Economic Growth

1
Economic Growth

• Our goals for this chapter include
• Understanding economic growth in several ways
• Utilizing and understanding the business cycle
  and cyclical and non-cyclical fluctuations
• Causes and definitions of all types of
  unemployment
• Defining inflation, its causes
• Looking at and describing the ranges of inflation
• Knowing who is hurt and helped by inflation
• Understanding the relationship between
  unemployment and inflation

2
Growth

• Two definitions of economic growth
• A. increase in real GDP over time
• B. increase in real GDP per capita over time
• Usually the second is considered a more accurate
  measure in comparing living standards

3
growth

• Growth is one of the more important economic
  goals for an economy because growth means more
  goods and services with which to satisfy needs
  and wants. Growth lessens the burdens of scarcity
  on a society.

4
growth

• A simple rule to use in trying to understand the
  speed with which economic growth can take place
  is called the rule of 70.
• If you have an annual average growth rate
  percentage, dividing it into 70 will give you an
  approximate time in which the real GDP of an
  economy will double.
• For instance, if the US is growing at 3 and
  maintains that growth over time, one could expect
  the economy to double in 23-24 years in terms of
  real GDP.

5
growth

• So, where does economic growth come from?
• Most economist believe that there are 2 main
  sources of growth
• A. increasing inputs (growth in resources)
• B. increasing productivity of existing inputs
• (working more efficiently) Most growth in modern
  economies comes from B.

6
Growth in the US

• While economic growth in the US is unstable, it
  has generally been averaging 3 for the last half
  century or so.
• That being said, we have to keep in mind that
  some things are not measured such as quality of
  products, increase or loss of leisure time,
  environmental effects, or the human impact of
  technologies.

7
Recent US Economic Growth

• Unlike the 20th century, the 21st century has
  posed growth problems for the US (as well as most
  industrialized nations)
• Growth since 2005 has averaged about half of the
  prior 60 year average of 3.
• The bigger issue is why for that no answer has
  yet been found.

8
21st Century realities

• It may be that large economics grow more slowly
  as they mature
• It may be that we are entering a paradigm change
  that is, a shift in the very fundamentals of
  production and distribution as well as
  consumption.
• The last major shift occurred during and after
  the Great Depression.

9
21st Century Realities

• Unfortunately, no one can tell if a paradigm is
  shifting until after it has done so.
• This leaves policy makers, economists, and people
  like us confused and leads to risky strategies to
  counter what may not be able to be countered.

10
The Business Cycle
11
Causes

• Frankly no one knows what causes business cycles
  for sure although we have plenty of speculation
• 1. Major innovations in technology or other areas
  may spur investment or consumption spending
• 2. Changes in productivity may be related to this
  and to the instability of the cycle
• 3. the level of aggregate (total) spending is
  important particularly changes in Ig and purchase
  of consumer durables

12
Cycles and fluctuations

• Cyclical fluctuations usually are accompanied by
  certain phenomena
• Usually durable goods spending is more volatile
  and unstable than non durable spending or service
  spending as these latter two are usually
  non-postponable.
• If you see a dip in durable consumption and/or
  capital investment (Ig) a cycle is underway

13
What instability?

• Capitalism is inherently unstable. This is
  actually one of the features that make it a very
  adaptable system. Unfortunately these
  instabilities have consequences for human beings.
• The two main instabilities in the capitalist
  economy are unemployment and inflation.

14
Unemployment

• Types of unemployment
• 1. Frictional that which occurs as people search
  for or wait to take jobs. May indicate there is
  mobility in the work force (exists at all levels
  of employment)

15
Unemployment

• 2. Structural due to changes in the structure of
  demand for labor. Perhaps geographic or caused by
  obsolescence in job skills (exists at all levels
  of employment)
• 3. Cyclical caused ONLY by the recession phase
  of the business cycle sometimes called deficient
  demand unemployment. (Will exist below FE)

16
Full Employment

• Full employment does not mean there is no
  unemployment
• The full employment rate of unemployment is equal
  to the total of frictional and structural
  unemployment
• This rate is also called the natural rate of
  unemployment

17
Full Employment

• The natural rate occurs when the labor markets
  are in balance. At this point potential output is
  being achieved in the economy.
• The natural rate is not a fixed point but
  fluctuates with changes in the structure of the
  economy and of the human resources contained
  therein.

18
How is unemployment measured?

• Population is divided into 3 groups
• Those under 16 or institutionalized
• Those persons not in the labor force over 16
  (retirees, those not looking for work)
• Those over 16 who are willing and able to work

19
Unemployment Defined

• Unemployment is limited to the largest group
  those who are over 16 and willing and able to
  work or THE LABOR FORCE
• The unemployment rate is defined as the of the
  labor force that is not employed. By definition
  that is those who can and want to work but arent
  divided by those who are willing and able to work.

20
Unemployment

• The actual rate is calculated by survey of a
  large number of households and using data
  gathered by the states each month
• Part time workers are counted as employed
• discouraged workers who want a job but are not
  actively seeking one are not counted so they do
  not appear in unemployment statistics since they
  are temporarily out of the labor force

21
Unemployment

• Like all other statistics, unemployment data are
  amenable to manipulation by anyone. Unless one
  understands the definition of what unemployment
  is and is not confusion may result. The truth is
  that actual unemployment is usually greater, in
  some circumstances, much greater that official
  statistics imply or acknowledge.

22
Underemployment

• Underemployment generally refers to those who do
  jobs that do not make use of all of their
  potential. This is particularly true in
  developing nations although developed nations
  also have this. UE statistics in the US have been
  developed to mask underemployment.

23
GDP GAP and Okuns Law

• The GDP gap is the difference between POTENTIAL
  GDP and actual GDP
• Potential GDP is that output which would have
  been achieved at the full employment rate of
  unemployment
• According to Okun, for each one per cent of
  unemployment over the full employment rate, 2 of
  potential GDP is lost. This formula is known as
  Okuns law.

24
Costs of unemployment

• Rates are lower for white collar workers
• Teenagers have the highest rate
• Minorities tend to have higher rates
• Rate for males and females are comparable
• Less educated workers tend to have on the average
  higher rates of unemployment
• Long term unemployment (over 15 weeks) is usually
  lower than the overall rate.