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Part III—Macroeconomics

Section I—Macroeconomic Problems

Chapter 22—Economic Growth, Business Cycles, Unemployment, and Inflation

• The 4 main macroeconomic problems are

1. Growth
2. Business Cycles
3. Unemployment
4. Inflation

I. Two Frameworks: The Long Run and the Short Run

• Issues of growth are generally considered in a long-run framework, which focuses on supply

• Business cycles are generally considered in the short-run framework, which focuses on demand

• Unemployment and inflation fall within both frameworks

II. Growth

• Real Gross Domestic Product (real GDP)—the market value of final goods and services produced in an
economy, stated in the prices of a given year

• U.S. economic output has grown at an annual 2.5 to 3.5 percent rate, known as the secular growth trend

• Per Capita Real Output—is real GDP divided by the total population

A. Global Experiences With Growth

• The growth trend we now take for granted started only at the end of the 18th century

B. The Benefits and Costs of Growth

• Politically, growth, or predictions of growth, allow governments to avoid hard questions.

III. Business Cycles

• A Business Cycle is the upward or downward movement of economic activity that occurs around the
growth trend

• The two groups of macroeconomists are:

1. Keynesians (who generally favor activist policies)

2. Classicals (who generally favor laissez-faire or nonactivist act)

• Expansions are the part of the business cycle above the long-term trend

• Contractions are the part of the business cycle below the long-term trend

B. The Phases of the Business Cycle

• The four phases of the business cycle are:

1. The peak (a boom is a very high peak)
2. The downturn
3. The trough
4. The upturn
• A Recession is generally considered to be a decline in real output that persists for more than two
consecutive quarters of a year.

• A Depression is a large recession

• Expansion—an upturn that last at least two consecutive quarter of a year

C. Why Do Business Cycles Occur

• If prolonged contractions are a type of cold the economy catches, the Great Depression of the 1930’s was
a double pneumonia

• The leading indicators for a recession include:

1. Average workweek for production workers in manufacturing
2. Average weekly claim for unemployment insurance
3. Manufacturers’ new orders for consumer goods and materials
4. Vendor performance, measured as a percentage of companies reporting slower delivery
from suppliers
5. Index of consumer expectations
6. New orders for nondefense capital goods
7. Number of new building permits issued for private housing units
8. Stock prices—500 common stocks
9. Interest rate speed—10-year government bond less federal funds rate
10. Money supply, M2

IV. Unemployment

• The Unemployment Rate is a percentage of people in the economy who are willing and able to work but
who are not working

• Cyclical Unemployment (unemployment resulting from fluctuations in economic activity)

• Structural Unemployment (unemployment caused by the institutional structure of an economy or by

economic restructuring making some skills obsolete)

A. Unemployment As A Social Problem

• Early capitalism so the solution to unemployment to be the fear of hunger

B. Unemployment As A Government’s Problem

• As capitalism evolved, capitalist societies no longer saw the fear of hunger as an acceptable answer to

• The Target Rate of Unemployment is the lowest sustainable rate of unemployment that policymakers
believe is achievable given existing demographics and the economy’s institutional structure

C. Why The Target Rate Of Unemployment Changed

• Lower inflation rates seemed incompatible with a low unemployment rate

• Different unemployment levels is the different demographic sectors

• Our economies changing social and institutional structure

D. Whose Responsibility Is Unemployment?

• Classical economists take the position that, generally, individuals should be responsible for finding jobs
• Keynesian economists tend to say that society owes people jobs commensurate with their training or past
job experience

E. How Is Unemployment Measured?

• Labor Force—those people in an economy who are willing and able to work
• The unemployment rate is measured by dividing the number of unemployed individuals by the number of
people in the civilian labor force and multiplying by 100

• The Labor Force Participation Rate measures the labor force as a percentage of the total population at
least 16 years old

• Employment Rate—the number of people who are working as a percentage of the labor force

• Despite problems, the unemployment rates statistics still give us usefully information about changes in
the economy

F. Unemployment And Potential Output

• The capacity utilization rate—the rate at which factories and machines are operating compared to the
maximum rate at which they could be used

• Potential Output is the output that would materialize at the target rate of unemployment and the target
rate of capacity utilization

• Okun’s Rule Of Thumb states that a 1% point change in the unemployment rate will be associated with
a 2% change in output in the opposite direction

G. Microeconomic Categories of Unemployment

• Some microeconomic categories of unemployment are reasons for unemployment, demographic

unemployment, duration of unemployment, and unemployment by industry

V. Inflation

• Inflation is a continual rise in the price level

A. Measuring Of Inflation

• A Price Index is a number that summarizes what happens to a weighted composite of prices of a
selection of goods (often called a market basket of goods)

• The GDP Deflator (gross domestic product deflator) is an index of the price level of aggregate output, or
the average price of components in total output (or GDP), relative to a base year

• The Consumer Price Index (CPI) measures the prices of a fixed basket of consumer goods, weighted
according to each component’s share of an average consumer’s expenditures

• The Personal Consumption Expenditure (PCE) Deflator is a measure of prices of goods that
consumers buy that allow yearly changes in the basket of goods that reflect annual consumer purchasing

• The Product Price Index (PPI) is an index of prices that measure average change in the selling prices
received by domestic producers of goods and services over time.

B. Real And Nominal Concepts

• Real Output is the total amount of goods and services produced, adjusted for price-level changes

• Nominal Output is the total amount of goods and services measured at current prices

• The “real” amount is the nominal amount divided by the price index. It is the nominal output adjusted
for inflation

C. Expected And Unexpected Inflation

• Expected Inflation is inflation people expect to occur

• Unexpected Inflation is inflation that surprises people

D. Costs Of Inflation

• While inflation may not make the nation poorer, it does cause income to be redistributed, and it can
reduce the amount of information that prices are supposed to convey

• Hyperinflation is when inflation hits triple digits—100% or more per year

VI. Conclusion

• The three topics of the section were growth, unemployment, and inflation

• These 3 concepts center on trade-offs between inflation on one hand, and growth and unemployment on
the other

• Policymakers must make trade-offs to try and balance inflation with growth and unemployment