Chapter 6--Introduction to Economic Growth, Unemployment ... · Introduction to Economic Growth, Unemployment, ... Economic Cost of Unemployment ... Chapter 6--Introduction to Economic
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© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 1
Introduction to Economic Growth,
Unemployment, and Inflation
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 4
Economic Growth
an increase in real GDP over some time
period, OR
an increase in real GDP per capita over
some time period
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 7
Level o
f re
al
ou
tpu
t
Time
Phases of the Business CycleFigure 6-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 8
PEAK
Time
Level o
f re
al
ou
tpu
t
Phases of the Business CycleFigure 6-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 9
RECESSION
Time
Level o
f re
al
ou
tpu
t
Phases of the Business CycleFigure 6-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 10
TROUGH
Time
Level o
f re
al
ou
tpu
t
Phases of the Business CycleFigure 6-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 11
RECOVERY
Time
Level o
f re
al
ou
tpu
t
Phases of the Business CycleFigure 6-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 12
Time
Level o
f re
al
ou
tpu
t
provincial
variations
Phases of the Business CycleFigure 6-1
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 13
Canadian Recessions Since 1930
Year Change in real GDP
1930-33 -27.5%
1945 -2.4%
1946 -2.2%
1954 -1.1%
1982 -3.2%
1991 -1.7%
Table 6-2
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 14
The Business Cycle
Causation: A First Glance
– innovation
– changes in productivity
– money supply changes
– total spending changes
Cyclical Impact: Durables & Non-
Durables
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 16
The Labour Force, 2002
Fig. 6-2
labour force
16.7
million
total population
31 million
unemployed 1.285 million
Employed
(15.4 million)
Not in labour force
(8.3 million)
Under 15 &/or
institutionalized
(6.0 million)
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 17
Unemployment
rate
unemployed
labour forcex 100=
Unemployment
rate 2002
=
1,285,000
16,700,000x 100=
7.7%
Measurement of Unemployment
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 18
Measurement of Unemployment
Criticisms of the calculation:
part-time employment
discouraged workers
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 19
Types of Unemployment
Frictional Unemployment
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 20
Types of Unemployment
Frictional Unemployment
Structural Unemployment
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 21
Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 24
Actual & Potential GDP & the
Unemployment RateFigure 6-3
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 26
Unequal Burdens
Occupation
Age
Gender
Education
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 27
Unemployment
Non-Economic Costs
Regional Variations
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 28
Regional Variations
Provincial Breakdown of the Unemployment Rate,
2002
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
CANADA
Newfoundland
PEI
Nova Scotia
New Brunswick
Quebec
Ontario
Manitoba
Saskatchewan
Alberta
British Columbia
%
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 29
Unemployment rates in five
industrial nationsGlobal Perspective 6.2
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 31
Inflation
Meaning of Inflation
– a rise in the general level of prices
Measurement of Inflation
– Consumer Price Index
100X(1992) base yearthe in basketsame the ofPrice
yearularthe partic in basket 1992 ofPrice CPI
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 32
Inflation
X100 yearlast CPI
yearlast CPI- this year CPI
inflation
ofRate
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 33
Annual Inflation Rates in Canada, 1972-2002
0
2
4
6
8
10
12
141972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
%
Facts of Inflation
The major periods of inflation
in Canada were in the 1970s &
1980s
Figure 6-4
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 34
Inflation rates in five industrial
nations 1992-2002
-1
0
1
2
3
4
5
6
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
GLOBAL PERSPECTIVE 6.3
UK
Germany
Japan
US
Canada
inflation rates in
Canada in the 1990s
were relatively low
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 35
Types of Inflation
Demand-Pull Inflation
– excess demand
Cost-Push Inflation
– per-unit production costs
– supply shocks
Complexities
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 37
Nominal & Real Income
real income =nominal income
price index
% change in real income
% change in nominal income
– % change in price level
X 100
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 38
Nominal & Real Income
Expectations
– redistribution effects of inflation depend on
whether or not inflation is expected
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 39
Who is Hurt by Inflation?
assuming unanticipated inflation
Fixed-income receivers
Savers
Creditors
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 40
Who is Unaffected or Helped by
Inflation?
assuming unanticipated inflation
Flexible-Income receivers
Debtors
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 41
Anticipated Inflation
Effects are lessened to the extent
inflation is correctly anticipated
– COLA clauses
– inflation premium on loans
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 42
Nominal
Interest
Rate
=11%
Inflation PremiumFigure 6-5
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 43
Nominal
Interest
Rate
Real
Interest
Rate
=11%
5%
Inflation PremiumFigure 6-5
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 44
Nominal
Interest
Rate
Real
Interest
Rate
Inflation
Premium
=11%
5%
6%
+
Inflation PremiumFigure 6-5
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 45
Addenda
Deflation
Mixed effects
Arbitrariness
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 47
Effects of Inflation on Output
Cost-Push Inflation & Real Output
Demand-Pull Inflation & Real Output
Hyperinflation & Breakdown
© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 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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