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Chapter_8_Lecture_Notes-inflation - Chapter 8 LECTURE NOTES...

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Chapter 8 - LECTURE NOTES I. Introduction: This chapter provides an introductory look at trends of real GDP growth and the macroeconomic problems of the business cycle, unemployment and inflation. II. Economic Growth-how to increase the economy’s productive capacity over time. A. Two definitions of economics growth are given. 1. The increase in real GDP, which occurs over a period of time. 2. 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. B. 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. C. 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.) D. Main sources of growth are increasing inputs or increasing productivity of existing inputs. 1. About one-third of U.S. growth comes from more inputs. 2. About two-thirds comes from increased productivity. E. Growth Record of the United States (Table 8-1) is impressive. 1. 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) 2. 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. a. Growth doesn’t measure quality improvements. b. Growth doesn’t measure increased leisure time. c. Growth doesn’t take into account adverse effects on environment or human security. d. 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). III. Overview of the Business Cycle A. Historical record: 1. The United States’ impressive long-run economic growth has been interrupted by periods of instability. 2. 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).
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B. Four phases of the business cycle are identified over a several-year period. (See Figure 8-1) 1. A peak is when business activity reaches a temporary maximum with full employment and near-capacity output.
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Chapter_8_Lecture_Notes-inflation - Chapter 8 LECTURE NOTES...

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