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Economic Growth
Economic growth is
This Chapter examines the an important
causes of economic growth,
as well as the costs and
economic goal
benefits of because it improves
growth. standards of living.
Economic Growth
Economic growth is
illustrated by an
outward shift of the
production
possibilities curve.
Rule of 70
In order to find the number of years required to
double a countrys GDP, you need to divide 70 by
the annual percentage rate of growth. The result
is the approximate number of years that it will
take for this country to double its GDP.
Approximate 70
number of years = annual percentage rate
required to double
real GDP of growth
Economic Growth
Rule of 70
Number of years
70
required to
double real GDP
= annual percentage rate
of growth
Number of years 70
required to
double real GDP
= 3.5
= 20
Economic Growth
LO1 25-13
Modern Economic Growth
Growth-promoting institutional
structures
Strong property rights
Patents and copyrights
Efficient financial institutions
Literacy and education
Free trade
Competitive market system
LO3 25-14
Sources of Economic Growth
Supply factors Demand factor
Increases in quantity Households,
and quality of natural businesses, and
resources government must
Increases in quality purchase the economys
and quantity of human expanding output
resources
Increases in the supply Efficiency factor
(or stock) of capital Must achieve economic
goods efficiency and full
Improvements in employment
technology
Key Terms
LO3 25-19
26 Chapter 26
Business Cycles, Unemployment, and
Inflation
Peak
Level of Real Output
Peak
Peak
Trough
Trough
Time
Cyclical Impact:
Durables and Nondurables
Cyclical Impact: Durables and Nondurables
Although the business cycle is felt everywhere in the economy, it
affects different segments in different ways and to different degrees.
Firms and industries producing capital goods (for example, housing,
commercial buildings, heavy equipment, and farm implements) and
consumer durables (for example, automobiles, personal computers, and
refrigerators) are affected most by the business cycle. Buyers can
postpone the purchase of capital goods and durable goods. As a result, in
vestment in capital and durable goods declines.
In contrast, service industries and industries that produce nondurable
consumer goods are somewhat protected from the most severe effects of
recession. People find it difficult to cut back on needed medical and legal
services, for example. And a recession actually helps some service firms,
such as law firms that specialize in bankruptcies. Nor are the purchases of
many nondurable goods such as food and clothing easy to postpone. The
quantity and quality of purchases of nondurables will decline, but not
so much as will purchases of capital goods and consumer durables.
Unemployment
Under 16
And/or
Institutionalized
(71.4 Million)
Not in
Labor Force
(81.7 Million)
Total
Population
(307.3 Million)
Employed Labor
(139.9 Million) Force
(154.2 Million)
Unemployment 14.3
Rate = x 100
154.2
= 9.3% Unemployed
(14.3 Million)
Class Practice
Cyclical Unemployment
Unemployment due to the cyclical trends in growth (business
cycle). At Recession, cyclical unemployment will be high.
Unemployment that is caused by a decline in total spending is called
cyclical unemployment and typically begins in the recession phase
of the business cycle. As the demand for goods and services
decreases, employment falls and unemployment rises. Cyclical
unemployment results from insufficient demand for goods and
services.
Type of Unemployment
LO3 26-43
Who is hurt by inflation?
Fixed-income receivers
Savers
Creditors
LO3 26-45
Who is unaffected or unhurt by inflation?
Some people are unaffected by inflation and others are actually helped by it
Flexible-Income Receivers
People who have flexible incomes may escape inflations harm or even benefit from
it. For example, individuals who derive their incomes solely from Social Security are
largely unaffected by inflation because Social Security payments are indexed to the
CPI. Benefits automatically increase when the CPI increases, preventing erosion of
benefits from inflation.
Some union workers also get automatic cost-of-living adjustments (COLAs) in their
pay when the CPI rises, although such increases rarely equal the full percentage
rise in inflation.
Some flexible-income receivers and all borrowers are helped by unanticipated
inflation. The strong product demand and labor shortages implied by rapid
demand-pull inflation may cause some nominal incomes to spurt ahead of the
price level, thereby enhancing real incomes.
Debtors
Unanticipated inflation benefits debtors (borrowers). In our earlier example, Chase
Banks loss of real income from inflation is Bobs gain of real income. Debtor Bob
borrows dear dollars but, because of inflation, pays back the principal and
interest with cheap dollars whose purchasing power has been eroded by
inflation. Real income is redistributed away from the owners of Chase Bank
toward borrowers such as Bob.
LO3 26-46
Anticipated Inflation
11%
= 5% + 6%
LO3 26-48
Key Terms
business cycle Okuns law
peak inflation
recession Consumer Price Index (CPI)
trough demand-pull inflation
expansion cost-push inflation
labor force per-unit production costs
unemployment rate nominal income
discouraged workers real income
frictional unemployment anticipated inflation
structural unemployment unanticipated inflation
cyclical unemployment cost-of-living adjustments
full-employment rate of (COLAs)
unemployment real interest rate
natural rate of unemployment nominal interest rate
(NRU) deflation
potential output hyperinflation
GDP gap