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Unit Two: Measuring Economic Growth and Performance

Unit Two: Measuring Economic Growth and Performance. Topic: Economic Growth and Instability Chapter: 8. Learning Targets. I will define economic growth. I will be able to calculate doubling time for GDPr. I will identify the sources of growth.

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Unit Two: Measuring Economic Growth and Performance

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  1. Unit Two: Measuring Economic Growth and Performance Topic: Economic Growth and Instability Chapter: 8

  2. Learning Targets • I will define economic growth. • I will be able to calculate doubling time for GDPr. • I will identify the sources of growth. • I can differentiate between the four phases of the business cycle, and identify various situations which can create changes in the business cycle. • I will identify the different groups of people affected by changes in the business cycle. • I will be able to calculate unemployment. • I can identify the three types of unemployment to the extent that I will know how an unemployed person is classified. • I will be able to define full employment, and explain how it is the natural rate of unemployment. • I will explain how Okun’s Law shows the GDP gap. • I will define and calculate inflation. • I will explain what causes the two types of inflation. • I will identify the difference between nominal income and real income. • I will understand how different groups of people affected by inflation.

  3. Economic Growth • An increase in GDPr occurring over some time period. • An increase in GDPr per capita occurring over some time period. • Rule of 70: 70 Approximate # of years required to double GDPr = Annual growth rate %

  4. Source of Growth (1) increase in number/amount of resources (2) increasing productivity of existing resources (technology and training) Capital goods Consumer goods Y* Y2

  5. Public Policy to Promote Growth • Capital investment (requires more savings because savings is used for loans for investment) • Catch-up effect (the less you have to start with, the higher your returns; the more you have, the lower your returns) • Investment from abroad (increases stock of capital, even though income earned may return to originating country) • Education • Health and nutrition • Property rights and political stability • Free trade • Research and development • Population growth

  6. Business Cycle • Def: shows the ups and downs of the economy; growth trend shows general movement of economy. The phases are really fluctuations with no set time period. Level of real output (GDPr) Time

  7. Who is affected by business cycle changes… • Producers of capital goods and consumer durables (lasting goods) are most affected by the BC. • Producers of nondurable consumer goods are not as affected by the BC.

  8. Unemployment • Labor force • Unemployment • Employment • Underemployment • Note: discouraged workers are not seeking jobs – they have given up, and therefore, are not counted in the unemployment rate.

  9. Unemployment Rate # of unemployed Unemployment rate = X 100 Labor force

  10. Types of Unemployment • Frictional • Structural • Cyclical

  11. Full Employment • Full employment (also called the natural rate of unemployment…NRU) is when the # of people unemployed = # of jobs available. • 4-6% is an accepted range. • Frictional and structural unemployment make up the NRU.

  12. GDP Gap and Okun’s Law • If there are not enough jobs for everyone who wants one, then the economy is operating inside the PPC and potential production is lost. The difference between the actual GDP and the potential GDP is a GDP gap. • Okun’s Law – for every 1% by which actual unemployment exceeds the NRU, 2% of potential GDP is lost (a GDP gap of 2%).

  13. Nominal Income vs. Real Income • Nominal income: number of dollars received as wages, interest, rent or profits. • Real income (or purchasing power): the amount of goods and services which can be purchased with nominal income; nominal income adjusted for inflation. Nominal income Real income = Price index (in hundredths)

  14. Inflation • Def: rise in the general price level. • Calculation: Price index of yr. – price index of base yr. X 100 Inflation rate = Price index of base yr.

  15. Types of Inflation • Demand-pull • Cost-push • Supply shocks occur when the cost of raw materials or energy sources have increased, leading to an overall increase in per-unit production costs for most industries.

  16. HURT Fixed-income receivers Savers HELPED (or unaffected) Flexible-income receivers (COLA) Debtors Effects of Inflation

  17. Miscellaneous • Anticipated inflation: know it’s coming and take measures to prevent its effects (hopefully) • Deflation: decrease in price level • Hyperinflation: rapid inflation with devastating effects

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