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Hubbard Macro Sg 09

Hubbard Macro Sg 09

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Chapter
9 (21)
 
Economic Growth, theFinancial System, andBusiness Cycles
Chapter Summary 
In this chapter, you learn about three topics: long-term economic growth, the financial markets thatchannel funds from savers to borrowers, and the properties of business cycles. The
business cycle
refersto alternating periods of economic expansion and economic recession. Financial markets (like the stock and bond markets) and financial intermediaries (like banks, credit unions, pension funds, and insurancecompanies) together comprise the
financial system
.
Long-run economic growth
is the process by whichrising productivity increases the standard of living of the typical person. Because of economic growth, thetypical American today can buy almost eight times as much as the typical American of 1900. Long-rungrowth is measured by increases in real GDP per capita. Increases in real GDP per capita depend onincreases in labor productivity.
Labor productivity
is the quantity of goods and services that can be produced by one worker or by one hour of work. Economists believe two key factors determine labor  productivity—the quantity of capital per hour worked and the level of technology. Economists oftendiscuss economic growth in terms of growth in
potential GDP
, which is the level of GDP attained whenall firms are producing at capacity.
Learning Objectives
When you finish this chapter, you should be able to:1.
 
Discuss the importance of long-run economic growth.
The
business cycle
is a period of economicexpansion followed by a period of economic recession. The expansion phase of a business cycle endswith a business cycle peak, followed by a period of contraction or recession.
Long-run economicgrowth
is the process by which rising productivity increases the standard of living of the typical person. Because of economic growth, the typical American today can buy more than eight times asmuch as the typical American of 1900. Long-run growth is measured by increases in real GDP per capita (or per person). Increases in real GDP per capita depend on increases in labor productivity.
Labor productivity
is the quantity of goods and services that can be produced by one worker or byone hour of work. Economists believe two key factors determine labor productivity: the quantity of capital per hour worked and the level of technology. Therefore, economic growth occurs if thequantity of capital per hour worked increases and if technological change occurs.2.
 
Discuss the role of the financial system in facilitating long-run economic growth.
Firms acquirefunds from households, either directly through financial markets—such as the stock and bond
 
CHAPTER 9 (21)
|
 
Economic Growth, the Financial System, and Business Cycles
 
226
markets—or indirectly through financial intermediaries such as banks. Financial markets andfinancial intermediaries together comprise the
financial system
. The funds available to firms comefrom saving.
 
There are two categories of saving in the economy: private saving by households and public saving by the government. In the model of the
market for loanable funds
, the interaction of  borrowers and lenders determines the market interest rate and the quantity of loanable fundsexchanged.3.
 
Explain what happens during a business cycle.
A business cycle consists of alternating periods of economic expansion and contraction. During the expansion phase of a business cycle, production,employment, and income are increasing. The period of expansion ends with a business cycle peak.Following the business cycle peak, production, employment, and income decline during the recession phase of the cycle. The recession comes to an end with a business cycle trough, after which another  period of expansion begins. The inflation rate usually rises near the end of a business cycle expansionand then falls during a recession. The unemployment rate declines during the latter part of expansionand increases during a recession. The unemployment rate often continues to increase even after anexpansion has begun. Economists have so far not been successful in discovering a method to predictwhen recessions will begin and end. Recessions are difficult to predict because they do not have onlyone cause.
Chapter Review 
Chapter Opener: Growth and the Business Cycle at Boeing (pages 274-275)
Established in 1916, Boeing has grown into one of the world’s largest designers and manufacturers of commercial jetliners, military aircraft, satellites, missiles, and defense systems. Like many other companies, Boeing’s experiences have mirrored that of the U.S. economy. Because they are a producer of durable goods, their sales have been vulnerable to the business cycle
.
When looking at output over longer  periods of time, both real GDP and real GDP per capita rise. However, over shorter periods of time, realGDP and real GDP per capita do not grow smoothly and the economy will experience the periodicincreases and decreases in production called
business cycles
. During the recession of 2001, Boeingexperienced a decline in business due to a fall in the demand for travel. Five years later in 2006, Boeingexperienced quite the opposite: a record-breaking year with orders for airliners soaring as a result of economic growth in the United States, Europe, and Asia. Boeing is just one of many examples of acompany affected by the business cycle.
Helpful Study Hint
Read
 An Inside Look 
at the end of the chapter to learn how China’sdomestic aviation market is struggling to earn a profit for three reasonsassociated with long-run growth:1. The Chinese airline industry’s recent large investment in new planes.2. The Chinese government’s failure to liberalize markets for air travel.3. A shortage of human capital, including pilots.The
 Economics in
 
YOUR Life!
feature asks you to consider what helps the economy more: when you spend money on goods andservices, or when you save money instead? Keep the question in mind asyou read the chapter. The authors will answer the question at the end of the chapter.
 
CHAPTER 9 (21)
|
 
Economic Growth, the Financial System, and Business Cycles
 
2279.1 LEARNING
OBJECTIVE
9.1 Long-Run Economic Growth (pages 276-283)
Learning Objective 1
Discuss the importance of long-run economic growth.
Long-term economic growth
increases living standards. It is the reason why the standard of living for the average American today is so different from that of the 1900’s. The best measure for the standard of living is real GDP per person or real GDP per capita. Real per capita GDP (in 2000 dollars) has grownfrom $4,900 in 1900 to $38,000 in 2006. Today, the average American can purchase about eight times asmany goods and services compared to 1900. Economists use growth in real GDP per capita over time as akey measure of the long term performance of the economy.In the following formula for calculating the growth rate in real GDP (or real GDP per capita),
refers tothe current year and
1 refers to the previous year:
11
Real GDPReal GDPReal GDP growth rate100Real GDP
t
= ×
 Real GDP was $11,049 billion in 2005 and $11,415 billion in 2006. So the growth rate in real GDP for 2006 was:
1002005GDPReal2005GDPReal2006GDPReal 2006rategrowthGDPReal
×=
 
3.3%100 billion$11,048 billion$11,049 billion$11,415  
=×=
 To find real GDP growth rates over longer periods of time, such as 10 years, we can average the growthrates for each year.
Helpful Study Hint
For a discussion of the correlation between economic prosperity andnational health, read
 Making the Connection
:
The Connection Between Economic Prosperity and Health
. As noted by Nobel-Prize winner Robert Fogel, there is a close connection between economic conditionsand a society’s health. Economic growth fosters better nutrition andimprovements in health care, as well as improving the quality of lifethrough the introduction of technological improvements that allowworkers to have more leisure time.Increases in real GDP and real GDP per capita are caused by increases in
labor productivity
(output per hours worked). Economists believe that there are two key factors that determine labor productivity: thequantity of the capital per hour worked and the level of technology. Recall that
capital
refers tomanufactured goods that are used to produce other goods or services. As the capital stock per hour increases, so does worker productivity.

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