Growth and the Business Cycle at Boeing

© 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION.

Fernando & Yvonn Quijano

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Chapter

21

Economic Growth, the Financial System, and Business Cycles

© 2009 Prentice Hall Business Publishing Economics Hubbard/O’Brien UPDATE EDITION. 2 of 34

Growth and the Business Cycle at Boeing

21.1 Discuss the importance of long-run economic growth.

21.2 Discuss the role of the financial system in facilitating long-run economic growth.

21.3 Explain what happens during a business cycle.

Learning Objectives

In this chapter, we will provide an overview of long-run growth and the business cycle and discuss their importance for individual firms, for consumers, and for the economy as a whole.

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Recession 2 quarters negative growth

The Annual Unemployment Rate in the United States, 1950–2007

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The Growth in Real GDP per Capita, 1900–2007

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Learning Objective 21.1

The Connection between Economic Prosperity and Health

Makingthe

Connection

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rateGrowth

70 double toyears ofNumber

Growth equation

Calculating Growth Rates and the Rule of 70

€

y t = y0(1+ g)t

€

y t / y0 = (1+ g)t

ln(2) = t ln(1+ g)

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Productivity: y output per worker

Increases in capital per unit of labor (hour worked) k

Technological Change: A

What Determines the Rate of Long-Run Growth?

€

y = Ak β

Savings less depreciation and population growth

€

Δk = sy − (δ + n)k

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Solved Problem 21-1The Role of Technological Change in Growth

1960-1995, y-hat in Singapore 6.2% percent

Double about every 11.5 years.

Singapore’s growth depended more on increases in capital per hour worked

increases in the labor force participation rate,

transfer of workers from agricultural to nonagricultural jobs than on technological change.

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What Explains Rapid Economic Growth in Botswana?

Makingthe

Connection

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Long-Run Economic Growth


Potential Real GDP

Potential GDP The level of GDP attained when all firms are producing at capacity.

Determined by Q = KβL1-β

Capacity utilization

Y/Q = (C+I+G+E-M)/ KβL1-β

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Potential Real GDP

Actual and Potential Real GDP

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Saving, Investment, and the Financial System


An Overview of the Financial System

Financial markets Markets where financial securities, such as stocks and bonds, are bought and sold.

Financial intermediaries Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers.

Financial system The system of financial markets and financial intermediaries through which firms acquire funds from households.

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The Macroeconomics of Saving and Investment

Y = C + I + G + NX

Y = C + I + G

I = Y − C − G

privateS = Y + TR − C − T

publicS = T − G − TR

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S = (Y + TR − C − T) + (T − G − TR)

S = Y − C − G

S = I

privateS publicSS = +

or

or

So, we can conclude that total saving must equal total investment:


The Macroeconomics of Saving and Investment

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The Market for Loanable Funds

Market for loanable funds The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.

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Demand and Supply in the Loanable Funds Market

FIGURE 21.3




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Ebenezer Scrooge: Accidental Promoter of Economic Growth?

Makingthe

Connection

Who was better for economic growth: Scrooge the saver or Scrooge the spender?

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Explaining Movements in Saving, Investment, and Interest Rates

FIGURE 21.4

An Increase in the Demand for Loanable Funds



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Crowding out A decline in private expenditures as a result of an increase in government purchases.




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FIGURE 21.5

The Effect of a Budget Deficit on the Market for Loanable Funds



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Solved Problem 21-2How Would a Consumption Tax Affect Saving, Investment, the Interest Rate, and Economic Growth?


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The Business Cycle


FIGURE 21.6

The Business Cycle

Some Basic Business Cycle Definitions

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The Business Cycle and the 2008 Election

Makingthe

Connection

The state of the U.S. economy was one factor that helped Barack Obama win the presidency in 2008.

The National Bureau of Economic Research (NBER) has the following broader definition: “A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.”

There is substantial evidence that in some elections, the state of the economy can be of decisive importance.

As real GDP began to decline and unemployment began to rise, Barack Obama ultimately won the election by a margin in the popular vote of 52 percent to 46 percent.

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The Business Cycle


What Happens during a Business Cycle?

The Effect of the Business Cycle on BoeingFigure 21-7

The Effect of the Business Cycle on Boeing

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FIGURE 21.8

The Effect of the 2001

Recession on the Inflation Rate

The Effect of the Business Cycle on the Inflation Rate

The Business Cycle


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FIGURE 21.9

The Impact of Recessions on the Inflation Rate

The Effect of the Business Cycle on the Inflation Rate

Don’t Let This Happen to YOU!Don’t Confuse the Price Level and the Inflation Rate

The Business Cycle


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FIGURE 21.10

How the Recession of 2001 Affected the Unemployment Rate

The Effect of the Business Cycle on the Unemployment Rate

The Business Cycle


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FIGURE 21.11

The Impact of Recessions on the Unemployment Rate

The Effect of the Business Cycle on the Unemployment Rate

The Business Cycle


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Recessions Have Been Milder and the Economy Has Been More Stable Since 1950

The Business Cycle


FIGURE 21.12

Fluctuations in Real GDP, 1900–2007

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Recessions Have Been Milder and the Economy Has Been More Stable Since 1950

Table 21-1

The Business Cycle Has Become Milder

PERIODAVERAGE LENGTH OF EXPANSIONS

AVERAGE LENGTH OF RECESSIONS

1870-1900 26 months 26 months



The Business Cycle


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• The increasing importance of services and the declining importance of goods.

• The establishment of unemployment insurance and other government transfer programs that provide funds to the unemployed.

• Active federal government policies to stabilize the economy.

The Business Cycle

Why Is the Economy More Stable?

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An Inside LOOK China’s Airlines Are Failing to Translate Rapid Growth into Profits

Chinese Aviation: On a Wing and a Prayer

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An Inside LOOK China’s Airlines Are Failing to Translate Rapid Growth into Profits

Chinese Aviation: On a Wing and a Prayer (continued)

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Business cycle

Capital

Crowding out

Financial intermediaries

Financial markets

Financial system

Labor productivity

Long-run economic growth

Market for loanable funds

Potential GDP

K e y T e r m s

Growth and the Business Cycle at Boeing

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