HO2e Macro ch09 2008

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Information about HO2e Macro ch09 2008
Business-Finance

Published on April 13, 2008

Author: Samantha

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Slide2:  Growth and the Business Cycle at Boeing Learning Objectives In this chapter, we will provide an overview of long-run growth and the business cycle and discuss their importance for individual firms, for consumers, and for the economy as a whole. Long-Run Economic Growth:  Long-Run Economic Growth Learning Objective 9.1 A key measure of the success of any economy is its ability to increase production of goods and services faster than the growth in population. Long-run economic growth The process by which rising productivity increases the average standard of living. The best measure of the standard of living is real GDP per person (real GDP per capita) Long-Run Economic Growth:  Long-Run Economic Growth Learning Objective 9.1 FIGURE 9.1 The Growth in Real GDP per Capita, 1900–2006 Long-Run Economic Growth:  Long-Run Economic Growth Learning Objective 9.1 Although real GDP per capita fluctuates because of the short-run effects of the business cycle, the trend is strongly upward over the long run. For the US, eight-fold increase in 1 century: $4900 in 1900 to $38000 in 2006 Slide6:  The most important characteristic of long-run economic growth is: a. The business cycle. b. Rising productivity. c. Steady increases in living standards for everyone each year. d. All of the above. Slide7:  Learning Objective 9.1 The Connection between Economic Prosperity and Health The Connection between Economic Prosperity and Health :  The Connection between Economic Prosperity and Health Learning Objective 9.1 Life expectancy at birth: high-income countries (US): 50 at 1900 to about 80 today developing countries (India): 27 in 1900 to about 70 today Early stage of development: improvement in agricultural technology and rising income lead to improvement in the nutrition of the average person; development of the germ theory of disease; technological progress in the purification of water Lesson for development of low-income countries today: need to reduce disease and increase nutrition The Connection between Economic Prosperity and Health :  The Connection between Economic Prosperity and Health Learning Objective 9.1 Forecasting for the future: lifetime discretionary hours: increased; lifetime hours of paid work: decreased; lifetime hours of leisure: increased Long-Run Economic Growth:  Long-Run Economic Growth Learning Objective 9.1 Calculating Growth Rates and the Rule of 70 Growth rate from one year to the next: standard formula For longer periods of time: we need to calculate the average annual growth rate An alternative way to look at how rapidly an economic variable grows is to calculate the number of years it would take to double If real GDP per capita doubles every 10 years, most people in the country would experience significant increases in the living standard over the course of their lives; if real GDP per capita doubles only every 100 years, then the increase in living standard is much lower. Thus, the time to double is a useful measure. Long-Run Economic Growth:  Long-Run Economic Growth Learning Objective 9.1 Calculating Growth Rates and the Rule of 70 Examples: taken from Penn World Table Australia: 70 / 2.0612 = 40.0 Japan: 70 / 4.5881 = 15.3 Slide12:  When it comes to raising the standard of living in a country, how important are growth rates, particularly the growth rate of real GDP? a. Growth rates are very important. Small differences in growth rates can have large effects over long time periods. b. The difference in growth rates must be rather substantial before we notice any rise in living standards. c. The standard of living can increase without any change in the growth rate of real GDP. d. Economists focus more on social factors than on growth rates of GDP. Long-Run Economic Growth:  Long-Run Economic Growth Learning Objective 9.1 What Determines the Rate of Long-Run Growth? Increases in real GDP per capita depends on increases in labor productivity In US, the 8-time increases in real GDP per capita is due to roughly the 8-time increases in labor productivity But why does labor productivity increase over time? Two factors: Labor productivity The quantity of goods and services that can be produced by one worker or by one hour of work. Long-Run Economic Growth:  Long-Run Economic Growth Learning Objective 9.1 What Determines the Rate of Long-Run Growth? Capital Manufactured goods that are used to produce other goods and services. Also, human capital The accumulated knowledge and skills that workers acquire from education and training, or from their life experiences. Increases in Capital per Hour Worked Technological Change Economic growth depends more on technological change than on increases in capital per hour worked. Technological change is an increase