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© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.

Fernando & Yvonn Quijano

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Chapter

9

Economic Growth, the Financial System, and Business Cycles

© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e. 2 of 33

Growth and the Business Cycle at Boeing

9.1 Discuss the importance of long-run economic growth.

9.2 Discuss the role of the financial system in facilitating long-run economic growth.

9.3 Explain what happens during a business cycle.

Learning Objectives

In this chapter, we will provide an overview of long-run growth and the business cycle and discuss their importance for individual firms, for consumers, and for the economy as a whole.

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Economic Growth, the Financial System, and Business Cycles

Business cycle Alternating periods of economic expansion and economic recession.

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Long-Run Economic Growth

Learning Objective 9.1

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

FIGURE 9.1

The Growth in Real GDP per Capita, 1900–2006

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The Connection between Economic Prosperity and Health

Makingthe

Connection

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Calculating Growth Rates and the Rule of 70

rateGrowth

70 double toyears ofNumber

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.

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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.

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Solved Problem 9-1The Role of Technological Change in Growth


Between 1960 and 1995, real GDP per capita in Singapore grew at an average annual rate of 6.2 percent. This very rapid growth rate results in the level of real GDP per capita doubling about every 11.5 years.

In 1995, Alywn Young of the University of Chicago published an article in which he argued that Singapore’s growth depended more on increases in capital per hour worked, increases in the labor force participation rate, and the transfer of workers from agricultural to nonagricultural jobs than on technological change.

If Young’s analysis was correct, predict what was likely to happen to Singapore’s growth rate in the years after 1995.

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What Explains Rapid Economic Growth in Botswana?

Makingthe

Connection

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Potential Real GDP

Potential GDP The level of GDP attained when all firms are producing at capacity.

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Potential Real GDP

FIGURE 9.2

Actual and Potential Real GDP

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Saving, Investment, and the Financial System


An Overview of the Financial System

Financial markets Markets where financial securities, such as stocks and bonds, are bought and sold.

Financial intermediaries Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers.

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

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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

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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:


The Macroeconomics of Saving and Investment

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The Market for Loanable Funds

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

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Demand and Supply in the Loanable Funds Market

FIGURE 9.3




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Ebenezer Scrooge: Accidental Promoter of Economic Growth?

Makingthe

Connection

Who was better for economic growth: Scrooge the saver or Scrooge the spender?

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Explaining Movements in Saving, Investment, and Interest Rates

FIGURE 9.4

An Increase in the Demand for Loanable Funds



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




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FIGURE 9.5

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



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Solved Problem 9-2How Would a Consumption Tax Affect Saving, Investment, the Interest Rate, and Economic Growth?


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The Business Cycle


FIGURE 9.6

The Business Cycle

Some Basic Business Cycle Definitions

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Who Decides if the Economy Is in a Recession?

Makingthe

Connection

PEAK TROUGHLENGTH OF RECESSION

July 1953 May 1954 10 months

August 1957 April 1958 8 months

April 1960 February 1961 10 months

December 1969 November 1970 11 months

November 1973 March 1975 16 months

January 1980 July 1980 6 months

July 1981 November 1982 16 months

July 1990 March 1991 8 months

March 2001 November 2001 8 months

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The Business Cycle


FIGURE 9.7

The Effect of the Business Cycle on Boeing

What Happens during a Business Cycle?

The Effect of the Business Cycle on Boeing

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FIGURE 9.8

The Effect of the 2001

Recession on the Inflation Rate

The Effect of the Business Cycle on the Inflation Rate

The Business Cycle


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FIGURE 9.9

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

The Business Cycle


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FIGURE 9.10

How the Recession of 2001 Affected the Unemployment Rate

The Effect of the Business Cycle on the Unemployment Rate

The Business Cycle


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FIGURE 9.11

The Impact of Recessions on the Unemployment Rate

The Effect of the Business Cycle on the Unemployment Rate

The Business Cycle


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FIGURE 9.12

Fluctuations in Real GDP, 1900–2006

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

The Business Cycle


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

Table 9-1

The Business Cycle Has Become Milder

PERIODAVERAGE LENGTH OF EXPANSIONS

AVERAGE LENGTH OF RECESSIONS

1870-1900 26 months 26 months



The Business Cycle


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• 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.

The Business Cycle

Why Is the Economy More Stable?

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An Inside LOOK China’s Airlines Are Failing to Translate Rapid Growth into Profits

Chinese Aviation: On a Wing and a Prayer

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An Inside LOOK China’s Airlines Are Failing to Translate Rapid Growth into Profits

Chinese Aviation: On a Wing and a Prayer (continued)

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Business cycle

Capital

Crowding out

Financial intermediaries

Financial markets

Financial system

Labor productivity

Long-run economic growth

Market for loanable funds

Potential GDP

K e y T e r m s

chap9pp

Documents

profits chinese aviation

translate rapid growth

run economic growth

run growth

economic growth

loanable funds

inflation rate

learning objective 9