Economic Growth & Instability

1. Economic Growth & Instability

2. Defining Growth • Increase in Real GDP • Increase in GDP per capita – Important because GDP numbers can be deceptive based on population sizes

3. Growth as a Goal • Means more abundance of materials and ability to answer the economizing problem – reduces scarcity • “Rule of 70” – Used by economists to determine how long it will take a measure to double • Ex = 70 / % OF Growth = Years to Double • Growth accomplished by increasing inputs or increasing productivity

4. The Growth of the United States • Real GDP has increased 6X since 1940 • Per Capita GDP has increased has risen almost 4X • Problems in measuring growth include the lack of solid measure for quality improvements, increased leisure time, and harm towards the environment

5. Business Cycle • US record of growth certainly seen periods of economic instability • Inflation often follows rapid growth and unemployment and decline in output following recession & depression

6. 4 Phases of Business Cycle • Peak – “Full Employment” & Near Capacity Output • Recession – Decline in Output, Income, Employment, and Trade lasting 6 months or more • Trough – Bottom of a recession period • Recovery – Out is expanding towards Peak Level

7. Causation & the Business Cycle • Causation – Fluctuation in Business Cycle • Innovations & Technological Advancement may trigger consumer spending • Productivity Changes • Consumer spending • Instability of durable goods

8. Unemployment • Frictional unemployment – Consists of those searching for jobs, indicates mobility, and is good for the economy • Structural unemployment – due to changes in structure or geographic • Cyclical – Caused by changes in the business cycle

9. Full Employment • Understood that 100% employment cannot be achieved. 4-6% is the desired goal • Full employment = Structural + Frictional • Referred to as the natural rate of unemployment • Natural rate is achieved when markets are in balance, when the number job seekers = the number of vacancies

10. Categorizing Unemployment • Under 16 and/or institutionalized • Not in the labor force and not seeking employment • Those working and/or willing to work • Natural rate now approx 5.5% due to increases in competition in markets and age of work force

11. Unemployment Rate • % of labor force that is not employed • Part-time workers are counted as employed • Discouraged or “under employed” not figured in to the unemployment statistic

12. Okun’s Law • For every 1% that the unemployment rate exceeds the natural rate, GDP will fall 2% of output potential

13. Inflation • Inflation is measured by comparing price indexes from a given year and the one before it.

14. Types of Inflation • Demand Pull Inflation – An excess of consumer spending creates a shortage of goods which causes prices to rise • Cost-push inflation –Prices rise to due per unit cost increases • Tough to distinguish which is which in a real world setting

15. Inflation Redistribution • Fixed income groups are hurt because their purchasing power and disposable income has decreased • Savers hurt because their dollars are worth less • Debtors helped because their debts have decreased

16. Additional Information • Inflation Premium – amount interest rates are increased to cover inflation • Hyperinflation – occurs when inflation is not handled properly, usually met with severe socioeconomic consequences i.e Post-War Japan, Germany after WWI