in the quantity of output firms can produce using a given quantity of inputs. Slide15:  The Role of Technological Change in Growth Learning Objective 9.1 Between 1960 and 1995, real GDP per capita in Singapore grew at an average annual rate of 6.2 percent. This very rapid growth rate results in the level of real GDP per capita doubling about every 11.5 years. In 1995, Alywn Young of the University of Chicago published an article in which he argued that Singapore’s growth depended more on increases in capital per hour worked, increases in the labor force participation rate, and the transfer of workers from agricultural to nonagricultural jobs than on technological change. If Young’s analysis was correct, predict what was likely to happen to Singapore’s growth rate in the years after 1995. Slide16:  The Role of Technological Change in Growth Learning Objective 9.1 One-shot changes would eventually come to an end. Growth rate slowed to 2.5% from 1996-2005. Not bad as compared with other high-income countries, but the doubling time will be increased (i.e., deteriorated) from every 11.5 years to 28 years. Slide17:  Learning Objective 9.1 What Explains Rapid Economic Growth in Botswana? Slide18:  Which of the following government policies can help economic growth? a. Ensuring relative political stability and little corruption. b. Promoting an efficient financial system. c. Protecting private property rights, allowing freedom of the press, and having a democratic form of government. d. All of the above. Long-Run Economic Growth:  Long-Run Economic Growth Learning Objective 9.1 Potential Real GDP Potential GDP The level of GDP attained when all firms are producing at capacity. Long-Run Economic Growth:  Long-Run Economic Growth Learning Objective 9.1 Potential Real GDP FIGURE 9.2 Actual and Potential Real GDP Saving, Investment, and the Financial System:  Saving, Investment, and the Financial System Learning Objective 9.2 Firms often become successful by adopting new technologies. But, they need funds. Firms can finance their expansion from retained earnings, through financial markets, and through financial intermediaries. Without a well-functioning financial system, economic growth is impossible because firms will find it difficult to expand and adopt new technologies Economic growth relies on technological progress Saving, Investment, and the Financial System:  Saving, Investment, and the Financial System Learning Objective 9.2 An Overview of the Financial System Financial markets Markets where financial securities, such as stocks and bonds, are bought and sold. Financial intermediaries Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers. Financial system The system of financial markets and financial intermediaries through which firms acquire funds from households. Saving, Investment, and the Financial System:  Saving, Investment, and the Financial System Learning Objective 9.2 (1) risk sharing (2) liquidity—the ease with which a financial instrument can be exchanged for money (3) information In addition to matching households that have excess funds with firms who want to borrow funds, the financial system provides three key services for savers and borrowers: Saving, Investment, and the Financial System:  Saving, Investment, and the Financial System Learning Objective 9.2 The Macroeconomics of Saving and Investment Y = C + I + G + NX Y = C + I + G I = Y − C − G Saving, Investment, and the Financial System:  Learning Objective 9.2 S = (Y + TR − C − T) + (T − G − TR) S = Y − C − G S = I or or So, we can conclude that total saving must equal total investment: Saving, Investment, and the Financial System The Macroeconomics of Saving and Investment Slide26:  What happens when government spending is greater than government tax revenues? a. There is negative public saving. b. The national debt rises. c. The government issues more new bonds than the old bonds it pays off. d. All of the above. Saving, Investment, and the Financial System:  Saving, Investment, and the Financial System Learning Objective 9.2 The Market for Loanable Funds Market for loanable funds The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged. Demand is determined by the willingness of firms to borrow money to engage in new investment projects Supply is determined by the willingness of households to save and by the extent of government saving or dissaving Saving, Investment, and the Financial System:  Learning Objective 9.2 Demand and Supply in the Loanable Funds Market FIGURE 9.3 The Market for Loanable Funds Saving, Investment, and the Financial System The Market for Loanable Funds Slide29:  Learning Objective 9.2 Ebenezer Scrooge: Accidental Promoter of Economic Growth? Who was better for economic growth: Scrooge the saver or Scrooge the spender? Saving, Investment, and the Financial System:  Learning Objective 9.2 Explaining Movements in Saving, Investment, and Interest Rates FIGURE 9.4 An Increase in the Demand for