© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 1 Introduction to Economic Growth, Unemployment, and Inflation.

© 2005 McGraw-Hill Ryerson Ltd.© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6Macroeconomics, Chapter 6 11

Introduction to Economic Growth, Introduction to Economic Growth, Unemployment, and InflationUnemployment, and Inflation


In this chapter you will learnIn this chapter you will learn

6.1 6.1 The definition and causes of economic The definition and causes of economic growthgrowth

6.2 6.2 The nature and cause of the business cycleThe nature and cause of the business cycle6.3 6.3 The nature of unemployment and its The nature of unemployment and its

measurementmeasurement6.4 6.4 The definition of inflation and how it is The definition of inflation and how it is

measuredmeasured6.5 6.5 About the redistribution effects of inflationAbout the redistribution effects of inflation6.66.6 About the output About the output effects of inflationeffects of inflation


Chapter 6 TopicsChapter 6 Topics

6.1 6.1 Economic GrowthEconomic Growth

6.2 6.2 The Business CycleThe Business Cycle

6.3 6.3 UnemploymentUnemployment

6.4 6.4 InflationInflation

6.5 6.5 Redistribution Effects of InflationRedistribution Effects of Inflation

6.6 6.6 Effects of Inflation on OutputEffects of Inflation on Output


Economic GrowthEconomic Growth

an increase in real GDP over some time an increase in real GDP over some time period, ORperiod, OR

an increase in real GDP an increase in real GDP per capitaper capita over some time periodover some time period


Economic GrowthEconomic Growth

Growth as a GoalGrowth as a Goal Arithmetic of GrowthArithmetic of Growth Main Sources of GrowthMain Sources of Growth Growth in CanadaGrowth in Canada

– improved products & servicesimproved products & services– added leisureadded leisure– other impactsother impacts

Relative Growth RatesRelative Growth Rates










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TimeTime

Phases of the Business CyclePhases of the Business CycleFigure 6-1Figure 6-1


PEAKPEAK

TimeTime

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RECESSIONRECESSION

TimeTime

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TROUGHTROUGH

TimeTime

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RECOVERYRECOVERY

TimeTime

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GROWTHGROWTH

TRENDTRENDGROWTH

GROWTH

TRENDTREND

TimeTime

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provincial provincial variationsvariationsprovincial provincial variationsvariations



Canadian Recessions Since 1930Canadian Recessions Since 1930

YearYear Change in real GDPChange in real GDP

1930-331930-33 -27.5%-27.5%

19451945 -2.4% -2.4%

19461946 -2.2%-2.2%

19541954 -1.1%-1.1%

19821982 -3.2%-3.2%

19911991 -1.7%-1.7%

Table 6-2Table 6-2


The Business CycleThe Business Cycle

Causation: A First GlanceCausation: A First Glance– innovationinnovation– changes in productivitychanges in productivity– money supply changesmoney supply changes– total spending changestotal spending changes

Cyclical Impact: Durables & Non-Cyclical Impact: Durables & Non-DurablesDurables










The Labour Force, 2002Fig. 6-2

labour forcelabour force

16.716.7

millionmillion

total population total population

31 million31 million

unemployed 1.285 millionunemployed 1.285 million

EmployedEmployed(15.4 million)(15.4 million)

Not in labour forceNot in labour force(8.3 million)(8.3 million)

Under 15 &/orUnder 15 &/orinstitutionalizedinstitutionalized

(6.0 million)(6.0 million)


UnemploymentUnemploymentraterate

unemployedunemployed

labour forcelabour forcex 100100=

UnemploymentUnemploymentrate rate 20022002

=

1,285,0001,285,000

16,700,00016,700,000x 100100=

7.7%7.7%

Measurement of UnemploymentMeasurement of Unemployment


Measurement of UnemploymentMeasurement of Unemployment

Criticisms of the calculation:Criticisms of the calculation: part-time employmentpart-time employment discouraged workersdiscouraged workers


Types of UnemploymentTypes of Unemployment

Frictional UnemploymentFrictional Unemployment



Frictional UnemploymentFrictional Unemployment Structural UnemploymentStructural Unemployment



Frictional UnemploymentFrictional Unemployment Structural UnemploymentStructural Unemployment Cyclical UnemploymentCyclical Unemployment


Definition of “Full Employment”Definition of “Full Employment”

natural rate of unemployment (NRU)natural rate of unemployment (NRU) NOTNOT zero unemployment zero unemployment occurs when there is no cyclical occurs when there is no cyclical

unemploymentunemployment not automaticnot automatic varies over timevaries over time


Economic Cost of UnemploymentEconomic Cost of Unemployment

GDP Gap & Okun’s LawGDP Gap & Okun’s Law The amount by which actual GDP falls The amount by which actual GDP falls

short of potential GDPshort of potential GDP GDP gap = actual GDP – potential GDPGDP gap = actual GDP – potential GDP Okun’s Law:Okun’s Law:

