Chapter 7 includes four topics.  Two we will spend little time with and two we will really focus on.

1.    Economic growth and productivity

2.    Business cycles

3.    Unemployment

4.    Inflation

Economic growth:  An increase in the economy's capacity to produce.   It results from a change in one or both of two factors:   

An increase in the quantity or quality of resources (factors)

Improvement in production technology which increases productivity.

   Productivity = real output per unit of resource input, i.e.  number of  widgets produced per man hour of labor.

Business cycles are those irregular but recurrent changes in economic activity (real GDP).  While there has long been debate about what causes these "ups and downs," most economists agree that the immediate cause of these cyclical changes in the level of real output is changes in aggregate spending.  The two types of spending that vary most over the cycles are business expenditures on capital goods and consumer spending on durable goods.

   The phases of a business cycle are peak, recession, trough, and recovery.  The duration of any business cycle is measured from peak to peak.

Unemployment:  The official Unemployment Rate is measured monthly and reported on the first Friday of each month.  It is the percentage of the civilian labor force that is unemployed.

                                                # persons officially unemployed

   Unemployment Rate  =         ________________________   X 100

                                                # persons in Labor force

The labor force excludes full time students, retired persons, active duty military and those persons institutionalized.  It includes all those, 16 years of age and older, who are either employed or unemployed but actively looking for work.  This is often referred to as the "looking for work" test for inclusion in the labor force.  The Unemployment Rate is calculated monthly and announced on the first Friday of each month by the Bureau of Labor Statistics.  The rate is calculated from a monthly survey of about 60,000 households.

The official rate may understate the actual extent of unemployment for two (2) reasons:

   (1)    part-time workers   

   (2)    discouraged workers

Economists usually divide unemployed persons into three (3) categories or groups:

   (1)    Frictional

    (2)    Structural 

    (3)    Cyclical

 The natural rate of unemployment is the full-employment unemployment rate.  It may also be viewed as the sum of frictional and structural unemployment.  Currently, the natural rate for the U.S. economy is 4-5%.

The economic cost of any unemployment above the natural rate is the lost output and lost income.  Economists measure that cost using the GDP Gap.  The GDP Gap is the difference between Potential GDP (what we could have produced at full-employment) and Actual GDP.

        GDP Gap  =  Actual Real GDP  -  Potential Real GDP

Inflation:   Inflation is defined as an increase in the price level ( the average price of goods and services).  It is measured as the percentage change in the Consumer Price Index.

   Inflation Rate₂₀₀₅  =   

Theories of Inflation:

  Demand-pull inflation results from excessive demand for final goods and services.  This excess demand "pulls" the average price up. Economists often refer to this as "too much money chasing too few goods".

   Cost-push inflation results from an increase in the price of a resource that significantly impacts the cost of producing a wide range of goods and services.  This decreases the total or aggregate supply of goods and "pushes" the average price up.

Who gets hurt? Who gets helped?

Real Income  = 

% Change in Real Income = % Change in Nominal Income - % Inflation

The general rule is that if one correctly anticipates the rate of inflation and has the market power to protect themselves, they need not be hurt by inflation.  So, who is hurt and who is helped when the price level rises?

   People on fixed income suffer most.  As prices rise, their real income falls.

   Savers lose.  As prices rise, the real value of accumulated savings falls.

   Creditors lose, when they do not correctly anticipate inflation. In most cases, if creditors correctly anticipate future inflation, they can increase the nominal rate of interest to protect the real value of loans.

   Debtors benefit when creditors do not correctly anticipate future inflation, because the dollars they pay back are worth less (have less real value or purchasing power) than the dollars they borrowed.  Unanticipated inflation arbitrarily redistributes purchasing power from creditors to debtors.

   Those whose real income is protected by automatic cost-of-living- adjustments (COLAs) generally are not hurt by inflation.

Practice Exercises

1.    A person's nominal income rises from $20,000 to $24,000, and the CPI increases from     100 to 108.      This person's real income will rise/fall by  12%

2.   Use the following data to calculate the Unemployment Rate.

    Full-time employed    -      80   

    Part-time employed    -     25

    Unemployed               -     15

    Discouraged workers  -       5

    CPI                            -  117.4

       Unemployment Rate =  12.5%.

3.    If the CPI was 184.6 in 2003 and 190.6 in 2004, the Inflation Rate for 2004 was

        approximately  3.3%.

4.   If  the Nominal Interest Rate  is 6% and the Real Rate of Interest is 3%, the inflation premium charged by lenders will be  3%.   

5.    If the Unemployment Rate is 7.6% and there are 8.4 million people officially unemployed,

       the Laborforce  =  110.5M.

EXTRA CREDIT      EXTRA CREDIT     EXTRA CREDIT   

For credit, this assignment must be submitted at the beginning of class on July 8, 2009.  Absolutely no exceptions!!  You are to find the answers to the following questions at the official website of the Bureau of Labor Statistics, www.bls.gov. 

1.    What was the average Unemployment Rate for the U.S. for the month of June, 2009?

2.    How many people were in the Labor force during June, 2009 ?

3.    How many "part time workers" were there in June, 2009 ?

4.    How many "discouraged workers" were there in June 2009?

The answers are to be printed (typewritten) in complete sentences.  Your submission must include a signed statement indicating that you completed the assignment without outside assistance.  Stapled to this sheet must be the pages from the website where you found the answers, with the answers highlighted.  If your submission does not comply exactly with these requirements, I will not accept.