1、Economic Growth, Business Cycles, Unemployment, and Inflation,Chapter 7,Laugher Curve,An Indian-born economist once explained his personal theory of reincarnation to his graduate economics class.,Laugher Curve,“If you are a good economist, a virtuous economist,” he said, “you are reborn as a physici
2、st.”,Laugher Curve,“If you are a good economist, a virtuous economist,” he said, “you are reborn as a physicist.” “But if you are an evil, wicked economist, you are reborn as a sociologist.”,Chapter Objectives,Summarize some relevant statistics about growth, business cycles, unemployment, and inflat
3、ion.,Chapter Objectives,Summarize some relevant statistics about growth, business cycles, unemployment, and inflation. Name five sources of growth.,Chapter Objectives,List four phases of the business cycle.,Chapter Objectives,List four phases of the business cycle. Explain how unemployment is measur
4、ed and state some microeconomic categories of unemployment.,Chapter Objectives,Relate the target rate of unemployment to potential income.,Chapter Objectives,Relate the target rate of unemployment to potential income. Define inflation and distinguish a real concept from a nominal concept.,Chapter Ob
5、jectives,Differentiate between cost-push and demand-pull inflation and expected and unexpected inflation.,Chapter Objectives,Differentiate between cost-push and demand-pull inflation and expected and unexpected inflation. State two important costs of inflation.,Central Problems of Macroeconomics,Gro
6、wth is one of the four central problems of macroeconomics.,Central Problems of Macroeconomics,Growth is one of the four central problems of macroeconomics. The others are business cycles, unemployment, and inflation.,Growth,The Benefits and Costs of Growth,Growth,The Benefits and Costs of Growth Gen
7、erally the U.S. economy is growing or expanding.,Growth,The Benefits and Costs of Growth Real gross domestic product (GDP) is the market value of goods and services stated in the prices of a given year.,Growth,The Benefits and Costs of Growth Real gross domestic product (GDP) is the market value of
8、goods and services stated in the prices of a given year. The primary measurement of growth is changes in real GDP.,Growth,The Benefits and Costs of Growth Since 1890, the U.S. economic output has grown at an annual rate of 2.5 to 3.5 per annum.,Growth,The Benefits and Costs of Growth Since 1890, the
9、 U.S. economic output has grown at an annual rate of 2.5 to 3.5 per annum. This is called the secular growth trend.,Growth,The Benefits and Costs of Growth Per capita economic growth allows everyone in society, on average to have more.,Growth,The Benefits and Costs of Growth Politically, growth, or
10、predictions of growth, allows governments to avoid hard questions.,Growth,The Benefits and Costs of Growth Politically, growth, or predictions of growth, allows governments to avoid hard questions. A growing economy creates jobs, to the joy of politicians.,Growth,The Benefits and Costs of Growth The
11、 costs to material growth include pollution, resource exhaustion, and destruction to natural habitat.,Growth,The Benefits and Costs of Growth Since many believe the environmental costs of growth are important, the result is often an environmental-economic growth stalemate.,Growth,The Sources of Grow
12、th,Growth,The Sources of Growth Institutions with incentives compatible with growth Technological development Available resources Investment and accumulated capital Entrepreneurship,Growth,Institutions With Incentives Compatible With Growth,Growth,Institutions With Incentives Compatible With Growth
13、Growth-compatible institutionsthose that foster growthmust have incentives built into them that lead people to work hard and discourage people from activities that inhibit growth.,Growth,Institutions With Incentives Compatible With Growth Private ownership of property plays an important role in grow
14、th.,Growth,Institutions With Incentives Compatible With Growth A corporation is another example of a growth-promoting economic institution because of limited liability.,Growth,Institutions With Incentives Compatible With Growth Many developing nations have merchantist policies dictating governmental
15、 permission before economic activity can take place.,Growth,Institutions With Incentives Compatible With Growth Many developing nations have merchantist policies dictating governmental permission before economic activity can take place. This does not foster growth.,Growth,Technological Development,G
16、rowth,Technological Development A much larger aspect of growth involves changes in technologychanges in the goods we buy and changes in the way we make goods.,Growth,Technological Development Society gets people to work on these new developments by doing the following:,Growth,Technological Developme
