Macroeconomics - ECO 2013 Fall 2005 – 1 Term August 24 – December 16, 2005.

Macroeconomics - ECO 2013

Fall 2005 – 1 TermAugust 24 – December 16, 2005

Chapter 8: Intro to Economic Growth & Stability

Economic GrowthBusiness CycleUnemploymentInflation

Economic Growth

Defined by two ways: An increase in real GDP occurring

over some time period An increase in real GDP per capita

occurring over some time period Best for comparing living standards

between countries Calculated as a percentage rate of

growth per year

Growth as a Goal

Expansion of total output v. population growth results in rising real wages and incomes higher SOL Better able to meet society’s wants &

resolve socioeconomic problems Rising real wages & income provide more

opportunities to individuals & families w/o sacrificing others

Undertake new programs to alleviate poverty or protect environment

Main Sources of Growth

Increasing Inputs of Resources (1/3) FFOP: Land, Labor, Capital, &

Entrepreneurial Abilities

Increasing Production of Inputs (2/3) Improvements in health, training, education

& motivation of workers Capital enhancements (machinery) Better natural resources Organization & Management Labor reallocated by efficiency

Results of Economics Growth in the U.S.

Improved Products & ServicesAdded Leisure (50 to 40 hrs/week)Environmental Impacts (Damaging)Quality of Life (Stress)

The Business Cycle: Four Phases

Peak: Business activity reaches temporary maximumRecession: Period of decline in Total Output, Income, Employment, Trade

Lasts more than 6 months Depression: a severe & prolonged recession, falling

prices are likely

Trough: Output & employment “bottoms out” at lowest levels

Can be long or short

Recovery: Expansion phase where output & employment rise toward full employment

Prices may rise

Causes of Fluctuations

Major innovations can trigger new investment and/or consumer spendingChanges in ProductivityMonetary Phenomenon Governments create more/less money

Changes in Total Spending In the U.S., long-run growth trend is

expansionary

Who is affected by Recessions in the Business Cycle?

Everyone & EverywhereFirms & Industries producing Capital & Consumer Durable Goods are most affectedService industries and Nondurable Consumer Goods are somewhat “insulated”

Measuring Unemployment

Who is eligible & available to work? Ineligible: Those less than 17 years and/or

institutionalized Not in Labor Force: Those not employed

and NOT SEEKING WORK Employed Unemployed: Those not employed and

SEEKING WORKLabor Force = Employed + Unemployed Approximately 50% of U.S. Population Those “willing and able” to work

Unemployment Rate

Calculated as a Percentage of Labor Force:Unemployment Rate = (Unemployed / Labor Force) * 100

BLS conducts survey of 60,000 households monthly

Unemployment Rate

Part-time Employment underestimates the true unemployment rate Many would prefer full-time work but

can’t find it

Discouraged workers understate the true unemployment rate Not in labor force but they wish they

were

Frictional Unemployment

Those “between jobs” Voluntary Fired Seasonal shifts in demand

“Unemployment Pool”Labor market is Imperfect & Noninstantaneous in matching workers to jobsInevitable & DesirableShort-term

Structural Unemployment

Changes over time in consumer demand & technology Demand for certain skills may decline or

vanish Demand for other skills intensifies

Change in the COMPOSITION of the Labor ForceGeographyLong-term, more serious

Cyclical Unemployment

Caused by decline in total spending during recessionsaka “Deficit Demand Unemployment”Serious

Full Employment

Occurs when economy is experiencing only frictional & structural unemployment (i.e., no cyclical unemployment)Full Employment Rate of Unemployment or Natural Rate of Unemployment (NRU)Economy is producing its Potential OutputNRU occurs when Job Seekers = Job Vacancies

Reasons for the Decline in NRU

Less younger workers in the labor forceGrowth of temp agenciesImproved information technologyWelfare reformDoubling of U.S. prison population

Economic Costs of Unemployment: GDP Gap

When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods & services is lostGDP Gap: Potential GDP – Actual GDPPotential GDP is at the NRU

Economic Costs of Unemployment: Unequal Burdens

Costs are unequally distributed among different groupsOccupation Low-skilled laborers > High-skilled

professionals More frequent & longer unemployment spells Bear brunt of recessions

Age Teenagers > Adults Lower skills Less geographical mobility New in labor market

Economic Costs of Unemployment: Unequal Burdens

Race & Ethnicity: African-Americans & Hispanics >

Caucasian Lower rates of educational attainment Greater concentration of low-skilled jobs Discrimination in the labor market

Education: Less educated > More educated

Duration

Inflation

Rise in the general level of prices Does NOT mean ALL prices are rising Prices rise unevenly

Measuring Inflation Consumer Price Index [CPI(2) – CPI(1)]/CPI(1) * 100

Redistribution Effects of Inflation

Who is hurt by Inflation (assuming it is unanticipated) Fixed Income Receivers (e.g., elderly) Savers

Value of savings will decline if rate of inflation is greater than the rate of interest

Creditors

Who is Unaffected or Benefits from Inflation?

Flexible-Income Receivers Cost of Living Adjustments (COLAs) Social Security Recipients

Borrowers

Chapter 8 Study Questions

4: Business Cycle5 & 6: Unemployment