8 - 1 copyright mcgraw-hill/irwin, 2005 economic growth the business cycle unemployment inflation...
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8 - 1Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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Introduction to Economic Growth and
Instability
8C H A P T E R
8 - 2Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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ECONOMIC GROWTHAn increase in real GDP over timeAn increase in real GDP per capita over time
•Growth as a Goal•Arithmetic of Growth
•Rule of 70•Main Sources of Growth
•Increases in Resources•Increases in Productivity
8 - 3Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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ECONOMIC GROWTH
Growth in the United States
•Improved Products and Services
•Added Leisure
•Other Impacts
•Relative International Growth Rates
8 - 4Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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THE BUSINESS CYCLEPhases of the Business CyclePEAK
Le
vel o
f b
usi
ne
ss a
cti
vit
y
Time
RECESSIONTROUGH RECOVERY
GROWTH
TREND
8 - 5Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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THE BUSINESS CYCLECausation: A First Glance •Many Causation Theories•Cyclical Impact
•Capital Goods•Consumer Durables•Service Industries•Nondurable Consumer Goods
8 - 6Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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UNEMPLOYMENTMeasurement of Unemployment, 2002
Employed
Not inlaborforce
Under 16and/or
institutionalized
TotalPopulation288,600,000
Laborforce
142,500,000
74,700,000
71,400,000
Unemployed 8,300,000
134,200,000
8 - 7Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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UNEMPLOYMENTMeasurement of Unemployment, 2002
Unemploymentrate
unemployed
labor forcex100=
Part-Time Employment
Discouraged Workers
8 - 8Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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UNEMPLOYMENTTypes of Unemployment
Frictional UnemploymentStructural UnemploymentCyclical UnemploymentFull-Employment Rate of
UnemploymentNatural Rate of
Unemployment (NRU)
8 - 9Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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UNEMPLOYMENTEconomic Costs of Unemployment
GDP Gap and Okun’s Law
Approximately a2% GDP Gap occurs
For every 1% unemployment exceeds the natural rate...
The amount by which actual GDP falls short of potential GDP
8 - 10Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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UNEMPLOYMENTUnequal Burdens of Unemployment
• Occupation• Age• Race and Ethnicity• Gender• Education• Duration
Noneconomic CostsInternational Comparisons
8 - 11Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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1997
15
10
5
0
France
U.K. Germany
U.S. Japan
1992 2002
GLOBAL PERSPECTIVEUnemployment Rates 5 Industrial Nations1992 - 2002
Source: Economic Report of the President, 2003
8 - 12Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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INFLATIONDefined and Measurement
• A rising general level of prices• Rate of inflation calculated
using index numbers
Consumer Price Index
= Price of the same marketbasket in 1982-1984
x 100CPIPrice of most recent market
basket in the particular year
8 - 13Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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INFLATION• Rule of 70 - Applied• Facts of Inflation• U.S. Double-Digit Inflation
in Late 70s and Early 80s• Currently Relatively Mild• Other Nations in 2002
•Romania – 23%•Belarus – 43%•Turkey – 45%•Myanmar – 57%
8 - 14Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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10
5
0
France
Italy Germany
U.S.
Japan
Source: Bureau of Labor Statistics
GLOBAL PERSPECTIVEInflation Rates in Five Industrial Nations1992 - 2002
19971992 2002
8 - 15Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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DEMAND-PULL INFLATION
INFLATIONTypes of Inflation
COST-PUSH INFLATION
•Rising Per-Unit Production Costs
•Supply-Side Inflation
•Supply Shocks
•Complexities
8 - 16Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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REDISTRIBUTIVE EFFECTSOF INFLATION
Nominal Income
Real Income
Anticipations
• Anticipated Inflation
• Unanticipated Inflation
8 - 17Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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REDISTRIBUTIVE EFFECTSOF INFLATION
Who is Hurt by Inflation?• Fixed-Income Receivers
•Savers
•Creditors
8 - 18Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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REDISTRIBUTIVE EFFECTSOF INFLATION
Who is Unaffected or Helped by Inflation?
• Flexible-Income Receivers• Cost of Living Adjustments (COLAs)
•Debtors
8 - 19Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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REDISTRIBUTIVE EFFECTSOF INFLATION
Addenda•Deflation•Mixed Effects•Arbitrariness
8 - 20Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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NominalInterest
Rate
RealInterest
Rate
InflationPremium
=11%
5%
6%+
ANTICIPATED INFLATION
8 - 21Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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EFFECTS OF INFLATION ON OUTPUT
•Cost-Push Inflation and Real Output
•Demand-Pull Inflation and Real Output
•Hyperinflation & Breakdown
economic growthreal GDP per capitarule of 70productivitybusiness cyclepeakrecessiontroughrecoverylabor forceunemployment ratediscouraged workersfrictional unemploymentstructural unemploymentcyclical unemploymentfull-employment rate of unemploymentnatural rate of unemployment (NRU)
potential outputGDP gapOkun’s LawinflationConsumer Price Index (CPI)demand-pull inflationcost-push inflationper-unit production costsnominal incomereal incomeanticipated inflationunanticipated inflationcost of living adjustments
(COLAs)real interest ratenominal interest ratedeflationhyperinflation
Copyright McGraw-Hill/Irwin, 2005ENDBACK
8 - 23Copyright McGraw-Hill/Irwin, 2005
Economic Growth
The Business Cycle
Unemployment
Inflation
CPI
Redistributive Effects of Inflation
Anticipated Inflation
Effects of Inflation on Output
Key Terms
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BASICMACROECONOMIC
RELATIONSHIPS
Chapter 9