You are on page 1of 17

Nonmarket transactions

Leisure
Improved product quality
The under ground economy
GDP and environment
Composition and distribution of output
Per capita output
Noneconomic sources of wellbeing

Economic Growth : economists define and measure economic growth


1. An increase in real GDP occurring over some time period.
2. an increase in real GDP per capita occurring over some time period.
. Arithmetic of Growth: The mathematical approximation called the
rule of 70 that tells us the number of years required to double the GDP.
.Approximate number of years required to double real GDP= 70/
annual percentage rate of growth.
.Main Sources of Growth
1. By increasing its input resources
2. By increasing the productivity of those resources

Productivity A measure of average output or real output per unit of


input.

The Business Cycle Recurring increases and


decreases in the level of economic activity over periods
of years; consists of peak, recession, trough, and
recovery phases.
Recession a period of declining real GDP, accompanied
by lower real income and higher unemployment.
Phases of Business Cycle
Peak At peak business activities reached a temporary
maximum, economy is at full employment, level of real
GDP is at or very close to economys capacity.
Recession a period of declining real GDP, accompanied
by lower real income and higher unemployment.
Trough in the trough of the recession or depression the
output and employment bottom out at their lowest

Unemployment The failure to use all available economic


resources to produce desired goods and services; the failure of
the economy to fully employed its labour force.
Types of Unemployment
1. Frictional Unemployment consists wait unemployment
and search unemployment for worker who are either
searching for jobs or waiting to take jobs in near future.
2. Structural unemployment, unemployment of workers
whose skills are not demanded by employers, who lack
sufficient skills to obtain employment or who can not easily
move to locations where jobs are available.
3. Cyclical Unemployment A type of unemployment caused by
insufficient total spending or insufficient aggregate demand.

Full Employment is something less than 100% employment of the


labour force. Economists say that the economy is fully employed when
it is experiencing only frictional and structural unemployment. That is full
employment occurs when there is no cyclical unemployment.
Natural Rate of Unemployment (NRU) when the number of jobs equal
to job seekers in the economy. At the NRU the economy is said to be
producing its potential output.
Economic Cost of Unemployment: Unemployment that is above the
natural rate involves great economic and social costs.
GDP Gap and Okuns Law indicates that for every 1% point by which
the actual unemployment rate exceeds the natural rate, a GDP gap of
about 2% occurs.
Example in 2014 unemployment rate was 7.4% and Natural Rate
Unemployment was 6% so 1.4% above the NRU. Now multiply 1.4 with
Okuns 2 indicates that 2014s GDP gap was 2.8%
GDP 2014 $ 3600 billion and economy sacrificed $ 176 billion

Year Actual GDP


Potential GDP
GDP gap
2005$5000 billion $5010 billion
-10 billion
20065500
5600
-100
20076000
6100
-100
20086500
6650
-150
20097000
7100
-100
20107500
7650
-150
20118000
8150
-150
20128500
8500
000
20139000
9020
-020
20149500
9700
-200
201510000
10250
-250

Inflation: inflation is a rise in the general level of prices. This


does not mean that all prices are rising.
Measuring of inflation the rate of inflation for any given year
(say 2014) is found by subtracting the preceding years (2013)
price index from that years (2014) index, dividing by the
preceding years index, and multiplying by 100 to express the
result as a percentage.
Suppose Price Index for 2014 is 172 and for 2013 is 166
Rate of Inflation = 2014-2013/2013 *100
Rate of Inflation = 172-166/166 * 100 =3.6

Types of Inflation
1. Demand-Pull Inflation: changes in the price level are caused by an
excess of total spending beyond the economys capacity to produce.
2. Cost-Push Inflation: the theory of cost-push inflation explains rising
prices in terms of factors that raise per-unit production cost at each
level of output.
Per-unit of cost = total input cost/units of output
.Nominal Income is the number of dollars / rupees received as a wages,
rent, interest or profits.
.Real Income is a measure of the amount of goods and services nominal
income can buy; it is the purchasing power of nominal income or income
adjusted for inflation.
.Real Income = nominal income / price index (in hundredths).
.Who is hurt by inflation?

i. Fixed Income Receivers people whose incomes are fixed see their real
incomes fall when inflation occurs.
ii. Savours Unanticipated inflation hurts savours. As prices rise, the real value,
or purchasing power of an accumulation of savings deteriorates (decreases).
iii. Creditors Unanticipated inflation harms creditors (lenders).
.Who is unaffected or helped by inflation
i.

Flexible Income Receivers People who have flexible incomes may


escapes inflations harm or even benefit from it.

ii. Debtors Unanticipated inflation benefits debtors (borrowers).


. Hyperinflation A vary rapid rise in the price level; an extremely high rate of
inflation.
. history of hyperinflation
After the second world war the prices in Hungary and Japan (1 followed by 27
zeros) and (3 followed by 22 zeros)

The German inflation of 1920s also was catastrophic. Prices


went up 5470 percent. In 1923 situation worsen; the German
price level rose 1,300,000,000,000 times.

You might also like