Introduction to Economic Growth, Unemployment, and Inflation 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 1
In this chapter you will learn 6.1 The definition and causes of economic growth 6.2 The nature and cause of the business cycle 6.3 The nature of unemployment and its measurement 6.4 The definition of inflation and how it is measured 6.5 About the redistribution effects of inflation 6.6 About the output effects of inflation 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 2
Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 3
Economic Growth an increase in real GDP over some time period, OR an increase in real GDP per capita over some time period 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 4
Economic Growth Growth as a Goal Arithmetic of Growth Main Sources of Growth Growth in Canada improved products & services added leisure other impacts Relative Growth Rates 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 5
Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 6
Level of real output Phases of the Business Cycle Figure 6-1 Time 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 7
Level of real output Phases of the Business Cycle Figure 6-1 PEAK Time 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 8
Level of real output Phases of the Business Cycle Figure 6-1 RECESSION Time 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 9
Level of real output Phases of the Business Cycle Figure 6-1 TROUGH Time 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 10
Level of real output Phases of the Business Cycle Figure 6-1 RECOVERY Time 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 11
Level of real output Phases of the Business Cycle Figure 6-1 provincial variations Time 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 12
Canadian Recessions Since 1930 Table 6-2 Year Change in real GDP 1930-33 -27.5% 1945-2.4% 1946-2.2% 1954-1.1% 1982-3.2% 1991-1.7% 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 13
The Business Cycle Causation: A First Glance innovation changes in productivity money supply changes total spending changes Cyclical Impact: Durables & Non- Durables 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 14
Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 15
The Labour Force, 2002 Fig. 6-2 Under 15 &/or institutionalized (6.0 million) total population 31 million Not in labour force (8.3 million) Employed (15.4 million) labour force 16.7 million unemployed 1.285 million 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 16
Measurement of Unemployment Unemployment rate = unemployed labour force x 100 Unemployment = rate 2002 = 1,285,000 16,700,000 x 100 7.7% 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 17
Measurement of Unemployment Criticisms of the calculation: part-time employment discouraged workers 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 18
Types of Unemployment Frictional Unemployment 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 19
Types of Unemployment Frictional Unemployment Structural Unemployment 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 20
Types of Unemployment Frictional Unemployment Structural Unemployment Cyclical Unemployment 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 21
Definition of Full Employment natural rate of unemployment (NRU) NOT zero unemployment occurs when there is no cyclical unemployment not automatic varies over time 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 22
Economic Cost of Unemployment GDP Gap & Okun s Law The amount by which actual GDP falls short of potential GDP GDP gap = actual GDP potential GDP Okun s Law: For every 1% unemployment exceeds the natural rate. A GDP Gap of about 2% occurs 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 23
Actual & Potential GDP & the Unemployment Rate Figure 6-3 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 24
Economic Cost of Unemployment Given for 1992: unemployment rate is 11.3% natural rate is 7.5% potential GDP is $770 billion What is the GDP gap? 11.3% 7.5% = 3.8% (gap in % terms) 3.8% X 2 = 7.6% (apply Okun s Law) 7.6% of $770 billion = $59 billion 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 25
Unequal Burdens Occupation Age Gender Education 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 26
Unemployment Non-Economic Costs Regional Variations 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 27
Regional Variations Provincial Breakdown of the Unemployment Rate, 2002 British Columbia Alberta Saskatchewan Manitoba Ontario Quebec New Brunswick Nova Scotia PEI Newfoundland CANADA 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 % 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 28
Unemployment rates in five industrial nations Global Perspective 6.2 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 29
Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 30
Inflation Meaning of Inflation a rise in the general level of prices Measurement of Inflation Consumer Price Index CPI Price of 1992 basket inthe particular year Price of the same basket inthe base year (1992) X100 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 31
Inflation Rate of inflation CPI this year - CPI last CPI last year year X100 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 32
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 % Facts of Inflation Figure 6-4 Annual Inflation Rates in Canada, 1972-2002 14 12 10 8 6 The major periods of inflation 4 2 in Canada were in the 1970s & 0 1980s 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 33
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 GLOBAL PERSPECTIVE 6.3 6 5 4 3 2 1 0-1 Inflation rates in five industrial nations 1992-2002 Germany inflation rates in Canada in the 1990s were relatively low UK Canada US Japan 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 34
Types of Inflation Demand-Pull Inflation excess demand Cost-Push Inflation per-unit production costs supply shocks Complexities 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 35
Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 36
Nominal & Real Income real income = nominal income price index X 100 % change in real income % change in nominal income % change in price level 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 37
Nominal & Real Income Expectations redistribution effects of inflation depend on whether or not inflation is expected 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 38
Who is Hurt by Inflation? assuming unanticipated inflation Fixed-income receivers Savers Creditors 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 39
Who is Unaffected or Helped by Inflation? assuming unanticipated inflation Flexible-Income receivers Debtors 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 40
Anticipated Inflation Effects are lessened to the extent inflation is correctly anticipated COLA clauses inflation premium on loans 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 41
Inflation Premium Figure 6-5 11% = Nominal Interest Rate 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 42
Inflation Premium Figure 6-5 11% = 5% Nominal Interest Rate Real Interest Rate 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 43
Inflation Premium Figure 6-5 11% = 5% + 6% Inflation Premium Nominal Interest Rate Real Interest Rate 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 44
Addenda Deflation Mixed effects Arbitrariness 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 45
Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 46
Effects of Inflation on Output Cost-Push Inflation & Real Output Demand-Pull Inflation & Real Output Hyperinflation & Breakdown 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 47
Chapter 6 Topics 6.1 Economic Growth 6.2 The Business Cycle 6.3 Unemployment 6.4 Inflation 6.5 Redistribution Effects of Inflation 6.6 Effects of Inflation on Output 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 48