LECTURE 8

Economic Growth and Instability

Economic Growth

Economic growth is defined as either: (a) An increase in real Gross Domestic

Product (GDP) occurring over some time period. (b) An increase in real GDP per capita

occurring over some time period. Real GDP per capita = Real GDP

Population

Unemployment: Types and Costs

The labor force excludes: 1. People less than 16 years old. 2. People who are institutionalized. 3. Adults who are not employed and not

seeking for work. From the labor force, there are 2 group

divisions: (a) Employed – those who are working. (b) Unemployed – those who are not working but actively seeking for a job.

Types of Unemployment

Frictional Unemployment Workers who are “between jobs.”

Structural Unemployment Changes over time in consumer demand and

in technology alter the “structure” of the total demand for labor, both occupationally and geographically.

Cyclical Unemployment This is caused by a decline in total spending

and is likely to occur in the recession phase of a business cycle.

Full Employment

The economy is “full employed” when it is experiencing only frictional and structural unemployment. That is, full employment occurs when there is no cyclical unemployment.

GDP Gap

When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost.

GDP Gap = Actual GDP – Potential GDP The GDP gap can be: (a) Positive (Actual GDP > Potential GDP) (b) Negative (Actual GDP < Potential

GDP)

GDP (RM billions)

GDP Gap (positive)

GDP Gap (negative)

Potential GDP

Actual GDP

Year

Inflation

Inflation is a rise in the general level of prices. When inflation occurs, each RM of income will buy fewer goods and services than before.

Inflation reduces “purchasing power” of money.

Measurement of Inflation

The main measure of inflation is the Consumer Price Index (CPI).

The CPI reports the price of a “market basket” of some 300 consumer goods and services that presumably are purchased by a typical urban consumer.

CPI = Price basket of most recent market basket in the particular year

x 100 Price of the same market basket

in the base year

Rate of Inflation

Rate of inflation is found by comparing, in percentage terms, that year’s index with the index in the previous year.

Rate of inflation = Inflation(this year) – Inflation(previous year) x 100

Inflation(previous year)

Excess demand bids up Rising prices in terms of

prices. factors that raise per-unit

production costs at each

level of spending.

Types of Inflation

Demand-Pull Inflation Cost-Push Inflation

Who are Hurt by Inflation?

Fixed-Income Receivers Savers Creditors

Who are Unaffected or Helped by Inflation?

Flexible-Income Receivers Debtors