Tuesday, October 8, 2013

Economic Growth And Stability


Economic Growth – the increase in real GDP over time
Real GDP per capita – another measure of growth is how real GDP increases relative to the size of the population (i.e. is there more stuff per person than before?)
Growth as a Goal – the general idea is that growth is “good”. I know that shocks everyone, but they do quantify it as the idea that growth reduces the amount of unmet needs of society. In effect, growth expands the PPF – giving us greater choices over time.
Arithmetic Growth – growth isn’t just additive (3% this year pus 3% next year, gives us 6%) it’s arithmetic (like compounding interest). If the economy grows at 3% per year, it does not take 33 1/3 years to double. It takes considerably less than that. In fact, it takes about 24 years to double at 3% per year. The formula for doubling the size of theeconomy is called the “rule of 72” though the older book calls it the “rule of 70”. To find out how long it takes to double the size of the economy you divide 72 by the growth rate . i.e. 72/3% = 24 years. We can see if the growth rate just does a little better (4%), the economy speeds up by doubling every 18 years.
Main Sources of Growth:
  • Increases in land, labor or capital ~ 1/3 of growth
  • Increases in productivity ~ 2/3 of growth
This historic statistic tells us that we can continue to get more from our resources as log as inventions and innovations continue to be advanced. It’s therefore, in our own interests to make sure that inventions and innovations are encouraged (tax credits for research and development, strong copyright laws, etc)
Growth in the United States:
  • Improved products and services – today’s shoes, computers etc are not what they used to be
  • Added leisure – growth allows us more time away from the drudgery of work
Other impacts:
Relative Growth Rates – the US has done better than most other industrialized nation in terms of growth, though there was a slow down after the 1940’s. War often fosters increased innovation as people are forced to try new ways to get more from less.


The Business Cycle: Phases of the business cycle:
  • Peak – the top point of the cycle
  • recession / depression – the downward sloping section
  • trough – the bottom point
  • recovery / expansion / boom – the upward sloping portion.
  • Notice that we can be in a recession and still be doing very well (even better than usual) and we can be in a recovery/boom /expansion and still have high unemployment. This is another place where the class uses terms differently from what many in the public think the terms mean. Immediately when the curve starts falling, we are in the recession phase, even if we are well above the trend line. Immediately after the economy bottoms out, the recession is over.
Causation: a first glance
Generally, the variability if GDP is caused by a lot of things, (the erratic development of new technologies, government policy changes etc) but mostly it’s due to changes in aggregate spending (total spending) and most of that (2/3) is consumer spending. If consumers stop spending, there will be a recession – even with pro-growth governmental policy, even with new technologies that save labor, and lower the costs of production. In the end, it mostly boils down to consumer confidence.
Unemployment – one of the most misunderstood statistics we have. People think it’s the percent of the population that is unemployed, or the percent of the working age population that is unemployed. It’s neither. It’s the percent of the labor force that is unemployed.
  • measurement of unemployment
(# unemployed in the labor force)
----------------------------------------- x 100%
(# in the labor force)
  • labor force, to be a part of the labor force, one must be:
    • of working age (16-65),
    • able to work (not incapacitated either physically or mentally by illness or handicaps, not those who are institutionalized in a jail or  hospital, and not those who already have a full-time commitment - like full-time school)
    • willing to work at the market wage (which generally boils down to if they are actively looking for work.)
  • part-time employment counts as if it were full-time employment. To the extent that part-timers would prefer to be full-time, we call this
    UNDERemployment – but it does not count as unemployment
  • discouraged workers – workers who can not find work may quit trying after a while. When they quit looking, they are no longer officially unemployed – because you must qualify as “willing”. When this happens, the official unemployment rate falls – making it look like a recession is easing, when in fact it is getting worse. For example, if our work force was 100 people, and 5 were unemployed (95 employed) the unemployment rate would be 5%. If one of our workers got discouraged, they would not be unemployed OR part of the laborforce anymore – giving us a 4/99 ratio which is close to 4%. It looks like the unemployment problem is improving, but it’s just  been bad so long that people are losing hope.
Type of Unemployment:
Frictional Unemployment – these people are temporarily unemployed due to a variety of reasons – like just graduating and looking for a job, just re-entering the labor force after an absence of any kind, voluntarily quitting your job, being fired for cause from your job, etc. This is always with us (people are always changing jobs, people are always graduating or otherwise entering the labor force for the first time)
Structural Unemployment – these people lose their jobs because the economy no longer needs the things they make. It could be that a GM worker is displaced because people move to some other type of transportation or another company is more efficient and takes part of GM’s market share. This is people who used to make wagon wheels after the economy moved to automobiles, or people who made slide rules after the calculator was invented. It is not a sign that the economy is doing poorly – in fact, quite the opposite. Growth depends (2/3 of it anyway) on advances. Each advance leaves someone or something behind.
Seasonal Unemployment – this is people who do jobs that are not year-round employment. Like looking like Santa – in May. Or being a roofer in the Midwest during the winter. Or being a migrant farm worker in the winter. This is also not a sign that the economy is doing poorly. It’s just the nature of the jobs.
Cyclical Unemployment – This is a sign of a bad economy. This type of unemploymentis due to the business cycle. The downturn in  spending means less items are bought – meaning that less goods and services are needed – meaning less workers are needed to supply them.
Natural rate of unemployment – we naturally always have some structural seasonal and frictional unemployment. That unemployment is expected – or at least naturally occurring. Generally in the US we expect unemployment of about 4-6% all the time.
Definition of Full-Employment – “full employment” is when there is no un-natural unemployment. i.e. – no cyclical unemployment, or an unemployment rate over 4-6%. Full-employment rate of unemployment – only natural unemployment – i.e. 94-96% employment.
Potential GDP (Potential Output) – the output if there was only natural unemployment – i.e. GDP when the unemployment rate is 4-6%.
Economic Cost of Unemployment:
GDP Gap and Okun’s Law – the difference between potential GDP (the GDP we would have had if we were at the natural rate of unemployment) and what we actually achieved.
Actual Real GDP fluctuates with resource availability as well as the business cycle, so it fluctuates more than potential GDP – which fluctuates with resource availability only. The lower the unemployment rate, the closer Actual GDP will be to Potential GDP – and the smaller the GDP gap will be.
Okun’s law – more a relationship than an actual statistical law: for each 1% of cyclicalunemployment (unemployment over 4-6%), the GDP gap will increase by 2%.
  • Unequal Burdens
    • by Occupation – occupations that deal with durable goods have higher rates of unemployment than those that deal with nondurable goods. i.e. people put off buying new cars, homes etc when times get bad – but they still have to buy food.
    • by age group – the old and the young tend to have higher rates of unemployment. The old due to out-dated skills and possibly  ageism, the young sue to less skills.
    • by race and ethnicity – African Americans have higher rates of unemployment than Hispanics who have higher rates than  Caucasians. Some of the cause is undoubtedly racism – others may include the differences in their industries (occupations),  education levels, etc.
    • by gender – traditionally, women had higher rates f unemployment, but that has changed recently. The difference isn’t large, but it was in the past and it continues to trend towards lower unemployment rates for women than men.
    • by education – simply put…the higher rates of unemployment are felt by those with the lower education levels.
    • by duration – some people experience longer terms of unemployment (called spells) than others.