17、nt Society gets people to work on these new developments by doing the following: Providing incentives. Working with institutions that foster creativity and bold thinking. Working through institutions that foster hard work.,Growth,Technological Development U.S. educational institutions do a good job
18、of fostering creativity but a poor job of fostering hard work.,Growth,Available Resources,Growth,Available Resources What is a resource depends on the technology used.,Growth,Available Resources What is a resource depends on the technology used. A resource in one time period may not be a resource in
19、 another.,Growth,Investment and Accumulated Capital,Growth,Investment and Accumulated Capital Capital accumulation and investment were once seen as the key elements to growth.,Growth,Investment and Accumulated Capital This is not longer thought to be true because:,Growth,Investment and Accumulated C
20、apital This is not longer thought to be true because: The empirical evidence does not support it. Products and processes change. Capital is far more than machines.,Growth,Investment and Accumulated Capital This is not longer thought to be true because: Capital also includes human capitalpeoples know
21、ledge and social capitalthe habitual way of doing things that guides people in how they approach production.,Growth,Entrepreneurship,Growth,Entrepreneurship Entrepreneurship involves creativity, vision, and the ability to translate that vision into reality.,Growth,Turning the Sources of Growth Into
22、Growth,Growth,Turning the Sources of Growth Into Growth Even if the five ingredients to growth exist, they may not exist in the right proportion.,Growth,Turning the Sources of Growth Into Growth Even if the five ingredients to growth exist, they may not exist in the right proportion. It is the combi
23、nation of investing in machines and technological change that plays a central role in the growth of any economy.,Business Cycles,The business cycle is the upward and downward movement of economic activity that occurs around the growth trend.,Business Cycles,The business cycle is the upward and downw
24、ard movement of economic activity that occurs around the growth trend. The secular growth trend is an average 2.5 to 3.5 percent increase in GDP.,Business Cycles,Business Cycles,There are a number of theories regarding business cycles.,Business Cycles,There are a number of theories regarding busines
25、s cycles. The Classicals generally favor laissez-faire or noninterventionist policies.,Business Cycles,There are a number of theories regarding business cycles. The Keynesians generally favor activist policies.,Business Cycles,There are a number of theories regarding business cycles. The rational ex
26、pectationists argue that expectations about the future based on the best current information is often undermined by the public who anticipate governments actions and do the opposite of what is expected of them.,Business Cycles,Each business cycle is different.,Business Cycles,Each business cycle is
27、different. After World War II, however, down turns have been less severe.,Business Cycles,Each business cycle is different. If prolonged contractions are a type of cold the economy catches, the Great Depression of the 1930s was double pneumonia.,Business Cycles,Each business cycle is different. If t
28、he severity of business fluctuations has been reduced, one reason is that changes in institutional structure were made as a result of the Great Depression.,Business Cycles,Each business cycle is different. Since 1945, the average expansion has lasted about 51 months.,The Phases of the Business Cycle
29、,The peak is the top of the business cycle.,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 Phases of the Business Cycle,The downturn - the phenomenon of economic activity starting to fall from a peak.,The
30、 Phases of the Business Cycle,The downturn - the phenomenon of economic activity starting to fall from a peak. A recession is a decline in output that persists for more than two consecutive quarters in a year.,The Phases of the Business Cycle,A depression is a large recession.,The Phases of the Busi
31、ness Cycle,A depression is a large recession. The bottom of the recession or depression is called the trough.,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 expansionan upturn that lasts at least two conse
32、cutive quarters of a year.,The Phases of the Business Cycle,Leading Indicators,Leading indicators are those that tell us whats likely to happen in the economy 12 to 15 months from now.,Leading Indicators,Leading indicators include the following:,Leading Indicators,Leading indicators include the foll
33、owing: Average workweek for production workers in manufacturing Unemployment claims New orders for consumer goods and materials,Leading Indicators,Leading indicators include the following: Vendor performance, measured as a percentage of companies reporting slower deliveries from suppliers Contracts
