INTRODUCTION TO ECONOMIC GROWTH AND INSTABILITY

Pertemuan 5

Matakuliah : J0594-Teori EkonomiTahun : 2009

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Economic Growth

• Increase in Real GDP• Increase in Real GDP Per Capita• Growth as a Goal• Arithmetic of Growth

- Rule of 70

Approximatenumber of yearsrequired to doublereal GDP

=70

annual percentage rateof growth

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Selected Growth Rates

Source: Economic Report of the President, 2006

-4

-2

0

2

4

6

U.S.

Germany

France

Japan

U.K.

Italy

1997 1999 2001 2003 2005

Per

cen

tag

e C

han

ge

(an

nu

al r

ate)

GLOBAL PERSPECTIVE

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The Business CycleL

evel

of

Rea

l Ou

tpu

t

Time

Peak

Peak

Peak

Recession

RecessionEx

pans

ion

Exp

ansi

on

Trough

Trough

Growth

Trend

Phases of the Business Cycle

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Unemployment

• Twin Problems of the Business Cycle– Unemployment– Inflation

• Measurement of Unemployment• Labor Force• Unemployment Rate

– Part-Time Employment– Discouraged Workers

Unemployment RateUnemployed

Labor Force= x 100

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Unemployment

Under 16And/or

Institutionalized(70.5 Million)

Labor Force, Employment, and Unemployment, 2005

TotalPopulation

(296.6 Million)

Not inLabor Force(76.8 Million)

Employed(141.7 Million)

LaborForce(149.3 Million)

Unemployed (7.6 Million)

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Unemployment & Full Employment

• Types of Unemployment– Frictional Unemployment– Structural Unemployment– Cyclical Unemployment

• Definition of Full Employment

Full Employment issomething less than 100 percent of the labor force

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Unemployment

• Economic Cost of Unemployment• Potential Output• GDP Gap and Okun’s Law

GDPGap Actual GDP Potential GDP= -

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Unemployment

0

2

4

6

8

10

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

The Unemployment Rate10

8

6

4

2

0

Un

emp

loy

men

t(p

erce

nt

of

civi

lian

Lab

or

forc

e)

Source: Congressional Budget Office & Bureau of Economic Analysis

Actual and Potential GDP and the Unemployment Rate

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

The GDP Gap12,000

11,000

10,000

9,000

8,000

7,000

6,000

5,000GD

P (

bil

lio

ns

of

1996

do

lla

rs)

GDP gap(positive)

GDP gap(negative)

Potential GDP

Actual GDP

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Unemployment

• Unequal Burdens– Occupation– Age– Race and Ethnicity– Gender– Education– Duration

• Noneconomic Costs

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Unemployment

Source: Bureau of Labor Statistics

0

5

10

15

U.S.Germany

Italy

Japan

France

1995 2000 2005

Un

emp

loym

ent

Rat

e (p

erce

nt)

Unemployment Rates in Five Industrial Nations,1995-2005

GLOBAL PERSPECTIVE

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Inflation

• Inflation Defined

• Measurement of Inflation

– Consumer Price Index

CPI

Price of the Most Recent MarketBasket in the Particular Year

Price of the Same MarketBasket in 1982-1984

= x 100

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Inflation

• Types of Inflation– Demand Pull Inflation– Cost-Push Inflation

• Per Unit Production Costs• Redistributive Effects

– Nominal and Real Income– Anticipations

• Anticipated Inflation• Unanticipated Inflation

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Inflation

• Who is Hurt by Inflation?– Fixed-Income Receivers– Savers– Creditors

• Who is Unaffected or Hurt by Inflation?– Flexible-Income Receivers

• Cost-of-Living Adjustments (COLAs)– Debtors

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Inflation

• Anticipated Inflation– Nominal Interest Rate – Real Interest Rate– Inflation Premium

NominalInterest

Rate

RealInterest

Rate

InflationPremium

11%

5%

6%

= +

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Inflation

• Deflation• Mixed Effects• Arbitrariness• Cost-Push Inflation and Real Output• Demand-Pull Inflation and Real

Output• Hyperinflation