Chapter 08 - Introduction to Economic Growth and Instability
Introduction: This chapter provides an introductory look at trends of real GDP growth and the macroeconomic
problems of the business cycle, unemployment and inflation.
Economic Growth-how to increase the economy's productive capacity over time.
Two definitions of economics growth are given.
The increase in real GDP, which occurs over a period of time.
The increase in real GDP per capita, which occurs over time.This definition is superior if comparison of
living standards is desired.For example, China's GDP is $744 billion compared to Denmark's $155 billion,
but per capita GDP's are $620 and $29,890 respectively.
Growth is an important economic goal because it means more material abundance and ability to meet the
economizing problem.Growth lessens the burden of scarcity.
The arithmetic of growth is impressive.Using the "rule of 70," a growth rate of 2 percent annually would take 35
years for GDP to double, but a growth rate of 4 percent annually would only take about 18 years for GDP to
double.(The "rule of 70" uses the absolute value of a rate of change, divides it into 70, and the result is the
number of years it takes the underlying quantity to double.)
Main sources of growth are increasing inputs or increasing productivity of existing inputs.
About one-third of U.S. growth comes from more inputs.
About two-thirds comes from increased productivity.
Growth Record of the United States (Table 8-1) is impressive.
Real GDP has increased more than sixfold since 1940, and real per capita GDP has risen almost
fourfold.(See columns 2 and 4, Table 8-1)
Rate of growth record shows that real GDP has grown 3.1 percent per year since 1950 and real GDP per
capita has grown about 2 percent per year.But the arithmetic needs to be qualified.
Growth doesn't measure quality improvements.
Growth doesn't measure increased leisure time.
Growth doesn't take into account adverse effects on environment or human security.
International comparisons are useful in evaluating U.S. performance. For example, Japan grew
more than twice as fast as U.S. until the 1990s when the U.S. far surpassed Japan. (see Global
Perspective 8-1).
Overview of the Business Cycle
Historical record:
The United States' impressive long‑run economic growth has been interrupted by periods of instability.
Uneven growth has been the pattern, with inflation often accompanying rapid growth, and declines in
employment and output during periods of recession and depression (see Figure 8‑1 and Table 8-2).
Four phases of the business cycle are identified over a several‑year period.(See Figure 8-1)
A peak is when business activity reaches a temporary maximum with full employment and near-capacity
output.
A recession is a decline in total output, income, employment, and trade lasting six months or more.
The trough is the bottom of the recession period.
Recovery is when output and employment are expanding toward full‑employment level.
There are several theories about causation.
Major innovations may trigger new investment and/or consumption spending.
Changes in productivity may be a related cause.
Most agree that the level of aggregate spending is important, especially changes on capital goods and
consumer durables.
Cyclical fluctuations:Durable goods output is more unstable than non-durables and services because spending
on latter usually can not be postponed.
Unemployment (One Result of Economic Downturns)
Types of unemployment:
Frictional unemployment consists of those searching for jobs or waiting to take jobs soon; it is regarded
as somewhat desirable, because it indicates that there is mobility as people change or seek jobs.
Structural unemployment:due to changes in the structure of demand for labor; e.g., when certain skills
become obsolete or geographic distribution of jobs changes.
Glass blowers were replaced by bottle-making machines.
Oil-field workers were displaced when oil demand fell in 1980s.
Introduction: This chapter provides an introductory look at trends of real GDP growth and the macroeconomic
problems of the business cycle, unemployment and inflation.
Economic Growth-how to increase the economy's productive capacity over time.
Two definitions of economics growth are given.
The increase in real GDP, which occurs over a period of time.
The increase in real GDP per capita, which occurs over time.This definition is superior if comparison of
living standards is desired.For example, China's GDP is $744 billion compared to Denmark's $155 billion,
but per capita GDP's are $620 and $29,890 respectively.
Growth is an important economic goal because it means more material abundance and ability to meet the
economizing problem.Growth lessens the burden of scarcity.
The arithmetic of growth is impressive.Using the "rule of 70," a growth rate of 2 percent annually would take 35
years for GDP to double, but a growth rate of 4 percent annually would only take about 18 years for GDP to
double.(The "rule of 70" uses the absolute value of a rate of change, divides it into 70, and the result is the
number of years it takes the underlying quantity to double.)
Main sources of growth are increasing inputs or increasing productivity of existing inputs.
About one-third of U.S. growth comes from more inputs.
About two-thirds comes from increased productivity.
Growth Record of the United States (Table 8-1) is impressive.
Real GDP has increased more than sixfold since 1940, and real per capita GDP has risen almost
fourfold.(See columns 2 and 4, Table 8-1)
Rate of growth record shows that real GDP has grown 3.1 percent per year since 1950 and real GDP per
capita has grown about 2 percent per year.But the arithmetic needs to be qualified.
Growth doesn't measure quality improvements.
Growth doesn't measure increased leisure time.
Growth doesn't take into account adverse effects on environment or human security.
International comparisons are useful in evaluating U.S. performance. For example, Japan grew
more than twice as fast as U.S. until the 1990s when the U.S. far surpassed Japan. (see Global
Perspective 8-1).
Overview of the Business Cycle
Historical record:
The United States' impressive long‑run economic growth has been interrupted by periods of instability.
Uneven growth has been the pattern, with inflation often accompanying rapid growth, and declines in
employment and output during periods of recession and depression (see Figure 8‑1 and Table 8-2).
Four phases of the business cycle are identified over a several‑year period.(See Figure 8-1)
A peak is when business activity reaches a temporary maximum with full employment and near-capacity
output.
A recession is a decline in total output, income, employment, and trade lasting six months or more.
The trough is the bottom of the recession period.
Recovery is when output and employment are expanding toward full‑employment level.
There are several theories about causation.
Major innovations may trigger new investment and/or consumption spending.
Changes in productivity may be a related cause.
Most agree that the level of aggregate spending is important, especially changes on capital goods and
consumer durables.
Cyclical fluctuations:Durable goods output is more unstable than non-durables and services because spending
on latter usually can not be postponed.
Unemployment (One Result of Economic Downturns)
Types of unemployment:
Frictional unemployment consists of those searching for jobs or waiting to take jobs soon; it is regarded
as somewhat desirable, because it indicates that there is mobility as people change or seek jobs.
Structural unemployment:due to changes in the structure of demand for labor; e.g., when certain skills
become obsolete or geographic distribution of jobs changes.
Glass blowers were replaced by bottle-making machines.
Oil-field workers were displaced when oil demand fell in 1980s.
