Macroeconomics - ECO 2013

1. Macroeconomics - ECO 2013 Fall 2005 – 1 Term August 24 – December 16, 2005

2. Chapter 8: Intro to Economic Growth & Stability • Economic Growth • Business Cycle • Unemployment • Inflation

3. Economic Growth • Defined by two ways: • An increase in real GDP occurring over some time period • An increase in real GDP per capita occurring over some time period • Best for comparing living standards between countries • Calculated as a percentage rate of growth per year

4. Growth as a Goal • Expansion of total output v. population growth results in rising real wages and incomes  higher SOL • Better able to meet society’s wants & resolve socioeconomic problems • Rising real wages & income provide more opportunities to individuals & families w/o sacrificing others • Undertake new programs to alleviate poverty or protect environment

5. Main Sources of Growth • Increasing Inputs of Resources (1/3) • FFOP: Land, Labor, Capital, & Entrepreneurial Abilities • Increasing Production of Inputs (2/3) • Improvements in health, training, education & motivation of workers • Capital enhancements (machinery) • Better natural resources • Organization & Management • Labor reallocated by efficiency

6. Results of Economics Growth in the U.S. • Improved Products & Services • Added Leisure (50 to 40 hrs/week) • Environmental Impacts (Damaging) • Quality of Life (Stress)

7. The Business Cycle: Four Phases • Peak: Business activity reaches temporary maximum • Recession: Period of decline in Total Output, Income, Employment, Trade • Lasts more than 6 months • Depression: a severe & prolonged recession, falling prices are likely • Trough: Output & employment “bottoms out” at lowest levels • Can be long or short • Recovery: Expansion phase where output & employment rise toward full employment • Prices may rise

8. Causes of Fluctuations • Major innovations can trigger new investment and/or consumer spending • Changes in Productivity • Monetary Phenomenon • Governments create more/less money • Changes in Total Spending • In the U.S., long-run growth trend is expansionary

9. Who is affected by Recessions in the Business Cycle? • Everyone & Everywhere • Firms & Industries producing Capital & Consumer Durable Goods are most affected • Service industries and Nondurable Consumer Goods are somewhat “insulated”

10. Measuring Unemployment • Who is eligible & available to work? • Ineligible: Those less than 17 years and/or institutionalized • Not in Labor Force: Those not employed and NOT SEEKING WORK • Employed • Unemployed: Those not employed and SEEKING WORK • Labor Force = Employed + Unemployed • Approximately 50% of U.S. Population • Those “willing and able” to work

11. Unemployment Rate • Calculated as a Percentage of Labor Force: • Unemployment Rate = (Unemployed / Labor Force) * 100 • BLS conducts survey of 60,000 households monthly

12. Unemployment Rate • Part-time Employment underestimates the true unemployment rate • Many would prefer full-time work but can’t find it • Discouraged workers understate the true unemployment rate • Not in labor force but they wish they were

13. Frictional Unemployment • Those “between jobs” • Voluntary • Fired • Seasonal shifts in demand • “Unemployment Pool” • Labor market is Imperfect & Noninstantaneous in matching workers to jobs • Inevitable & Desirable • Short-term

14. Structural Unemployment • Changes over time in consumer demand & technology • Demand for certain skills may decline or vanish • Demand for other skills intensifies • Change in the COMPOSITION of the Labor Force • Geography • Long-term, more serious

15. Cyclical Unemployment • Caused by decline in total spending during recessions • aka “Deficit Demand Unemployment” • Serious

16. Full Employment • Occurs when economy is experiencing only frictional & structural unemployment (i.e., no cyclical unemployment) • Full Employment Rate of Unemployment or Natural Rate of Unemployment (NRU) • Economy is producing its Potential Output • NRU occurs when Job Seekers = Job Vacancies

17. Reasons for the Decline in NRU • Less younger workers in the labor force • Growth of temp agencies • Improved information technology • Welfare reform • Doubling of U.S. prison population

18. Economic Costs of Unemployment: GDP Gap • When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods & services is lost • GDP Gap: Potential GDP – Actual GDP • Potential GDP is at the NRU

19. Economic Costs of Unemployment: Unequal Burdens • Costs are unequally distributed among different groups • Occupation • Low-skilled laborers > High-skilled professionals • More frequent & longer unemployment spells • Bear brunt of recessions • Age • Teenagers > Adults • Lower skills • Less geographical mobility • New in labor market

20. Economic Costs of Unemployment: Unequal Burdens • Race & Ethnicity: • African-Americans & Hispanics > Caucasian • Lower rates of educational attainment • Greater concentration of low-skilled jobs • Discrimination in the labor market • Education: • Less educated > More educated • Duration

21. Inflation • Rise in the general level of prices • Does NOT mean ALL prices are rising • Prices rise unevenly • Measuring Inflation • Consumer Price Index [CPI(2) – CPI(1)]/CPI(1) * 100

22. Redistribution Effects of Inflation • Who is hurt by Inflation (assuming it is unanticipated) • Fixed Income Receivers (e.g., elderly) • Savers • Value of savings will decline if rate of inflation is greater than the rate of interest • Creditors

23. Who is Unaffected or Benefits from Inflation? • Flexible-Income Receivers • Cost of Living Adjustments (COLAs) • Social Security Recipients • Borrowers

24. Chapter 8 Study Questions • 4: Business Cycle • 5 & 6: Unemployment