– For every 1% unemployment exceeds the For every 1% unemployment exceeds the natural rate.…natural rate.…

– A GDP Gap of about 2% occursA GDP Gap of about 2% occurs


Actual & Potential GDP & the Actual & Potential GDP & the Unemployment RateUnemployment Rate

Figure 6-3Figure 6-3


Economic Cost of UnemploymentEconomic Cost of Unemployment

Given for 1992:Given for 1992:– unemployment rate is 11.3%unemployment rate is 11.3%– natural rate is 7.5%natural rate is 7.5%– potential GDP is $770 billionpotential GDP is $770 billion

What is the GDP gap?What is the GDP gap?– 11.3% 11.3% 7.5% = 3.8% (gap in % terms) 7.5% = 3.8% (gap in % terms)– 3.8% X 2 = 7.6% (apply Okun’s Law)3.8% X 2 = 7.6% (apply Okun’s Law)– 7.6% of $770 billion = $59 billion7.6% of $770 billion = $59 billion


Unequal BurdensUnequal Burdens

OccupationOccupation AgeAge GenderGender EducationEducation


UnemploymentUnemployment

Non-Economic CostsNon-Economic Costs Regional VariationsRegional Variations


Regional VariationsRegional 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

%


Unemployment rates in five Unemployment rates in five industrial nationsindustrial nations

Global Perspective 6.2Global Perspective 6.2










InflationInflation

Meaning of InflationMeaning of Inflation– a rise in the general level of pricesa rise in the general level of prices

Measurement of InflationMeasurement of Inflation– Consumer Price IndexConsumer Price Index

100X(1992) base yearthe in basketsame the ofPrice

yearularthe partic in basket 1992 ofPrice CPI


InflationInflation

X100 yearlast CPI

yearlast CPI- this year CPIinflation

ofRate


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 InflationFacts of Inflation

The major periods of inflation The major periods of inflation in Canada were in the 1970s & in Canada were in the 1970s &

1980s1980s

The major periods of inflation The major periods of inflation in Canada were in the 1970s & in Canada were in the 1970s &

1980s1980s

Figure 6-4Figure 6-4


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 6.3GLOBAL PERSPECTIVE 6.3

UKUK

GermanyGermany

JapanJapan

USUSCanadaCanada

inflation rates in inflation rates in Canada in the 1990s Canada in the 1990s were relatively lowwere relatively low

inflation rates in inflation rates in Canada in the 1990s Canada in the 1990s were relatively lowwere relatively low


Types of InflationTypes of Inflation

Demand-Pull InflationDemand-Pull Inflation– excess demandexcess demand

Cost-Push InflationCost-Push Inflation– per-unit production costsper-unit production costs– supply shockssupply shocks

ComplexitiesComplexities










Nominal & Real IncomeNominal & Real Income

real incomereal income ==nominal incomenominal income

price indexprice index

% change in real income % change in real income

% change in nominal income% change in nominal income–– % change in price level% change in price level

XX 100100


Nominal & Real IncomeNominal & Real Income

ExpectationsExpectations– redistribution effects of inflation depend on redistribution effects of inflation depend on

whether or not inflation is expectedwhether or not inflation is expected


Who is Hurt by Inflation?Who is Hurt by Inflation?

assuming unanticipated inflationassuming unanticipated inflation Fixed-income receiversFixed-income receivers SaversSavers CreditorsCreditors


Who is Unaffected or Helped by Who is Unaffected or Helped by Inflation?Inflation?

assuming unanticipated inflationassuming unanticipated inflation Flexible-Income receiversFlexible-Income receivers DebtorsDebtors


Anticipated InflationAnticipated Inflation

Effects are lessened to the extent Effects are lessened to the extent inflation is inflation is correctly correctly anticipatedanticipated– COLA clausesCOLA clauses

– inflation premium on loansinflation premium on loans


NominalNominalInterestInterest

RateRate

=11%

Inflation PremiumInflation PremiumFigure 6-5Figure 6-5



RateRate

RealRealInterestInterest

RateRate

=11%

5%




RateRate

RealRealInterestInterest

RateRate

InflationInflationPremiumPremium

=11%

5%

6%+



AddendaAddenda

DeflationDeflation Mixed effectsMixed effects ArbitrarinessArbitrariness










Effects of Inflation on OutputEffects of Inflation on Output

Cost-Push Inflation & Real OutputCost-Push Inflation & Real Output Demand-Pull Inflation & Real OutputDemand-Pull Inflation & Real Output Hyperinflation & BreakdownHyperinflation & Breakdown









© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 1 Introduction to Economic Growth, Unemployment, and Inflation.

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