Chapter+6+-+Growth+and+Cycles

Chapter+6+-+Growth+and+Cycles - Study Guide To Accompany...

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Chapter 6 Study Guide To Accompany Macroeconomics: Theory and Policy By B. Modjtahedit Prepared by T. J. McCarthy and B. Modjtahedi University of California, Davis
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Economic growth means increases in real GDP over a long period of time. Key Points Two sources of long-run economic growth 1. Increases in amounts of factors of production 2. Technological progress Calculating the growth rate between 2009 and 2010
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Key Points Potential GDP( Y P ): The total amount of goods and services that could be produced if all resources were fully employed. Business cycles: fluctuations of real GDP around potential GDP. A business cycle is defined as one recession followed by one expansion; or one expansion followed by one recession.
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Recession: a period over which real GDP is decreasing Expansion: a period over which real GDP is increasing Key Points Business cycles are recurrent (repeat a pattern of recession and expansion), but not periodic (each business cycle is different from others). GDP gap: the amount by which real GDP falls below potential GDP (Y P – Y) Benefit of growth: Increases in the standards of living (quantity and quality of goods and services consumed) Cost of growth: Potential irreversible damage to environment
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Unemployment rate (u): the percentage of people in the labor force who are unemployed. Labor force: all those who are willing and able to perform civilian work Excludes the military, the institutionalized population, and people under age 16 Employed: members of the labor force who have jobs Unemployed: members of the labor force who do not have jobs People who are either unable or unwilling to work (not in the labor force) are not considered unemployed Key Points
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Formula to calculate the unemployment rate Key Points
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Two types of unemployment: (1) Natural unemployment (u n ) Results from the normal functioning of the economy Naturally unemployed people will find jobs in time, as there are unfilled jobs available for them Two types of natural unemployment a. Frictional unemployment (due to job search time) b. Structural unemployment (due to changes in the types of jobs available) Key Points
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Two types of unemployment: (2) Cyclical unemployment (u c ) Results from business cycles Cyclically unemployed people will not find jobs, as there are no unfilled jobs available for them Positive when GDP is below potential GDP, negative when GDP is above potential GDP, and zero when GDP is equal to potential GDP Full employment: no cyclical unemployment (only natural unemployment) Key Points Costs of unemployment 1. Lost output (when cyclical unemployment is positive, GDP is below potential) 2. Lost productivity due to erosion of skills among unemployed workers 3. Social costs resulting from higher crime rates, social unrest, etc.
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Inflation rate (π) is the percentage change in the price level between two periods. Formula to calculate inflation rate between 2009 and 2010
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Chapter+6+-+Growth+and+Cycles - Study Guide To Accompany...

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