Chapter 6--Introduction to Economic Growth, Unemployment ... · Introduction to Economic Growth, Unemployment, ... Economic Cost of Unemployment ... Chapter 6--Introduction to Economic

© 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 6 1

Introduction to Economic Growth,

Unemployment, and Inflation


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


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


Economic Growth

an increase in real GDP over some time

period, OR

an increase in real GDP per capita over

some time period


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


Chapter 6 Topics

6.1 Economic Growth


6.3 Unemployment

6.4 Inflation




Level o

f re

al

ou

tpu

t

Time

Phases of the Business CycleFigure 6-1


PEAK

Time

Level o

f re

al

ou

tpu

t



RECESSION

Time

Level o

f re

al

ou

tpu

t



TROUGH

Time

Level o

f re

al

ou

tpu

t



RECOVERY

Time

Level o

f re

al

ou

tpu

t



Time

Level o

f re

al

ou

tpu

t

provincial

variations



Canadian Recessions Since 1930

Year Change in real GDP

1930-33 -27.5%

1945 -2.4%

1946 -2.2%

1954 -1.1%

1982 -3.2%

1991 -1.7%

Table 6-2


The Business Cycle

Causation: A First Glance

– innovation

– changes in productivity

– money supply changes

– total spending changes

Cyclical Impact: Durables & Non-

Durables


Chapter 6 Topics

6.1 Economic Growth


6.3 Unemployment

6.4 Inflation




The Labour Force, 2002

Fig. 6-2

labour force

16.7

million

total population

31 million

unemployed 1.285 million

Employed

(15.4 million)

Not in labour force

(8.3 million)

Under 15 &/or

institutionalized

(6.0 million)


Unemployment

rate

unemployed

labour forcex 100=

Unemployment

rate 2002

=

1,285,000

16,700,000x 100=

7.7%

Measurement of Unemployment


Measurement of Unemployment

Criticisms of the calculation:

part-time employment

discouraged workers


Types of Unemployment

Frictional Unemployment




Structural Unemployment




Structural Unemployment

Cyclical Unemployment


Definition of “Full Employment”

natural rate of unemployment (NRU)

NOT zero unemployment

occurs when there is no cyclical

unemployment

not automatic

varies over time


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


Actual & Potential GDP & the

Unemployment RateFigure 6-3


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


Unequal Burdens

Occupation

Age

Gender

Education


Unemployment

Non-Economic Costs

Regional Variations


Regional Variations

Provincial Breakdown of the Unemployment Rate,

2002

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

CANADA

Newfoundland

PEI

Nova Scotia

New Brunswick

Quebec

Ontario

Manitoba

Saskatchewan

Alberta

British Columbia

%


Unemployment rates in five

industrial nationsGlobal Perspective 6.2


Chapter 6 Topics

6.1 Economic Growth


6.3 Unemployment

6.4 Inflation




Inflation

Meaning of Inflation

– a rise in the general level of prices

Measurement of Inflation

– Consumer Price Index

100X(1992) base yearthe in basketsame the ofPrice

yearularthe partic in basket 1992 ofPrice CPI


Inflation

X100 yearlast CPI

yearlast CPI- this year CPI

inflation

ofRate


Annual Inflation Rates in Canada, 1972-2002

0

2

4

6

8

10

12

141972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

%

Facts of Inflation

The major periods of inflation

in Canada were in the 1970s &

1980s

Figure 6-4


Inflation rates in five industrial

nations 1992-2002

-1

0

1

2

3

4

5

6

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

GLOBAL PERSPECTIVE 6.3

UK

Germany

Japan

US

Canada

inflation rates in

Canada in the 1990s

were relatively low


Types of Inflation

Demand-Pull Inflation

– excess demand

Cost-Push Inflation

– per-unit production costs

– supply shocks

Complexities


Chapter 6 Topics

6.1 Economic Growth


6.3 Unemployment

6.4 Inflation




Nominal & Real Income

real income =nominal income

price index

% change in real income

% change in nominal income

– % change in price level

X 100


Nominal & Real Income

Expectations

– redistribution effects of inflation depend on

whether or not inflation is expected


Who is Hurt by Inflation?

assuming unanticipated inflation

Fixed-income receivers

Savers

Creditors


Who is Unaffected or Helped by

Inflation?

assuming unanticipated inflation

Flexible-Income receivers

Debtors


Anticipated Inflation

Effects are lessened to the extent

inflation is correctly anticipated

– COLA clauses

– inflation premium on loans


Nominal

Interest

Rate

=11%

Inflation PremiumFigure 6-5


Nominal

Interest

Rate

Real

Interest

Rate

=11%

5%



Nominal

Interest

Rate

Real

Interest

Rate

Inflation

Premium

=11%

5%

6%

+



Addenda

Deflation

Mixed effects

Arbitrariness


Chapter 6 Topics

6.1 Economic Growth


6.3 Unemployment

6.4 Inflation




Effects of Inflation on Output

Cost-Push Inflation & Real Output

Demand-Pull Inflation & Real Output

Hyperinflation & Breakdown


Chapter 6 Topics

6.1 Economic Growth


6.3 Unemployment

6.4 Inflation



Documents

Chapter 6--Introduction to Economic Growth, Unemployment ... · Introduction to Economic Growth, Unemployment, ... Economic Cost of Unemployment ... Chapter 6--Introduction to Economic