Understanding Business Cycles & Financial System's Role in Economic Growth - Prof. Michael, Study notes of Economics

Download Understanding Business Cycles & Financial System's Role in Economic Growth - Prof. Michael and more Study notes Economics in PDF only on Docsity! 1 Chapter 9 Economic Growth, the Financial System, and Business Cycles 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 2 Learning Objective 9.1
The Connection between Economic Prosperity and Health
The growth rate of Real GDP per capita is the best indicator of advances in the standard of living in a country
One way to judge how rapidly a variable is growing is to see how quickly it will double in size.
An approximation of the # of years to double is the Rule of 70.
e.g. Growth rate = 2%. How many years to double?
e.g. Growth rate = 5%. How many years to double?
Note that growth rates compound over time, so that small changes in growth rates have large effects in the long run. 5 3 Key Services to Savers/Borrowers Provided by the Financial System
Reduction of Risk
Liquidity
Providing Information Macroeconomics of Saving and Investment Recall our basic relationship between GDP and its components Remember that Y is both the total value of production and total In an “open economy” there is trade and borrowing/lending with other countries. In a “closed economy” there is no trade or borrowing/lending with others. Thus, Rearranging (to focus on investment spending) gives: 6 Define “T” as taxes paid to the government. Define “TR” as transfer payments from the government to households. e.g. Social security, unemployment payments, etc. Thus, we can write an expression for “private saving” (savings by households): SPRIVATE = Y + TR – C – T The government also engages in savings (“public saving”): SPUBLIC = T – G – TR Note that public saving can be >0, <0, or =0. T > G + TR (govt budget surplus) T < G + TR (govt budget deficit) T = G + TR (balanced budget) Thus, our “total saving” or “national saving” is: S = (Y + TR – C – T) + (T – G – TR) S = Y – C – G We’ve shown already that I = Y – C – G. Thus, for the macroeconomy as whole, S = I Remember that investment spending is an important component of long run growth. In a closed economy, what is the only way to increase our investment spending? save more! What insures that Saving = Investment? the financial system 7 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.
There are many financial markets in an economy. To keep things simple and clear, we assume that there is just one such market.
We assume that there is one interest rate which simultaneously represents the _________________ to saving and the ___________ of borrowing.
The demand for loanable funds comes from:
The supply of loanable funds comes from: Real Interest Rate Loanable Funds 10 Who decides if we are in a recession?
The National Bureau of Economic Research (NBER)
Their definition? “ A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.” PEAK TROUGH LENGTH 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 Learning Objective 9.3 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 11 Learning Objective 9.3 FIGURE 9.8 The Effect of the 2001 Recession on the Inflation Rate The Effect of the Business Cycle on the Inflation Rate What Happens during a Business Cycle? Learning Objective 9.3 FIGURE 9.9 The Impact of Recessions on the Inflation Rate The Effect of the Business Cycle on the Inflation Rate What Happens during a Business Cycle? 12 Learning Objective 9.3 FIGURE 9.10 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? Learning Objective 9.3 FIGURE 9.11 The Impact of Recessions on the Unemployment Rate The Effect of the Business Cycle on the Unemployment Rate What Happens during a Business Cycle?