lecture5 - ECONOMICS 100B Professor Steven Wood 2/2/10...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
ECONOMICS 100B Professor Steven Wood 2/2/10 Lecture 5 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. ANNOUNCEMENTS I posted an announcement on bSpace that the dates of the exams have been changed. Problem set #1 will be due on Tuesday, February 9 and it has already been posted. You need to word process your answers, print it out, and turn it in. I will post problem set #2 at the beginning of next week. Since last Thursday we have had a lot of economic news. One of the notable reports is that the economy grew 5.7% at an annualized rate for the fourth quarter of last year. Often when we hear about economic growth in the US we see a big number such as 5.7%, but we need to keep in mind that it is an annualized rate. Growth rates in Europe are reported at a lower number, about ¼ of this amount. Sometimes it is important to understand how we derive this figure. It is not clear how sustainable this level of growth is. We still have high unemployment rate, as we saw with Okun’s Law. If we want unemployment rate to decrease, it will require strong economic growth. Employers remain cautious about hiring. One of the things we saw was that output grew very strongly, but employment actually fell in the fourth quarter. If we look at Okun’s Law and try to apply it to the fourth quarter, we will see a huge deviation from predicted and measured values. Unemployment rate should show an inverse relationship with economic growth. Okun’s Law is generally a statistical relationship, meaning that it does not hold exactly, and it should be applied over a longer period of time rather than to a quarter. If you want economic growth to continue at rapid rate, you should plan on decreasing the unemployment rate. The reason that we are worried about the sustainability of economic growth has to do with these headlines: “growth of wages, benefits hits low”. We are seeing very weak labor markets and very high unemployment rates, so wage gains are not very robust. This along with the lost wealth, declining home values, low stock markets, and relatively tight credit, seems to be keeping consumer spending in check. Let’s look at the 2009 Q4 GDP. Consumer spending grew 2% this quarter and represents 70% of GDP, so its contribution to GDP growth is only 1.4%. Its contribution was not very significant. On the other hand, inventory investment accounts for about 0.3% of overall GDP but added 3.4% to GDP growth. This will not happen on sustained basis. We can also look at this data in a slightly different way. If we subtracted inventory investment from GDP
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 6

lecture5 - ECONOMICS 100B Professor Steven Wood 2/2/10...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online