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Title: Economic Growth, Business Cycles, Unemployment, and Inflation


1
Economic Growth, Business Cycles, Unemployment,
and Inflation
  • Chapter 6

2
Laugher Curve
  • An Indian-born economist once explained his
    personal theory of reincarnation to his graduate
    economics class.

3
Laugher Curve
  • If you are a good economist, a virtuous
    economist, he said, you are reborn as a
    physicist.

4
Central Problems of Macroeconomics
  • Macroeconomics is the study of the aggregate
    moods of the economy.
  • The four central problems are growth, business
    cycles, unemployment, and inflation.

5
Two Timeframes The Long Run and the Short Run
  • Issues of growth are considered in a long-run
    framework.
  • Long-run growth focuses on supply.
  • Supply is so important in the long run, policies
    that affect production such as incentives that
    promote work, capital, and technological change
    are key.

6
Two Timeframes The Long Run and the Short Run
  • Business cycles are generally considered in a
    short-run framework.

7
Growth
  • Generally the U.S. economy is growing or
    expanding.

8
Growth
  • The primary measurement of growth is changes in
    real gross domestic product (GDP).

9
Growth
  • Since 1890, U.S. economic output has grown at an
    annual rate of 2.5 to 3.5 per annum.

10
Growth
  • Another measure of growth is changes in per
    capita real output.

11
Global Experience with Growth
  • Global experiences with growth vary across time
    and among nations.
  • Today's growth rates are high by historical
    standards.
  • The range of growth rates among nations is wide.

12
The Benefits and Costs of Growth
  • Per capita economic growth allows everyone in
    society, on average to have more.
  • Growth, or predictions of growth, allows
    governments to avoid hard questions.
  • A growing economy creates jobs, to the joy of
    politicians.

13
The Benefits and Costs of Growth
  • The costs of growth include pollution, resource
    exhaustion, and destruction of natural habitat.

14
Business Cycles
  • There are numerous fluctuations around the
    secular growth trend called the business cycle.
  • The business cycle is the upward and downward
    movement of economic activity that occurs around
    the growth trend.

15
Business Cycles
  • There are a number of theories regarding business
    cycles.

16
U. S. Business Cycles
17
The Phases of the Business Cycle
  • The peak is the top of the business cycle.
  • A boom is a very high peak, representing a big
    jump in output.
  • The downturn is the phenomenon of economic
    activity starting to fall from a peak.

18
The Phases of the Business Cycle
  • A recession is a decline in output that persists
    for more than two consecutive quarters in a year.

19
The Phases of the Business Cycle
  • As total output starts to expand, the economy
    comes out of the trough into an upturn, which may
    turn into an expansion.
  • An expansion is an upturn that lasts at least two
    consecutive quarters of a year.

20
The Phases of the Business Cycle
21
Why Do Business Cycles Occur
22
Why Do Business Cycles Occur
23
Why Do Business Cycles Occur
24
Why Do Business Cycles Occur
25
Why Do Business Cycles Occur
26
Leading Indicators
  • Leading indicators are those that tell us what's
    likely to happen in the economy 12 to 15 months
    from now.

27
Leading Indicators
  • Leading indicators include the following

28
Leading Indicators
  • Leading indicators include the following

29
Leading Indicators
  • Leading indicators include the following

30
Leading Indicators
  • The drudge work of sifting through statistical
    series is the backbone of business economists'
    work

31
Unemployment
  • Business cycles and growth are directly related
    to unemployment in the U.S. economy.
  • Unemployment occurs when people are looking for a
    job and cannot find one.

32
Unemployment
  • The unemployment rate is the number of people who
    cannot find a job as a percent of those people in
    the economy who are willing and able to work.

33
Unemployment
  • Cyclical unemployment is that which results from
    fluctuations in economic activity.

34
Unemployment
  • Structural unemployment is that caused by
    economic restructuring making some skills
    obsolete.

