UNIT 13: ECONOMIC FLUCTUATIONS AND
UNEMPLOYMENT
Economic Growth
Annual rate of increase in total production in the economy measured as real GDP.
GDP:
- Total value of all nal goods + services produced within national boundaries of a
country within a speci c period.
- Measures aggregate economic output; whereas National Accounts measure
overall output and expenditure in a country.
- Goods + services not sold on markets not included
- Not good measure of well-being; does not include negative externalities
- Goods and services that are not easily priced are not included
- GDP revised constantly: re-basing exercise
GDP PER CAPITA:
Avg. annual income of people in economy; Total GDP/Total Population
BUSINESS CYCLE
- Alternating periods of positive and negative economic growth.
- Phases: troughs, upswings (expansion/boom) , peaks, downswings.
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,- Extended downswings: recessions (2 consecutive quarters of negative growth)
OKUNS LAW
Strong negative relationship between unemployment and economic growth
OKUNS COEFFICIENT
Change in unemployment rate in % predicted by association with a 1% change in
GDP.
Measuring GDP
I. Expenditure method: calc. total spending on goods and services produced in
the domestic market
II. Production method: calculates total domestic production measured as value
added during the production process
III. Income method: calc. total income earned by factors of production in domestic
market.
Components of GDP
I. Consumption (C): Expenditure on consumer goods and services
II. Investment (I): Expenditure on newly produced goods (equipment, buildings,
inventory)
, III. Gov Spending (G): Gov spending on goods and services excl transfers (double
counting avoided)
IV. Net Eports: Exports (X) - Imports (M)
**GDP (Y) = C + I + G + X - M**
Economic Fluctuations
SHOCK
An unexpected event which causes GDP to uctuate.
HOUSEHOLD SHOCKS
- Shocks that are speci c to their household. Households protect themselves from
these shocks by:
A. Self Insurance: Saving/Borrowing
B. Co-Insurance: Support from a social network/government.
- Households prefer to smooth their consumption
- Households are altruistic to a degree.
ECONOMY WIDE SHOCKS
- co-insurance is less e ective, but even more necessary
- farming economies in volatile climates: co insurance based on trust, reciprocity,
altruism
CONSUMPTION SMOOTHING
- basic source of stabilisation in an economy.
- Limitations = cannot always stabilise economy; may amplify initial shock.
- Reasons for limitations: credit constraints and weakness of will that limits self-
insurance ; limited co-insurance.
- Readjust long-rung consumption if shocks are permanent.
- No change in long run consumption if shock is temporary.
- Credit constraints = limits ability to borrow.
- Households unable to adjust to temporary income shock have lower welfare.
- In SA: Sophisticated nancial markets; excludes the poor/low-income earners
from credit due to lack of collateral + education on accessing nancial credit
markets; resort to informal short-term credit markets with high interest rates.
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UNEMPLOYMENT
Economic Growth
Annual rate of increase in total production in the economy measured as real GDP.
GDP:
- Total value of all nal goods + services produced within national boundaries of a
country within a speci c period.
- Measures aggregate economic output; whereas National Accounts measure
overall output and expenditure in a country.
- Goods + services not sold on markets not included
- Not good measure of well-being; does not include negative externalities
- Goods and services that are not easily priced are not included
- GDP revised constantly: re-basing exercise
GDP PER CAPITA:
Avg. annual income of people in economy; Total GDP/Total Population
BUSINESS CYCLE
- Alternating periods of positive and negative economic growth.
- Phases: troughs, upswings (expansion/boom) , peaks, downswings.
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,- Extended downswings: recessions (2 consecutive quarters of negative growth)
OKUNS LAW
Strong negative relationship between unemployment and economic growth
OKUNS COEFFICIENT
Change in unemployment rate in % predicted by association with a 1% change in
GDP.
Measuring GDP
I. Expenditure method: calc. total spending on goods and services produced in
the domestic market
II. Production method: calculates total domestic production measured as value
added during the production process
III. Income method: calc. total income earned by factors of production in domestic
market.
Components of GDP
I. Consumption (C): Expenditure on consumer goods and services
II. Investment (I): Expenditure on newly produced goods (equipment, buildings,
inventory)
, III. Gov Spending (G): Gov spending on goods and services excl transfers (double
counting avoided)
IV. Net Eports: Exports (X) - Imports (M)
**GDP (Y) = C + I + G + X - M**
Economic Fluctuations
SHOCK
An unexpected event which causes GDP to uctuate.
HOUSEHOLD SHOCKS
- Shocks that are speci c to their household. Households protect themselves from
these shocks by:
A. Self Insurance: Saving/Borrowing
B. Co-Insurance: Support from a social network/government.
- Households prefer to smooth their consumption
- Households are altruistic to a degree.
ECONOMY WIDE SHOCKS
- co-insurance is less e ective, but even more necessary
- farming economies in volatile climates: co insurance based on trust, reciprocity,
altruism
CONSUMPTION SMOOTHING
- basic source of stabilisation in an economy.
- Limitations = cannot always stabilise economy; may amplify initial shock.
- Reasons for limitations: credit constraints and weakness of will that limits self-
insurance ; limited co-insurance.
- Readjust long-rung consumption if shocks are permanent.
- No change in long run consumption if shock is temporary.
- Credit constraints = limits ability to borrow.
- Households unable to adjust to temporary income shock have lower welfare.
- In SA: Sophisticated nancial markets; excludes the poor/low-income earners
from credit due to lack of collateral + education on accessing nancial credit
markets; resort to informal short-term credit markets with high interest rates.
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