Political Instability and Economic Growth The Harvard community
Economic Instability
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Transcript of Economic Instability
Economic Instability
Chapter 13 Vocab
1. Inflation2. Deflation3. Price index4. Consumer price
index5. Market basket6. Base year7. Creeping inflation8. Hyperinflation9. Stagflation10. Demand-pull
inflation
11. Cost-push inflation
12. Civilian labor force
13. Unemployed14. Unemployment
rate15. Frictional
unemployment16. Structural
unemployment
17. Outsourcing18. Technological
unemployment19. Cyclical
unemployment20. Seasonal
unemployment21. GDP gap22. Misery index/
Discomfort index
Business Cycles vs. Business Fluctuations
• Business Cycles: regular increases and decreases in real GDP
• Business Fluctuations: irregular increases and decreases in real GDP
They both can interrupt economic growth
First phase is recession, a period during which real GDP
(GDP measured in constant prices) declines for at least 2
quarters in a row or 6 consecutive months.
The recession begins when the economy reaches a peak,
the point where real GDP stops going up.
The recession ends when the economy reaches a trough,
the turnaround point where real GDP stops going down.
As soon as the declining real GDP
bottoms out, the economy moves into the second
phase, expansion – a period of recovery
until the economy reaches a new peak.
When it does, the current business cycle ends and a new one begins.
Trend line: growth path the economy
would follow if it were not interrupted by
alternating periods of recession and recovery
Causes of Changes in the Business Cycle1. Changes in investment spending: When the
economy is expanding, businesses expect future sales to be high, so they invest heavily in capital goods.
2. Innovation and Imitation: Come up with a new product or new way of doing things; copying what other companies may be doing
3. Monetary Policy Decisions: Change of interest rates causing incentives to invest or not
4. External Shocks: oil prices, wars, international conflict, natural disasters
What Happens if a recession becomes very severe?
Depression: a state of the economy with large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants.
The Great DepressionCauses
• Unequal distribution of income
• Easy Credit• Global economic
conditions
Effects• GDP fell almost 50 percent• Unemployment rose nearly
800 percent• Average manufacturing
wage fell from 55 cents an hour to 5 cents an hour
• Banks failed• Money supply contracted
What’s the difference between inflation and deflation?
• Inflation: increase in the general level of prices of goods and services
• Deflation: decrease in the general level of prices for goods and services
Market Basket: commonly purchased goods and services
Total of approx. 354 determined
items
Constructing the Consumer Price Index• Consumer Price Index (CPI): series used to
measure prices changes for a representative sample of frequently used consumer items
1. Select a Market Basket2. Find the average price of each item in the
market basket. Then add up the total for the basket.
3. Have a base year: a year that serves as a comparison for all other years
4. Convert the dollar cost of a market basket to an index value so that it is easier to interpret.
Measuring Inflation
(current year CPI – previous year CPI)Previous year CPI
Types of Inflation
• Creeping Inflation: 1-3% inflation per year; not much of a problem
• Hyperinflation: 500% and above inflation per year; very very rare
• Stagflation: period of slow economic growth coupled with inflation
Causes of InflationCauses of inflation include strong demand,
rising costs, and wage-price spirals, along with a growing supply of money.
• Demand-pull inflation: prices rise because all sectors try to buy more goods and services than the economy can produce; cause shortages, which drive up prices
• Cost-push inflation: rising costs drive up prices of products
Consequences of InflationInflation can reduce purchasing power, distort
spending, and affect the distribution of income.• Reduce Purchasing Power: dollar buys less as
prices rise• Distort Spending Patterns: • Encourage Speculation: Spend money on
luxury items if the prices are expected to increase
• Distorted Distribution of Income:
UNEMPLOYMENT
Measuring Unemployment
• Civilian Labor Force: sum of all people age 16 and above who are either employed or actively seeking employment
• Who is classified as unemployed?– People available to work who made a specific
effort to find a job during the past month AND worked less than 1 hour for pay in a week
– Work 15 hours or less in a week in a family business for no pay
How to Calculate the Unemployment Rate
Number of unemployed personsCivilian Labor Force
7,015,000 = 0.046 = 4.6% 150,991,000
Unemployment RateBedford Co.
10.8%
Tennessee9.5%
All U.S.9.2%
Limitations of the Unemployment Rate
1. Doesn’t measure people too frustrated or discouraged to look for work
2. People are considered employed even if they only have part-time jobs
Sources of Unemployment1. Frictional: workers are between jobs; short-term
condition2. Structural: fundamental change in the economy;
more serious type of unemployment, also includes Technological: workers are replaced by machines or automated systems
3. Cyclical: related to changes in the business cycle, also includes Seasonal: annual changes in the weather or other conditions that reduce the demand for jobs