35
Unemployment as a Social Problem
  • The Industrial Revolution was accompanied by a
    change in how families dealt with unemployment.
  • What had previously been a family problem, became
    a social problem.
  • The Industrial Revolution created the possibility
    of cyclical unemployment.

36
Unemployment as a Social Problem
  • The Industrial Revolution was accompanied by a
    change in how families dealt with unemployment.

37
Unemployment as a Social Problem
  • The early solution for unemployment -- hunger --
    was not an effective answer to unemployment.

38
Unemployment as Governments Problem
  • Government took responsibility for full
    employment in the Employment Act of 1946.
  • Full employment an economic climate in which
    just about everyone who wants a job can have one.

39
Unemployment as Governments Problem
  • Initially government regarded 2 percent
    unemployment as a condition of full employment.

40
Unemployment as Governments Problem
  • Frictional unemployment is the unemployment
    caused by new entrants into the job market and
    people quitting a job just long enough to look
    for and find another one.

41
Unemployment as Governments Problem
  • The target rate of unemployment (sometimes called
    the natural rate of unemployment) is the lowest
    sustainable rate of unemployment that
    policymakers believe is achievable under existing
    conditions.

42
Unemployment as Governments Problem
  • In the 1980s and 1990s, the target rate of
    unemployment was been between 5 and 7 percent.

43
Why the Target Rate of Unemployment Changed
  • The target rate of unemployment has changed over
    time for the following reasons

44
Why the Target Rate of Unemployment Changed
  • The target rate of unemployment has changed over
    time for the following reasons

45
Why the Target Rate of Unemployment Changed
  • The target rate of unemployment has changed over
    time for the following reasons

46
Whose Responsibility Is Unemployment?
  • The Classicals believe that individuals are
    responsible for their own employment.

47
Whose Responsibility Is Unemployment?
  • Keynesian economists tend to say that society
    owes a person a job commensurate with the
    individual's training or past job experience.

48
How Is Unemployment Measured?
  • The unemployment rate is published by the U.S.
    Department of Labor's Bureau of labor Statistics.

49
Unemployment Rate Since 1900
50
Calculating the Unemployment Rate
  • The unemployment rate is calculated by dividing
    the number of unemployed individuals by the
    number of people in the civilian labor force and
    multiplying by 100.

51
Calculating the Unemployment Rate
  • The labor force is those people in an economy who
    are willing and able to work.

52
How Accurate Is the Official Unemployment Rate?
  • The unemployment rate does not include
    discouraged workers.
  • Discouraged workers people who do not look for
    a job because they feel they do not have a chance
    of getting one.

53
How Accurate Is the Official Unemployment Rate?
  • The unemployment rate counts as employed those
    who are underemployed.

54
How Accurate Is the Official Unemployment Rate?
  • To meet some of the definitional complaints, the
    Bureau of Labor Statistics began using
    supplemental measures to more clearly define
    unemployment.

55
How Accurate Is the Official Unemployment Rate?
  • The labor force participation rate measures the
    labor force as a percentage of the total
    population at least 16 years old.

56
How Accurate Is the Official Unemployment Rate?
  • The employment rate measures the number of people
    who are working as a percentage of the labor
    force.

57
How Accurate Is the Official Unemployment Rate?
  • For completely different reasons, both Classicals
    and Keynesians agree that unemployment figures
    are imperfect.

58
How Accurate Is the Official Unemployment Rate?
59
Unemployment and Potential Income
  • The capacity utilization rate is the rate at
    which factories and machines are operating
    compared to the maximum sustainable rate at which
    they could be used.

60
Unemployment and Potential Income
  • The capacity utilization rate indicates how much
    capital is available for economic growth.

61
Unemployment and Potential Income
  • Potential output is the output that would
    materialize at the target rate of unemployment
    and the target rate of capacity utilization.

