Macro Chapter 7

Presentation 1- Economic Growth

Consumer Price Index (CPI)

• CPI reports inflation each month and year• Reports the price of a basket of 300 consumer

goods a typical urban consumer would buy• Includes foreign goods

CPIPrice of the Most Recent Market

Basket in the Particular Year

Price of the Same MarketBasket in 1982-1984

= x 100

GDP per Capita

• Divide GDP by the size of the pop.• US GDP 2010 was 14.3 Trillion• Population of US was 310 million• Per Capita = 14.3 trillion/310 million• = $46,860• US #13 (1. Luxembourg 2. Norway 3. Qatar4. Switzerland 5. UAE)

Economic Growth

1. An increase in real GDP over some time period

2. An increase in real GDP per capita occurring over some period of time

Main Sources of Growth

• Society can grow through:• 1. Increasing inputs of resources• 2. Increasing the productivity of the

resources used• Productivity- real output per unit of

input

Rule of 70

• Approx number of years required to double GDP

• = 70/annual percentage rate of growth• Ex- If China’s growth rate is 8%, it will

take their economy about 9 years to double GDP

• = 70/8= appx. 9

The Business Cycle

•

Downturn

• Recession / Contraction– 6 months or more of decline in total output, income

and unemployment– The period of time during which aggregate economic activity is

falling

• If the recession is particularly severe, it becomes a depression.

• During a recession– Many sectors of the economy experience declining sales and

production– Workers are laid off or forced to work only part-time

• Peak: the point in which output starts to decline

Upturn

• After reaching the low point of the contraction (the trough), aggregate economic activity begins to increase.

• The period of time during which aggregate economic activity grows is an expansion or a boom.

• The high point of the expansion is called a peak.

Demand-Pull Inflation

• When resources are fully employed, the business sector cannot respond to excess demand by increasing output

• Excess demand causes an increase in cost• “too much spending chasing too few goods”

Cost-Push Inflation

• Rising per-unit costs of production lower profits and force the prices up

• Supply Shock- abrupt increases in the cost of raw materials

• Ex. Skyrocketing prices of oil in 1973-74 and 1979-80

• Per unit cost= total input cost/# of units of output

Hyperinflation

• An extremely high and fast inflation rate• Ex- Germany in post-WW1• Serbia in 1994 the inflation rate went up 1.56

million %

COLA

• Cost of Living Adjustment• An increase in benefits as inflation occurs• EX- Retirement of Firemen increases by 3%

each to keep up with the increased cost of living

Who is Hurt by Inflation?

• 1. Fixed Income Receivers- not adjusted for cost-of-living

• 2. Savers- real purchasing power of a saved account deteriorates

• 3. Creditors- lenders are repaid with money that has less purchasing power

Who is Not Hurt by Inflation?

• 1. Flexible income receivers- cost-of-living adjustments

• 2. Debtors- pay back loans with less valuable money