGraw-Hill Companies7-15
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
InflationAnnual Inflation Rates in the United States,1960-2005
0
5
10
15
1960 1970 1980 1990 2000
Infla
tion
Rat
e (p
erce
nt)
Source: Bureau of Labor Statistics
Copyright 2008 The McGraw-Hill Companies7-16
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Inflation
Source: Bureau of Labor Statistics
-1
0
1
2
3
4
5
6
U.S.
Germany
Italy
Japan
France
1995 2000 2005
Infl
atio
n R
ate
(per
cen
t)
Inflation Rates in Five Industrial Nations,1995-2005
GLOBAL PERSPECTIVE
Copyright 2008 The McGraw-Hill Companies7-17
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Inflation• Types of Inflation
–Demand Pull Inflation–Cost-Push Inflation
• Per Unit Production Costs• Redistributive Effects
–Nominal and Real Income
–Anticipations• Anticipated Inflation• Unanticipated Inflation
Copyright 2008 The McGraw-Hill Companies7-18
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Inflation• Who is Hurt by Inflation?
–Fixed-Income Receivers–Savers–Creditors
• Who is Unaffected or Hurt by Inflation?–Flexible-Income Receivers
• Cost-of-Living Adjustments (COLAs)
–Debtors
W 7.4
Copyright 2008 The McGraw-Hill Companies7-19
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Inflation• Anticipated Inflation
–Nominal Interest Rate –Real Interest Rate–Inflation Premium
NominalInterest
Rate
RealInterest
Rate
InflationPremium
11%
5%
6%
= +
O 7.2
Copyright 2008 The McGraw-Hill Companies7-20
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Inflation• Deflation• Mixed Effects• Arbitrariness• Cost-Push Inflation and
Real Output• Demand-Pull Inflation and
Real Output• Hyperinflation
Copyright 2008 The McGraw-Hill Companies7-21
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
The Stock Market and the Economy
• Supply and Demand in the Stock Market• Collective Expectations of Future Profits
and Losses• Dow Jones Industrial Average (DJIA)• Volatility of the Stock Market• Wealth Effect• Investment Effect• Studies Show Consumption and Investment
Unaffected• Little Impact on Macroeconomy• Stock Market Bubbles Do Have an Impact• Stock Price Cycle Predictions• Index of Leading Indicators• Stock Prices Not a Reliable Predictor Alone
Last
Word
Do Stock Prices Affect Macroeconomic Instability?
Copyright 2008 The McGraw-Hill Companies7-22
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
Key Terms• economic growth• real GDP per capita• rule of 70• productivity• business cycle• peak• recession• trough• expansion• labor force• unemployment rate• discouraged workers• frictional unemployment• structural unemployment• cyclical unemployment• full-employment rate of un
employment• natural rate of unemploym
ent (NRU)
• potential output• GDP gap• Okun’s law• inflation• Consumer Price Index (CPI
)• demand-pull inflation• cost-push inflation• per-unit production costs• nominal income• real income• anticipated inflation• unanticipated inflation• cost-of-living adjustments
(COLAs)• real interest rate• nominal interest rate• deflation• hyperinflation
Copyright 2008 The McGraw-Hill Companies7-23
Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word
Key Terms
End Show
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BasicMacroeconomicRelationships