Loanable Funds Saving, Investment, and the Financial System The Market for Loanable Funds Saving, Investment, and the Financial System:  Learning Objective 9.2 Crowding out A decline in private expenditures as a result of an increase in government purchases. Explaining Movements in Saving, Investment, and Interest Rates Saving, Investment, and the Financial System The Market for Loanable Funds Saving, Investment, and the Financial System:  Learning Objective 9.2 Explaining Movements in Saving, Investment, and Interest Rates FIGURE 9.5 The Effect of a Budget Deficit on the Market for Loanable Funds Saving, Investment, and the Financial System The Market for Loanable Funds Slide33:  How Would a Consumption Tax Affect Saving, Investment, the Interest Rate, and Economic Growth? Learning Objective 9.2 The Business Cycle:  Learning Objective 9.3 Business cycle Alternating periods of economic expansion and economic recession. The Business Cycle Expansion phase Business cycle peak Recession phase Business cycle trough The Business Cycle:  The Business Cycle Learning Objective 9.3 FIGURE 9.6 The Business Cycle Some Basic Business Cycle Definitions Slide36:  Learning Objective 9.3 Who Decides if the US Economy Is in a Recession? Not by any government agency, but by a private research group—the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) They use a broader definition than the “media” definition of a recession: two consecutive quarters of declining real GDP Slide37:  Learning Objective 9.3 Who Decides if the US Economy Is in a Recession? Slide38:  From a trough to a peak, the economy goes through: a. The recession phase of the business cycle. b. The expansion phase of the business cycle. c. A contraction. d. A depression. The Business Cycle:  The Business Cycle Learning Objective 9.3 FIGURE 9.7 The Effect of the Business Cycle on Boeing What Happens during a Business Cycle? The Effect of the Business Cycle on Boeing The Business Cycle:  The Business Cycle Learning Objective 9.3 What Happens during a Business Cycle? The Effect of the Business Cycle on Boeing Durables are affected more by the business cycle than are non-durables The effects of the recession on Boeing are much more dramatic and long-lived than the effects on the economy as a whole The Business Cycle:  Learning Objective 9.3 FIGURE 9.8 The Effect of the 2001 Recession on the Inflation Rate The Effect of the Business Cycle on the Inflation Rate The Business Cycle What Happens during a Business Cycle? The Business Cycle:  Learning Objective 9.3 FIGURE 9.9 The Impact of Recessions on the Inflation Rate The Effect of the Business Cycle on the Inflation Rate Don’t Let This Happen to YOU! Don’t Confuse the Price Level and the Inflation Rate The Business Cycle What Happens during a Business Cycle? The Business Cycle:  Learning Objective 9.3 FIGURE 9.10 How the Recession of 2001 Affected the Unemployment Rate The Effect of the Business Cycle on the Unemployment Rate The Business Cycle What Happens during a Business Cycle? The Business Cycle:  Learning Objective 9.3 FIGURE 9.11 The Impact of Recessions on the Unemployment Rate The Effect of the Business Cycle on the Unemployment Rate The Business Cycle What Happens during a Business Cycle? Slide45:  Which types of goods are more likely to be affected by the business cycle? a. Durable goods. b. Nondurable goods. c. Services. d. Both durable and nondurable goods equally. The Business Cycle:  Learning Objective 9.3 FIGURE 9.12 Fluctuations in Real GDP, 1900–2006 Recessions Have Been Milder and the Economy Has Been More Stable Since 1950 The Business Cycle What Happens during a Business Cycle? The Business Cycle:  Learning Objective 9.3 Recessions Have Been Milder and the Economy Has Been More Stable Since 1950 Table 9-1 The Business Cycle Has Become Milder The Business Cycle What Happens during a Business Cycle? The “Great Moderation” The Business Cycle:  Learning Objective 9.3 • 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. The Business Cycle Why Is the Economy More Stable? The Business Cycle:  Learning Objective 9.3 Employment Act of 1946 (USA): the federal government committed to “foster and promote … conditions under which there will be afforded useful employment to those able, willing, and seeking to work; and to promote maximum employment, production, and purchasing power.” (Hubbard and O’Brien, 2008, p. 301) The Business Cycle Why Is the Economy More Stable? Slide50:  An Inside LOOK China’s Airlines Are Failing to Translate Rapid Growth into Profits Chinese Aviation: On a Wing and a Prayer Slide51:  An Inside LOOK China’s Airlines Are Failing to Translate Rapid Growth into Profits Chinese Aviation: On a Wing and a Prayer (continued) Slide52:  Business cycle Capital Crowding out Financial intermediaries Financial markets Financial system Labor productivity Long-run economic growth Market for loanable funds Potential GDP

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