Economic Growth, Business Cycles, Unemployment, and Inflation

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Economic Growth, Business Cycles, Unemployment,
and Inflation

• Chapter 6

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Laugher Curve

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

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Laugher Curve

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

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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.

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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.

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Two Timeframes The Long Run and the Short Run

• Business cycles are generally considered in a
  short-run framework.

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Growth

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

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Growth

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

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Growth

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

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Growth

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

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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.

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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.

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The Benefits and Costs of Growth

• The costs of growth include pollution, resource
  exhaustion, and destruction of natural habitat.

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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.

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Business Cycles

• There are a number of theories regarding business
  cycles.

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U. S. Business Cycles
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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.

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The Phases of the Business Cycle

• A recession is a decline in output that persists
  for more than two consecutive quarters in a year.

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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.

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The Phases of the Business Cycle
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Why Do Business Cycles Occur
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Why Do Business Cycles Occur
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Why Do Business Cycles Occur
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Why Do Business Cycles Occur
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Why Do Business Cycles Occur
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Leading Indicators

• Leading indicators are those that tell us what's
  likely to happen in the economy 12 to 15 months
  from now.

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Leading Indicators

• Leading indicators include the following

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Leading Indicators

• Leading indicators include the following

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Leading Indicators

• Leading indicators include the following

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Leading Indicators

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

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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.

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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.

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Unemployment

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

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Unemployment

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

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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.

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Unemployment as a Social Problem

• The Industrial Revolution was accompanied by a
  change in how families dealt with unemployment.

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Unemployment as a Social Problem

• The early solution for unemployment -- hunger --
  was not an effective answer to unemployment.

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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.

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Unemployment as Governments Problem

• Initially government regarded 2 percent
  unemployment as a condition of full employment.

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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.

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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.

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Unemployment as Governments Problem

• In the 1980s and 1990s, the target rate of
  unemployment was been between 5 and 7 percent.

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Why the Target Rate of Unemployment Changed

• The target rate of unemployment has changed over
  time for the following reasons

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Why the Target Rate of Unemployment Changed

• The target rate of unemployment has changed over
  time for the following reasons

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Why the Target Rate of Unemployment Changed

• The target rate of unemployment has changed over
  time for the following reasons

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Whose Responsibility Is Unemployment?

• The Classicals believe that individuals are
  responsible for their own employment.

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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.

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How Is Unemployment Measured?

• The unemployment rate is published by the U.S.
  Department of Labor's Bureau of labor Statistics.

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Unemployment Rate Since 1900
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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.

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Calculating the Unemployment Rate

• The labor force is those people in an economy who
  are willing and able to work.

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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.

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How Accurate Is the Official Unemployment Rate?

• The unemployment rate counts as employed those
  who are underemployed.

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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.

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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.

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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.

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How Accurate Is the Official Unemployment Rate?

• For completely different reasons, both Classicals
  and Keynesians agree that unemployment figures
  are imperfect.

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How Accurate Is the Official Unemployment Rate?
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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.

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Unemployment and Potential Income

• The capacity utilization rate indicates how much
  capital is available for economic growth.

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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.

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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.

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Unemployment and Potential Income

• There is debate about where the actual level of
  potential income is.

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Unemployment and Potential Income

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

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Microeconomic Categories of Unemployment

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

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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.

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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.

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Inflation Since 1900
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Measurement of Inflation

• Inflation is measured with changes in price
  indexes.
  
• A price index is a composite of prices.

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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.

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Measurement of Inflation

• A price index can be created by looking at a
  market basket.

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Real-World Price Indexes

• Real-world price indexes include the PPI, the
  CPI, and the GDP deflator.

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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.

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The Producer Price Index (PPI)

• The PPI does not accurately measure what most
  consumers are interested infinal goods.

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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.

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The GDP Deflator

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

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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.

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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.

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The Consumer Price Index (CPI)

• The CPI is the measure of inflation most often
  presented in news broadcasts.

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Composition of CPI
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Real and Nominal Concepts

• Nominal output is the total amount of goods and
  services as measured by current prices.

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Real and Nominal Concepts

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

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Real and Nominal Concepts

• The real amount is the nominal amount adjusted
  for inflation.

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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.

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Expected and Unexpected Inflation

• Expectations of inflation play an important role
  in further exacerbating inflation.

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Costs of Inflation

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

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Costs of Inflation

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

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Costs of Inflation

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

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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.

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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.

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Economic Growth, Business Cycles, Unemployment,
and Inflation

• End of Chapter 6

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