Published on December 8, 2008
INTRODUCTION TO ECONOMIC GROWTH AND BUSINESS CYCLES : INTRODUCTION TO ECONOMIC GROWTH AND BUSINESS CYCLES Overview : Overview Long-Run Economic Growth: The process by which rising productivity increases the standard of living. Business Cycle: The rise and fall of economic activity relative to the long-run growth trend of the economy. Alternating periods of economic expansion and economic recession. Slide 3: Long-Run Economic Growth and the Business Cycle Great Depression World War II 1st OPEC Oil Shock 2nd OPEC Oil Shock 2001 Recession Stock Market Crash of 1929 1990 Recession Slide 4: Overview Economic growth is the the key to sustained increases in the standard of living. Standards of living vary tremendously across countries. Within a country, standards of living also tend to vary tremendously over time. When measuring economic growth and standards of living, economists tend to focus on real GDP per capita. Slide 5: Measures of A Nation’s Standard of Living More on International Standard of Living Comparisons Slide 6: Growth in GDP Per Capita Over Time Slide 7: Economic Growth and Standards of Living U.S. Time Allocation Determinants of Long-Run Growth : Determinants of Long-Run Growth The single most important factor determining a nation's standard of living is the productivity of its labor force. Labor Productivity: The quantity of goods and services that can be produced by one worker or by one hour of work. Slide 9: Labor Productivity Labor Productivity is total output (real GDP) divided by the total number of hours of labor used to produce that output. In practice, labor productivity is measured as the ratio of total output to the total number of workers, or output per worker. Slide 10: Determinants of Labor Productivity There are two key determinants of labor productivity: Increases in capital per hour worked Technological change Slide 11: Determinants of Labor Productivity Capital refers to manufactured goods that are used to produce other goods and services. As the capital stock per worker increases, worker productivity increases and thus economic growth increases. Technological Change is an increase in the amount of goods and services that can be produced using a fixed quantity of inputs. Slide 12: Introduction to Business Cycles Business Cycle: The rise and fall of economic activity relative to the long-run growth trend of the economy Facts Concerning Business Cycles Business cycles vary in duration and severity. Business cycles are irregular and unpredictable. Slide 13: Phases of a Typical Business Cycle Business cycles are typically comprised of: Expansion: A period of rising economic activity. A period during which the economy’s total output (real GDP) is rising. Peak: The high point of economic activity. A peak marks the end of an expansion. Slide 14: Phases of a Typical Business Cycle (3) Recession: A period of falling economic activity. A period during which the economy’s total output (real GDP) is falling. (4) Trough: The low point of economic activity. A trough marks the bottom of a recessionary or contractionary phase. Slide 15: A Typical Business Cycle Real GDP Time Long-Run Growth Trend Trough Trough Peak Peak Expansion Expansion Recession Recession Slide 16: Economic Fluctuations Great Depression World War II 1st OPEC Oil Shock 2nd OPEC Oil Shock 2001 Recession Stock Market Crash of 1929 1990 Recession Slide 17: Recent Recessions in the U.S. Slide 18: Economic Fluctuations Most macroeconomic variables fluctuate together: When output falls, consumer spending and investment tend to fall. When output falls, unemployment rises. Changes in real GDP are inversely related to changes in the unemployment rate. Slide 19: Investment Spending and Real GDP Billions of 1996 Dollars $1,800 1,600 1,400 1,200 1,000 800 600 400 200 1965 1970 1975 1980 1985 1990 1995 2000 Investment spending Copyright © 2004 South-Western Note: Bars Denote Recessions Slide 20: Unemployment and Real GDP Unemployment Rate 0 2 4 6 8 10 12 1965 1970 1975 1980 1985 1990 1995 2000 Unemployment rate Copyright © 2004 South-Western Note: Bars Denote Recessions Slide 21: The Effect of the 2001 Recession on the Unemployment Rate Slide 22: FIGURE 21.12 Fluctuations in Real GDP, 1900–2006 The Magnitude of Business Cycles Over Time The economy has become more stable over time Why is the Economy More Stable? : Why is the Economy More Stable? The increasing importance of services and the declining importance of goods. The establishment of unemployment insurance and other government transfer programs that provide funds to the unemployed. Active federal government policies to stabilize the economy.