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Introduction toEconomic Growth and
InstabilityChapters: 28, 29
Week: 1 ! 11
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Topic Outline• Unemployment-measurement and types of
unemployment
• Inflation- measuring inflation rate and
type/causes of inflation, effect of inflation on
output.
•
Economic growth, sources of growth• Business cycle
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Economic Growth
Increase in real GDP or real GDPper capita over some time
period
Percentage rate of growth
Growth as a goal
Arithmetic of growth: Rule of 70
Approimatenum!er of "earsre#uired to dou!lereal GDP
$70
annual percentage rateof growth
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$odern Economic Growth
%egan in %ritain
(as spread slowl"
'tarting date main cause of worldwide
di)erences in living standards*atching up is possi!le
+eader countries invent technolog"
,ollower countries adopt technolog"
*an grow faster
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Growth%&romotin'Institutional (tructures
'trong propert" rights
Patents and cop"rights
-.cient /nancial institutions
+iterac" and widespread
education,ree trade
*ompetitive maret s"stem
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*eterminants o+ Growth
"#)
'uppl" factors• Increases in #uantit"and #ualit" of
natural
resources• Increases in #ualit"and #uantit" of
humanresources• Increases in the
suppl" 1or stoc2 ofcapital goods• Improvements
intechnolog"
Demand factor• (ouseholds3!usinesses3 and
government mustpurchase the econom"4sepanding output
-.cienc" factor
• 5ust achieve economice.cienc" and fullemplo"ment
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ccountin' +or Growth,actors a)ecting productivit"growth
Technological advance 1602
8uantit" of capital 1902
-ducation and training 1&2-conomies of scale andresource
allocation 1&2
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&roducti-ity GrowthAverage rate of growth
&; per "ear &
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&roducti-ity Growth5icrochip@information technolog"
ew /rms and increasing returns
'ources of increasing returns5ore specialiBed inputs
'preading of development costs
'imultaneous consumption
etwor e)ects
+earning !" doing
Glo!al competition
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Economic GrowthIs economic growth desira!le andsustaina!leC
The antigrowth view-nvironmental and resource issues
In defense of economic growth
(igher standard of living(uman imagination can
solveenvironmental and resource issues
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Economic GrowthGrowth is the path to greatermaterial a!undance
1man"3 plent"2
Results in higher standards of livingIncreases leisure time
Allows for the epansion and
application of human nowledge
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The %usiness *"cle
Alternating increases anddecreases in economic activit"
overtime
Phases of the !usiness c"cle•Pea
•Recession
• Trough
•-pansion
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The %usiness *"cle
" e - e l o + r e a l o
u t p u t
0ime
Peak
Peak
Peak
R e c e s s i o n
R e c e s s i o n
E
x p a n
s i o n
E
x p a n s i o
n
Trough
Trough
G r o w t h
Tr en d
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*ausation: A ,irst Glance
%usiness c"cle uctuations•-conomic shocs
•Prices are Estic"F downwards
• Market economies react to changes with price adjustments.
For example, a negative productivity shock lowers themarginal
product of labor, so that the real wage would haveto move downward
to adjust labor demand and supply. But ifwages are inexible for
some reason, the adjustment cannottake place. he result is
unemployment and an output lossthat is larger than the direct e!ect
of the shock. "imilare!ects arise if goods prices are sticky.
