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Introduction to Economic Growth, Unemployment, and Inflation

Introduction to Economic Growth, Unemployment, and Inflation. In this chapter you will learn. 6.1 The definition and causes of economic growth 6.2 The nature and cause of the business cycle 6.3 The nature of unemployment and its measurement

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Introduction to Economic Growth, Unemployment, and Inflation

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  1. Introduction to Economic Growth, Unemployment, and Inflation

  2. In this chapter you will learn 6.1 The definition and causes of economic growth 6.2 The nature and cause of the business cycle 6.3 The nature of unemployment and its measurement 6.4 The definition of inflation and how it is measured 6.5 About the redistribution effects of inflation 6.6 About the output effects of inflation

  3. Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output

  4. Economic Growth • an increase in real GDP over some time period, OR • an increase in real GDP per capita over some time period

  5. Economic Growth • Growth as a Goal • Arithmetic of Growth • Main Sources of Growth • Growth in Canada • improved products & services • added leisure • other impacts • Relative Growth Rates

  6. Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output 

  7. Phases of the Business Cycle Figure 6-1 Level of real output Time

  8. Phases of the Business Cycle Figure 6-1 PEAK Level of real output Time

  9. Phases of the Business Cycle Figure 6-1 Level of real output RECESSION Time

  10. Phases of the Business Cycle Figure 6-1 TROUGH Level of real output Time

  11. Phases of the Business Cycle Figure 6-1 RECOVERY Level of real output Time

  12. Phases of the Business Cycle Figure 6-1 provincial variations GROWTH TREND Level of real output Time

  13. Canadian Recessions Since 1930 Table 6-2

  14. The Business Cycle • Causation: A First Glance • innovation • changes in productivity • money supply changes • total spending changes • Cyclical Impact: Durables & Non-Durables

  15. Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output  

  16. total population 31 million labour force 16.7 million Under 15 &/or institutionalized (6.0 million) Not in labour force (8.3 million) Employed (15.4 million) unemployed 1.285 million

  17. Measurement of Unemployment unemployed Unemployment rate x = 100 labour force 1,285,000 Unemployment rate 2002 x = 100 16,700,000 = 7.7%

  18. Measurement of Unemployment Criticisms of the calculation: • part-time employment • discouraged workers

  19. Types of Unemployment • Frictional Unemployment

  20. Types of Unemployment • Frictional Unemployment • Structural Unemployment

  21. Types of Unemployment • Frictional Unemployment • Structural Unemployment • Cyclical Unemployment

  22. Definition of “Full Employment” • natural rate of unemployment (NRU) • NOT zero unemployment • occurs when there is no cyclical unemployment • not automatic • varies over time

  23. Economic Cost of Unemployment GDP Gap & Okun’s Law • The amount by which actual GDP falls short of potential GDP • GDP gap = actual GDP – potential GDP • Okun’s Law: • For every 1% unemployment exceeds the natural rate.… • A GDP Gap of about 2% occurs

  24. Actual & Potential GDP & the Unemployment Rate Figure 6-3

  25. Economic Cost of Unemployment • Given for 1992: • unemployment rate is 11.3% • natural rate is 7.5% • potential GDP is $770 billion • What is the GDP gap? • 11.3%  7.5% = 3.8% (gap in % terms) • 3.8% X 2 = 7.6% (apply Okun’s Law) • 7.6% of $770 billion = $59 billion

  26. Unequal Burdens • Occupation • Age • Gender • Education

  27. Unemployment • Non-Economic Costs • Regional Variations

  28. Regional Variations

  29. Unemployment rates in five industrial nations Global Perspective 6.2

  30. Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output   

  31. Inflation • Meaning of Inflation • a rise in the general level of prices • Measurement of Inflation • Consumer Price Index

  32. Inflation

  33. Facts of Inflation Figure 6-4 The major periods of inflation in Canada were in the 1970s & 1980s

  34. GLOBAL PERSPECTIVE 6.3 inflation rates in Canada in the 1990s were relatively low Germany Canada UK US Japan

  35. Types of Inflation • Demand-Pull Inflation • excess demand • Cost-Push Inflation • per-unit production costs • supply shocks • Complexities

  36. Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output    

  37. Nominal & Real Income real income nominal income X 100 = price index % change in real income  % change in nominal income – % change in price level

  38. Nominal & Real Income • Expectations • redistribution effects of inflation depend on whether or not inflation is expected

  39. Who is Hurt by Inflation? assuming unanticipated inflation • Fixed-income receivers • Savers • Creditors

  40. Who is Unaffected or Helped by Inflation? assuming unanticipated inflation • Flexible-Income receivers • Debtors

  41. Anticipated Inflation • Effects are lessened to the extent inflation is correctly anticipated • COLA clauses • inflation premium on loans

  42. Inflation Premium Figure 6-5 = 11% Nominal Interest Rate

  43. Inflation Premium Figure 6-5 = 11% 5% Nominal Interest Rate Real Interest Rate

  44. Inflation Premium Figure 6-5 6% = + 11% Inflation Premium 5% Nominal Interest Rate Real Interest Rate

  45. Addenda • Deflation • Mixed effects • Arbitrariness

  46. Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output     

  47. Effects of Inflation on Output • Cost-Push Inflation & Real Output • Demand-Pull Inflation & Real Output • Hyperinflation & Breakdown

  48. Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output      

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