34、and orders for plant and equipment,Leading Indicators,Leading indicators include the following: Number of new building permits issued for private housing units Change in stock prices,Leading Indicators,Leading indicators include the following: Change in consumer expectations Changes in the money sup
35、ply,Leading Indicators,The drudge work of sifting through statistical series is the backbone of business economists work,Unemployment,Business cycles and growth are directly related to unemployment in the U.S. economy.,Unemployment,Unemployment occurs when people are looking for a job and cannot fin
36、d one.,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.,Types of Unemployment,Frictional unemployment is the unemployment caused by new entrants into the job market and people quitting a job
37、 just long enough to look for and find another one.,Types of Unemployment,Structural unemployment is that caused by economic restructuring making some skills obsolete.,Types of Unemployment,Structural unemployment is that caused by economic restructuring making some skills obsolete. It existed in pr
38、e-industrial society.,Types of Unemployment,Cyclical unemployment is that which results from fluctuations in economic activity.,Types of Unemployment,Cyclical unemployment is that which results from fluctuations in economic activity. It did not exist in pre-industrial society.,Types of Unemployment,
39、Cyclical unemployment is that which results from fluctuations in economic activity. The Industrial Revolution changed the nature of work and introduced unemployment as a problem for society.,Types of Unemployment,Cyclical unemployment is that which results from fluctuations in economic activity. The
40、 Industrial Revolution was accompanied by a change in how families dealt with unemployment.,Types of Unemployment,Cyclical unemployment is that which results from fluctuations in economic activity. What had previously been a family problem, now became a social problem.,Types of Unemployment,Cyclical
41、 unemployment is that which results from fluctuations in economic activity. Hunger was the early solution for unemployment.,Types of Unemployment,Cyclical unemployment is that which results from fluctuations in economic activity. Hunger was the early solution for unemployment. It was not an effectiv
42、e answer to unemployment.,Types of Unemployment,Cyclical unemployment is that which results from fluctuations in economic activity. In the Employment Act of 1946, government took responsibility for full employmentan economic climate in which just about everyone who wants a job can have one.,The Targ
43、et Rate of Unemployment,The target rate of unemployment is the lowest sustainable rate of unemployment that policymakers believe is achievable under existing conditions.,The Target Rate of Unemployment,Initially government regarded 2 percent unemployment as a condition of full employment.,The Target
44、 Rate of Unemployment,Initially government regarded 2 percent unemployment as a condition of full employment. The 2 percent was made up of frictional unemployment.,The Target Rate of Unemployment,In the 1980s and 1990s, the target rate of unemployment was been between 5 and 7 percent.,The Target Rat
45、e of Unemployment,The target rate of unemployment has changed over time for the following reasons:,The Target Rate of Unemployment,The target rate of unemployment has changed over time for the following reasons: In the 1970s and early 1980s, a low inflation rate seemed to be incompatible with a low
46、unemployment rate.,The Target Rate of Unemployment,The target rate of unemployment has changed over time for the following reasons: Demographics have changed.,The Target Rate of Unemployment,The target rate of unemployment has changed over time for the following reasons: Demographics have changed. D
47、ifferent age groups have different rates of unemployment.,The Target Rate of Unemployment,The target rate of unemployment has changed over time for the following reasons: Social and institutional structures have changed.,The Target Rate of Unemployment,The target rate of unemployment has changed ove
48、r time for the following reasons: The economy has undergone major structural readjustments - modifications in the types of goods produced and the methods of production.,The Target Rate of Unemployment,The target rate of unemployment has changed over time for the following reasons: Governmental insti
49、tutions also changed.,Whose responsibility is unemployment?,The Classicals believe that individuals are responsible for their own employment.,Whose responsibility is unemployment?,Keynesian economists tend to say that society owes a person a job commensurate with the individuals training or past job
50、 experience.,How is unemployment measured?,The unemployment rate is published by the U.S. Department of Labors Bureau of labor Statistics.,How is unemployment measured?,The unemployment rate is published by the U.S. Department of Labors Bureau of labor Statistics. Visit the Bureau of Labor Statistics on the Internet at : http:/stats.Bls.Gov.,
