Economic Growth and the Financial system

Economic Growth, the Financial System, and Business Cycles

Business cycle: Alternating periods of economic expansion and economic recession.

Long-Run Economic GrowthLong-run economic growth: The process by which rising productivity increases the average standard of living.

The Growth in Real GDP per Capita, 1900–2008

Measured in 2005 dollars, real GDP per capital in the United States grew from about $5,600 in 1900 to about $43,700 in 2008. The average American in the year 2008 could buy nearly eight times as many goods and services as the average American in the year 1900..

The Connection between Economic Prosperity and Health

Long-Run Economic Growth

rateGrowth 70 double toyears ofNumber

Calculating Growth Rates and the Rule of 70

What Determines the Rate of Long-Run Growth?

Labor productivity: The quantity of goods and services that can be produced by one worker or by one hour of work.

Long-Run Economic Growth

What Determines the Rate of Long-Run Growth?

Capital Manufactured goods that are used to produce other goods and services.

Increases in Capital per Hour Worked

Technological Change

Economic growth depends more on technological change than on increases in capital per hour worked.

Technological change is an increase in the quantity of output firms can produce using a given quantity of inputs.

Saving, Investment, and the Financial System

Financial system: The system of financial markets and financial intermediaries through which firms acquire funds from households.

Saving, Investment, and the Financial System

The Macroeconomics of Saving and Investment

Y = C + I + G + NX

Y = C + I + G

I = Y − C − G

privateS = Y + TR − C − T

publicS = T − G − TR

S = (Y + TR − C − T) + (T − G − TR)

S = Y − C − G

S = I

privateS publicSS = +

or

or

So, we can conclude that total saving must equal total investment:

Saving, Investment, and the Financial System

The Macroeconomics of Saving and Investment

Market for loanable funds The interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged.

Demand and Supply in the Loanable Funds Market

The Market for Loanable Funds

The Market for Loanable Funds

Equilibrium in Loanable Funds

Explaining Movements in Saving, Investment, and Interest Rates

An Increase in the Demand for Loanable Funds

The Market for Loanable Funds

The Effect of a Budget Deficit on the Market for Loanable Funds

Crowding out: A decline in private expenditures as a result of an increase in government purchases.

- Who sets the interest rate? Central Banks?- Kind of.

ANY good tradesman will tell you the importance of the bits of a house

that you cannot see. Never mind the new kitchen: what about the

rafters, the wiring and the pipes? So it is with financial markets. The

stockmarkets are the most visible: as they soar or swoon, the headline-

writers get to work. The money markets, however, are the plumbing of

the system. Normally, they function efficiently and unseen, allowing

investment institutions, companies and banks to lend and borrow

trillions of dollars for up to a year at a time. They are only noticed when

they go wrong. And, like plumbing, when they do get blocked, they

make an almighty stink.(Source: Blocked Pipes, The Economist, Oct 2nd 2008)

Business cycle

The Business Cycle

The Business CycleSome Basic Business Cycle Definitions

The Effect of the Business Cycle on Boeing

The Effect of the Business Cycle on Boeing

What Happens during a Business Cycle?

The Effect of the Business Cycle on the Inflation Rate

What Happens during a Business Cycle?

The Impact of Recessions on the Inflation Rate

The Effect of the Business Cycle on the Inflation Rate

Don’t Let This Happen to YOU!Don’t Confuse the Price Level and the Inflation Rate

What Happens during a Business Cycle?

How the Recession of 2001 Affected the Unemployment Rate

The Effect of the Business Cycle on the Unemployment Rate

What Happens during a Business Cycle?

How Recessions Affect the Unemployment Rate

The Effect of the Business Cycle on the Unemployment Rate

What Happens during a Business Cycle?

The Impact of Recessions on the Unemployment Rate

The Effect of the Business Cycle on the Unemployment Rate

What Happens during a Business Cycle?

Fluctuations in Real GDP, 1900–2008

Fluctuations in real GDP were greater before 1950 than they have been since 1950.

Recessions Have Been Milder and the Economy Has Been More Stable Since 1950

What Happens during a Business Cycle?

• The increasing importance of services and the declining importance of goods.

• The establishment of unemployment insurance and other government transfer programs that provide funds to the unemployed.

• Active federal government policies to stabilize the economy.

Why Is the Economy More Stable?