62
Unemployment and Potential Income
  • Potential income is defined as the output that
    will be achieved at the target rate of
    unemployment and at the target level of capacity
    utilization.

63
Unemployment and Potential Income
  • There is debate about where the actual level of
    potential income is.

64
Unemployment and Potential Income
  • To determine the effect changes in the
    unemployment rate will have on income, we use
    Okum's rule of thumb.

65
Microeconomic Categories of Unemployment
  • Macroeconomic measures of unemployment may be too
    crude.
  • Different types of unemployment are susceptible
    to different types of products.

66
Microeconomic Categories of Unemployment
  • Some microeconomic categories of unemployment are
    reason for how people become unemployed,
    demographic unemployment, duration of
    unemployment, and unemployment by industry.

67
Inflation
  • Inflation is a continual rise in the price
    level.
  • Since World War II, the U.S. inflation rate has
    remained positive and relatively stable.

68
Inflation Since 1900
69
Measurement of Inflation
  • Inflation is measured with changes in price
    indexes.
  • A price index is a composite of prices.

70
Measurement of Inflation
  • A price index is a series of numbers that
    summarizes what happens to prices of a selection
    of goods (often called a market basket of goods)
    over time.

71
Measurement of Inflation
  • A price index can be created by looking at a
    market basket.

72
Real-World Price Indexes
  • Real-world price indexes include the PPI, the
    CPI, and the GDP deflator.

73
The Producer Price Index (PPI)
  • The producer price index (PPI) is an index or
    ratio of a composite of prices of a number of
    important raw materials, such as steel, relative
    to a composite of the prices of those raw
    materials in a base year.

74
The Producer Price Index (PPI)
  • The PPI does not accurately measure what most
    consumers are interested infinal goods.

75
The GDP Deflator
  • The GDP deflator (gross domestic product
    deflator) is an index of the price level of
    aggregate output or the average price of the
    components in GDP relative to a base year.

76
The GDP Deflator
  • The GDP deflator is the measure of inflation most
    economists favor since it includes the widest
    number of goods.

77
The GDP Deflator
  • Another price index is the chain-type price index
    for GDP which uses a GDP deflator with a
    constantly moving base year.

78
The Consumer Price Index (CPI)
  • The consumer price index (CPI) measures the
    prices of a fixed "basket" of consumer goods,
    weighed according to each component's share of an
    average consumer's expenditures.

79
The Consumer Price Index (CPI)
  • The CPI is the measure of inflation most often
    presented in news broadcasts.

80
Composition of CPI
81
Real and Nominal Concepts
  • Nominal output is the total amount of goods and
    services as measured by current prices.

82
Real and Nominal Concepts
  • Real output is the total amount of goods and
    services produced, adjusted for price level
    changes.

83
Real and Nominal Concepts
  • The real amount is the nominal amount adjusted
    for inflation.

84
Expected and Unexpected Inflation
  • Expected and unexpected inflation affects
    behavior differently.
  • Expected inflation is that which people
    anticipate.
  • Unexpected inflation is that which surprises
    people.

85
Expected and Unexpected Inflation
  • Expectations of inflation play an important role
    in further exacerbating inflation.

86
Costs of Inflation
  • There are two main costs of inflation
    redistribution costs and blurring of price
    information.

87
Costs of Inflation
  • Inflation causes income to be redistributed from
    those who do not raise their prices to those who
    do.

88
Costs of Inflation
  • Inflation can reduce the amount of information
    that prices are supposed to convey.

89
Costs of Inflation
  • Despite redisributive costs and a blurring of
    price information, inflation is usually accepted
    by governments as long as it stays at a low level.

90
Costs of Inflation
  • The danger is when inflation becomes
    hyperinflation.
  • Hyperinflation exceptionally high levels of
    inflation of, say, 100 percent or more a year.
  • The U.S. has never experienced a hyperinflation.

91
Economic Growth, Business Cycles, Unemployment,
and Inflation
  • End of Chapter 6

92
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