introduction to economic growth unemployment and inflation

Copyright 20011 The McGraw-Hill Companies19-1

Economic GrowthThe Business CycleUnemploymentLabor Force CompositionTypes of UnemploymentUnequal BurdensInflationConsumer Price Index (CPI)Types of InflationInflation PremiumLast Word

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19Introduction to Economic Growth Unemployment and Inflation



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Chapter Objectives• The Business Cycle and its

Primary Phases

• How Economic Growth is Measured and Why is it Important

• How Unemployment and Inflation are Measured

• The Types of Unemployment and Inflation and their Various Economic Impacts



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Economic Growth• Increase in Real GDP• Increase in Real GDP Per

Capita• Growth as a Goal• Arithmetic of Growth

– Rule of 70Approximatenumber of yearsrequired to doublereal GDP

=70

annual percentage rateof growth

19.1



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Economic Growth in SA

671 652

803 427

935 617

1 000 737

1 086 901

1 134 582

1 301 773

1 571 082

1 814 521

5.2

1.7

6.6

-1.2

-0.3

3.1

4.2

5.3

3.7

29 881

31 736

32 883

31 384

30 648

28 815

29 792

33 176

36 951

2.5

-0.06

4.2

-3.4

-2.4

1.0

2.1

3.9

2.5

1970

1975

1980

1985

1990

1995

2000

2005

2009

(1)

Year

(2)

Real GDP

(4)

Real GDP per capita

(5)

% Change in Real GDP Per Capita

(Year to PreviousYear)

…in millions of rands

(3)

% Change in Real GDP

(Year to Previous

Year)

Source: www.resbank.co.za



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Economic Growth• Main Sources of Growth• Increases in Inputs• Increases in Resource

Productivity• Growth in S.A.

– Improved Products and Services

– Added Leisure– Other Impacts



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The Business Cycle

Lev

el o

f R

eal O

utp

ut

Time

Peak

Peak

Peak

Recession

Recession

Expa

nsio

n Exp

ansi

on

Trough

Trough

Growth

Trend

19.1Phases of the Business Cycle

Cyclical Impact:Durables and Nondurables



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Unemployment• Twin Problems of the Business

Cycle– Unemployment– Inflation

• Measurement of Unemployment• Labor Force• Unemployment Rate

– Part-Time Employment– Discouraged Workers

Unemployment RateUnemployed

Labor Force= x 100

19.2



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Unemployment

• Types of Unemployment–Frictional Unemployment–Structural Unemployment–Cyclical Unemployment

• Full Employment–Natural Rate of

Unemployment (NRU)



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Unemployment in SA

30 801

17 777

13 655

4122

13 024

23.2%

57.7%

31 080

17 495

13 369

4 125

13 585

23.6%

56.3%

31 172

17 077

12 885

4 192

14 095

24.5%

54.8%

371

-700

-770

70

1 071

1.3%

-2.9%

Population 15-64

Labour Force

Employed

Unemployed

Not Economically

Active

Unemployment rate

Labour Force

Participation rate

Jul-Sept2008

Year on Year

Change

…in thousands

Source: www.resbank.co.za

Apr-Jun2009

Jul-Sept2009



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Unemployment

• Economic Cost of

Unemployment• Potential OutputGDPGap Actual GDP Potential GDP= -



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Unemployment• Unequal Burdens

–Occupation–Age–Race and Ethnicity–Gender–Education–Duration

• Noneconomic Costs



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Inflation• Inflation Defined

• Measurement of Inflation

–Consumer Price Index

CPIPrice of the Most Recent Market

Basket in the Particular Year

Price of the Same MarketBasket in 1982-1984

= x 100



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InflationAnnual Inflation Rate in South Africa,1967-2010

Source: StatsSA



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Inflation

Source: Bureau of Labor Statistics

-1

0

1

2

3

4

5

6

U.S.

Germany

Italy

Japan

France

1995 2000 2005

Infl

atio

n R

ate

(per

cen

t)

Inflation Rates in Five Industrial Nations,1995-2005

GLOBAL PERSPECTIVE



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Inflation• Types of Inflation

–Demand Pull Inflation–Cost-Push Inflation

• Per Unit Production Costs• Redistributive Effects

–Nominal and Real Income

–Anticipations• Anticipated Inflation• Unanticipated Inflation

19.3



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Inflation• Who is Hurt by Inflation?

–Fixed-Income Receivers–Savers–Creditors

• Who is Unaffected or Hurt by Inflation?–Flexible-Income Receivers

• Cost-of-Living Adjustments (COLAs)

–Debtors



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Inflation• Anticipated Inflation

–Nominal Interest Rate –Real Interest Rate–Inflation Premium

NominalInterest

Rate

RealInterest

Rate

InflationPremium

11%

5%

6%

= +

19.2



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Inflation• Cost-Push Inflation and Real

Output• Demand-Pull Inflation and

Real Output• Inflation targeting in S.A.• Hyperinflation

– Case of Zimbabwe



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The Stock Market and the Economy

• Supply and Demand in the Stock Market• Collective Expectations of Future Profits

and Losses• Volatility of the Stock Market• Wealth Effect• Investment Effect• Studies Show Consumption and Investment

Unaffected• Little Impact on Macro economy• Stock Market Bubbles Do Have an Impact• Stock Price Cycle Predictions• Index of Leading Indicators• Stock Prices Not a Reliable Predictor Alone

Last

Word Do Stock Prices Affect

Macroeconomic Instability?



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Key Terms• economic growth• real GDP per capita• rule of 70• business cycle• peak• recession• trough• expansion• labor force• unemployment rate• frictional

unemployment• structural unemploym

ent• cyclical unemployment• natural

rate of unemployment (NRU)

• potential output• GDP gap• inflation• Consumer Price Index

(CPI)• demand-pull inflation• cost-push inflation• per-unit production co

sts• nominal income• real income• anticipated inflation• unanticipated inflation• real interest rate• nominal interest rate• Inflation targeting• hyperinflation



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Government and Market Failure

introduction to economic growth unemployment and inflation

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