Economics for Managers
Lecture 4 16 November 2011
Macroeconomic Instability
Economic
Growth Business Cycle Unemployment Inflation
Economic Growth
Economists
define and measure economic growth as either: An increase in real GDP occurring over some time period An increase in real GDP per capita occurring over some time period.
Economic Growth
If
real GDP was $ 200 billion in some country last year and $ 210 billion this year, the rate of growth would be 5 percent.
Rule
of 70: Approximate number of years required to double real GDP = (70 / annual percentage rate of growth)
The Business Cycle
The
term business cycle refers to alternating rises and declines in the level of economic activity. Decline in real GDP leads to significant increases in unemployment. Rapid economic growth has been marred by rapid inflation.
The Business Cycle
Level of real output Growth Trend Peak
Recovery
Recession Trough
Time
Phases of the Business Cycle
Peak:
at a peak business activity has reached a temporary maximum. the economy is at full employment. very close to full productivity.
The
price level is likely to rise during this phase.
Phases of the Business Cycle
Recession:
a period of decline in total output, income, employment, and trade. wide spread contraction of business activity.
The
price level is likely to fall.
Phases of the Business Cycle
Trough:
output and employment bottom out at their lowest levels. the trough phase may be either short lived or quite long.
Phases of the Business Cycle
Recovery:
in the recovery phase, output and employment rise toward full employment.
The
price level may begin to rise before full employment and full capacity production return.
Unemployment
The
labor force consists of people who are able and willing to work. Both those who are employed and those who are unemployed but actively seeking work are counted as being in the labor force.
Unemployment
The
unemployment rate is the percentage of the labor force unemployed:
Unemployment rate= (unemployed / labor force) X 100
Types of Unemployment
There
are three types of unemployment:
Frictional Unemployment Structural Unemployment Cyclical Unemployment
Frictional Unemployment
Frictional
unemployment consisting of search unemployment and wait unemployment. word frictional implies that the labor market does not operate perfectly in matching workers and jobs.
The
Structural Unemployment
Structural
unemployment results because the composition of the labor force does not respond immediately or completely to the new structure of job opportunities. Structurally unemployed workers find it hard to obtain new jobs without retraining, gaining additional education, or relocating.
Cyclical Unemployment
Cyclical
unemployment is caused by a decline in total spending and is likely to occur in the recession phase of the business cycle.
Inflation
Inflation
is a rise in the general level of
prices.
P r - C I 2 iP r n I 1 Y I n R f l a aa t= t r e i o 2 i n n Y 1 e 0 C Pr I 1 i n
Types of Inflation
Two
types of inflation:
Demand-Pull Inflation Cost-Push Inflation
Demand-Pull & Cost-Push Inflation
Demand
Pull Inflation: Changes in the price level are caused by an excess of total spending beyond the economys capacity to produce. Inflation: Rising prices in terms of factors that raise per-unit production cost at each level of spending.
Cost-Push
Summary of Macroeconomic Instability
Economic
growth and productivity. The business cycle. Measurement and types of unemployment. Demand-pull and Cost-push inflation.
