PRINCIPLE
OF ECONOMIC
6 EDITION
KARL CASE,
RAY FAIR
PRENTICE
HALL BUSINESS PUBLISHING
COPY RIGHT
2002
Long-Run Output and Productivity
Growth
•
An ideal economy is one in which there
is:
•
rapid growth of output per worker,
•
low unemployment, and
•
low inflation.
Long-Run Output and Productivity
Growth
•
The average growth rate of output in the
economy since 1900 has been about 3.4 percent per year.
•
An area of economics called “growth
theory” is concerned with the question of what determines this rate.
Long-Run Output and Productivity
Growth
•
There are a number of ways to increase
output. An economy can:
•
Add more workers
•
Add more machines
•
Increase the length of the workweek
•
Increase the quality of the workers
•
Increase the quality of the machines
Long-Run Output and Productivity
Growth
•
Output per worker hour is called “labor
productivity.”
•
For the 1952-2000 period, labor
productivity exhibits:
•
an upward trend, and
•
fairly sizable fluctuations around that
trend.
•
The growth rate was much higher in the
1950s and 1960s than it has been since the early 1970s.
Long-Run Output and Productivity
Growth
•
Part of the reason for the upward trend
in productivity is an increase in the amount of capital per worker. With more capital per worker, more output can
be produced per year.
•
The other reason is that the quality of
labor and capital has been increasing.
•
A harder question to answer is why has
the quality of labor and capital grown more slowly since the early 1970s.
•
The growth of the Internet, which brings
about an increase in the quality of capital, should lead to a “new age” of
productivity growth.
Recessions,
Depressions, and Unemployment
•
The business cycle
describes the periodic ups and downs in the economy, or deviations of
output and employment away from the
long-run trend.
•
A recession
is roughly a period in which real GDP declines for at least two consecutive
quarters. It is marked by falling output
and rising unemployment.
•
A depression is a
prolonged and deep recession. The
precise definitions of prolonged and deep are debatable.
•
Capacity utilization rates,
which show the percentage of factory capacity being used in production, are one
indicator of recession.
Defining and Measuring
Unemployment
•
The most frequently discussed symptom of
a recession is unemployment.
•
An employed person is any
person 16 years old or older
1. who
works for pay, either for someone else or in his or her own business for 1 or
more hours per week,
2. who
works without pay for 15 or more hours per week in a family enterprise, or
3. who
has a job but has been temporarily absent, with our without pay.
Defining and Measuring
Unemployment
•
An unemployed person is a
person 16 years old or older who:
1. is not working,
2. is
available for work, and
3. has
made specific efforts to find work during the previous 4 weeks.
•
A person who is not looking for work,
either because he or she does not want a job or has given up looking, is not
in the labor force.
Discouraged-Worker
Effects
•
The discouraged-worker effect
lowers the unemployment rate. Discouraged
workers are people who want to work but cannot find jobs, grow discouraged, and
stop looking for work, thus dropping out of the ranks of the unemployed and the
labor force.
Types of Unemployment
•
Frictional unemployment
is the portion of unemployment that is due to the normal working of the labor
market; used to denote short-run job/skill matching problems.
•
Structural unemployment
is the portion of unemployment that is due to changes in the structure of the
economy that result in a significant loss of jobs in certain industries.
•
Cyclical unemployment
is the increase in unemployment that occurs during recessions and depressions.
•
The natural rate of unemployment
is the unemployment that occurs as a normal part of the functioning of the
economy. Sometimes taken as the sum of
frictional unemployment and structural unemployment.
The Benefits of
Recessions
•
Recessions may help to reduce inflation.
•
Some argue that recessions may increase
efficiency by driving the least efficient firms in the economy out of business
and forcing surviving firms to trim waste and manage their resources better.
•
Also, a recession leads to a decrease in
the demand for imports, which improves a nation’s balance of payments.
Inflation
•
Inflation
is an increase in the overall price level.
•
Deflation
is a decrease in the overall price level.
•
Sustained inflation
is an increase in the overall price level that continues over a significant
period.
Price Indexes
•
Price indexes
are used to measure overall price levels.
The price index that pertains to all goods and services in the economy
is the GDP price index.
•
The consumer price index (CPI)
is a price index computed each month by the Bureau of Labor Statistics using a
bundle that is meant to represent the “market basket” purchased monthly by the
typical urban consumer.
•
The consumer price index (CPI)
is the most popular fixed-weight price index.
•
Other popular price indexes are producer
price indexes (PPIs).
These are indexes of prices that producers receive for products at all
stages in the production process. The
three main categories are finished goods, intermediate
materials, and crude materials.
The Costs of Inflation
•
People’s income increases during
inflations, when most prices, including input prices, tend to rise together.
•
Inflation changes the distribution of
income. People living on fixed incomes
are particularly hurt by inflation.
•
The benefits of many retired workers,
including social security, are fully indexed to inflation. When prices rise, benefits rise.
•
The poor have not fared so well. Welfare benefits are not indexed and have not
kept pace with inflation.
•
Unanticipated inflation—an
inflation that takes people by surprise—can hurt creditors.
•
Inflation that is higher than expected
benefits debtors; inflation that is lower than expected benefits creditors.
•
The real interest rate is
the difference between the interest rate on a loan and the inflation rate.
•
Inflation creates administrative costs
and inefficiencies. Without inflation,
time could be used more efficiently.
•
The opportunity cost of holding cash is
high during inflations. People therefore
hold less cash and need to stop at the bank more often.
•
People are not fully informed about
price changes and may make mistakes that lead to a misallocation of resources.
•
The recessions of 1974 to 1975 and 1980
to 1982 were the price we had to pay to stop inflation. Stopping inflation is costly.
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