Chapter 13

Economic Instability

Three Goals:

1. Economic Growth

2. Price Stability

3. Full Employment

The Business Cycle (changes in GDP)

Peaks

Recessions

Troughs

Expansions

Trend Line

Causes of Cycles

Investment

Innovation

Interest Rates

External Factors

Causes of the Great Depression

Poverty gap

Banking crisis

Easy credit

Global slowdown

Tariffs

Leading Economic Indicators

Inflation

Price Indices

Consumer Price Index

Producer Price Index

GDP Deflator

Market Basket

Base Year

Price Index

       Deflation (worse than the alternative)

Causes of Inflation:

Demand Pull

Deficit Spending

Cost Push

Wage-Price Spiral

Monetary Growth (helicopter theory)

Consequences of Inflation:

Lower purchasing power

Spending patterns change

Difficulty in planning

Helped: Hurt:

Borrowers Lenders

COLAs Fixed Incomes

Savers

Unemployment Rate (percent)

Unemployed    =    __(looking for a job)___     x 100

labor force             (# employed + # looking)

Unemployment rate is inaccurate:

Excludes discouraged workers

Equal treatment of "fully" and “underemployed”

Types of Unemployment:

1. Frictional – between jobs (unavoidable)

2. Seasonal – work only part of year (unavoidable)

3. Structural – mismatch between job openings and labor skills

(unavoidable without education and training)

4. Cyclical – caused by business cycle (the focus of policy makers)

Natural rate of unemployment – the “unavoidable” unemployment

Full employment – cyclical unemployment is zero

The Cost of Instability:

GDP Gap (Okun’s Law)

Misery Index

Uncertainty

Political instability

Crime and Family issues

As Good As It Gets (formula for the perfect economy)

Gross Domestic Product = 3 – 5% real growth

       Unemployment Rate = 4 – 5% seasonally adjusted rate

       Inflation = 1 – 2% annual increase