•-conomic response entails decreases in output andemplo"ment
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'hocs: the man" shocs anddistur!ances that are present in an
econom"0echnolo'y shocks: Real=world production functions change
over time;
ew technologies lie computers or ro!ots alter the production
process andraise overall productivit";
Weather shocks and natural disasters: 5an" industries lie
agriculture
or tourism are weather=dependent; Rainfall and sunshine inuence
theoutput of these sectors3 so the weather is a potential source of
uctuations;
$onetary shocks: ination has real e)ects on monetar" polic";
Thereforerandom changes to mone" suppl" or interest rates are a
potential source ofuctuations as well;
&olitical shocks: The government inuences the econom"
!oth directl"through government enterprises and indirectl" through
regulation; *hangesin ta laws3 antitrust regulation3 government
ependiture and so on are apotential source of disruption in the
econom";
0aste shocks: shifts in preferences cause uctuations; i;e;3
,ashion changesrapidl"3 and the" ma" cause uctuations in areas lie
the apparel3 music3 ormovie industries
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;'; nemplo"ment
nder 1and3orInstitutionali4
ed 5617.million
ot inlabor+orce
58176 million
Employed51)979
million
nemployed
51.7) million
0otalpopulation 5)67)million
"abor+orce51/.72million
nemploymentrate
1.,2/,
1/.,1.2,
; 1 97)<
nemploymentrate
= o+ unemployed
labor +orce
; 1
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nemplo"ment
*riticisms of unemplo"ment• Involuntar" part=time worers counted
as if full=time
•An involuntar" part=time worer is a worer who would
liefull=time wor !ut canHt /nd it; An involuntar" part=timeworer is
also called a part=time worer due to economic
reasons; There are two maJor reasons wh" some!od"would !e an
involuntar" part=time worer: &2 Their hourshave !een cut from
their previousl" full=time Jo!K >2 The"can not /nd a full=time
Jo! despite wanting one;
•Discouraged worers are not counted as unemplo"ed
•a discoura'ed worker is a person of legal emplo"ment age
who isnot activel" seeing emplo"ment or who does not /nd
emplo"mentafter long=term unemplo"ment; This is usuall" !ecause
anindividual has given up looing or has had no success in /nding
a Jo!3 hence the term discouraged;
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https://en.wikipedia.org/wiki/Unemploymenthttps://en.wikipedia.org/wiki/Unemployment
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T"pes of nemplo"ment,rictional unemplo"ment
• Individuals searching for Jo!s orwaiting to tae Jo!s soon
'tructural unemplo"ment
•Occurs due to changes in thestructure of the demand for
la!or
*"clical unemplo"ment
•*aused !" the recession phase ofthe !usiness c"cle
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-mplo"ment
atural Rate of nemplo"ment1R2
•,ull emplo"ment level ofunemplo"ment
•*an var" over time
Demographic changes
*hanging Jo! search methods
Pu!lic polic" changes
•Actual unemplo"ment can !e a!oveor fall !elow the R
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nemplo"ment
GDP Gap•GDP gap $ actual GDP L potentialGDP
•*an !e negative or positive
Oun4s +aw
•-ver" & of c"clical
unemplo"ment creates a > GDPgap
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ne#ual %urdens
•
Occupation•Age
•Race and ethnicit"
•Gender•-ducation
•
Duration
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oneconomic *osts
"#)
• +oss of sills and loss of self=
respect
• Plummeting morale
•,amil" disintegration• Povert" and reduced hope
• (eightened racial and ethnic
tensions• 'uicide3 homicide3 fatal heart
attacs3 mental illness
•
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InationGeneral rise in the price level
Ination reduces the EpurchasingpowerF of mone"
*onsumer Price Inde 1*PI2
"#)
C&I&rice o+ the $ost >ecent $arket
?asket in the &articular @ear
&rice estimate o+ the $arket
?asket in 1982%198.
A 1
C&I267) % 217
217 A 1 278<
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T"pes of Ination
Demand=Pull ination
•-cess spending relative to output
•*entral !an issues too much
mone"*ost=Push ination
•Due to a rise in per=unit input costs
•'uppl" shocs
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Ination
ominal income
•nadJusted for ination
Real income
•ominal income adJusted forination
Anticipated vs; unanticipated
income&ercenta'echan'e inrealincome
&ercenta'echan'e innominalincome
&ercenta'echan'e inprice le-el
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Mho is (urt !" InationC
,ied=income receivers
•Real incomes fall
'avers•Nalue of accumulated savingsdeteriorates
*reditors
•+enders get paid !ac in Echeaper
dollarsF"#)
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InationC
,lei!le=income receivers•'ocial 'ecurit" recipients
•nion mem!ers
De!tors
•Pa" !ac the loan with Echeaper
dollarsF
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OutputC*ost=push ination
•Reduces real output
•Redistri!utes a decreased level ofreal income
Demand=pull ination
•One view is that Bero ination is !est
•Another view is that mild ination is!est
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