Non-economic costs:
  • things like family disillusion, depression, social unrest, etc. While they are important and real, we deal mostly with just the economic costs here.
International Comparisons – the US has experienced less unemployment than many of the other industrialized western-type economies.
Inflation – the sustained increase in the price level
Measurement of Inflation – generally, we measure it by using Price Indexes
Types of Inflation:
  • Demand-Pull inflation – caused by the change in total demand for goods and services in the economy. If there is a lot more demand, then prices tend to rise (just like when we used simple demand curves in a price–quantity space graph).
  • Cost-Push Inflation – caused by an increase in input prices – which causes firms to cut back on production. This causes prices to rise because all products are now more scarce.
Redistribution Effects of Inflation:
Nominal and Real Income – nominal income is what the number is on your check stub. Real income is what that income will buy. The higher the inflation rate, the less that nominal income will buy – i.e. the real income falls as price levels rise.
Anticipators:
Anticipated inflation – If a bank knows prices will rise at 3%, they build that expectation into their loan decisions. For instance, if prices are rising 3% per year, they need to make loans at more than 3% to make any money.
Unanticipated inflation – this is when the banks are fooled
Who is Hurt by Inflation?
  • Fixed income receivers – if a person gets the same dollar amount each month from an annuity, pension or even social security, then as inflation increases, their money doesn’t buy as much as it used to.
  • Savers – those who earn interest on savings find that their savings doesn’t increase their purchasing power as fast as it would without inflation.
  • Creditors – those who loan money out at a certain rate do not get the expected return on their loan as they intended, because prices are rising and eating away the value of their return.
Who is helped by inflation?
  • Flexible Income receivers – their incomes rise with inflation, while others’ incomes do not. By comparison they are better off than fixed income earners.
  • Debtors – Let’s say you borrow $100 and agree to pay it back next year with 5% interest. In the mean time, inflation was 10%. If you used to earn $10 per hour, you now get $11 ($10 + 10%). It used to take 10 hours of work to but what cost $100. Now for that same 10 hours of work, you can pay back the loan of $100 plus the $5 of interest and still have $5 left over.
Anticipated Inflation – If inflation is fully anticipated, then interest rates from banks incorporate it into their loans. The more inflation there is, the higher the interest rates on loans.
Real-interest rate – the rate of interest (or rate of return) than lenders receive
Nominal interest rate – the rate of interest written on the loan – i.e. the rate borrowers pay.
Addenda:
  • Deflation – a decrease in the price level
  • mixed effects – some prices rise and some prices fall
  • arbitrariness -
Effects of Inflation on Output – as it becomes more expensive to borrow, firms do less of it. The growth rate slows down and the economy suffers
Cost-Push and Real Output – when costs rise, output falls = stagflation (stagnated economy and inflation)
Demand-Pull Inflation and Real Output – when demand rises, prices rise inflation) but GDP rises as well.
Hyperinflation and Breakdown – when inflation rates are so high that people stop using the currency and instead revert to either barter (a cashless trade system where people trade goods for other goods) or usurp another nations currency (many times they sue the US’s currency because of it’s history of relative stability). The US has not experienced hyper-inflation.

No comments:

Post a Comment