 |  Macroeconomics, 9/e Campbell R. McConnell,
University of Nebraska, Lincoln
Stanley L. Brue,
Pacific Lutheran University
Thomas P. Barbiero,
Ryerson University
Introduction to Economic Growth and Fluctuations
Chapter HighlightsCHAPTER 7- Economic growth may be defined as either (a) an increase of real GDP over time or (b) an increase in real
GDP per capita over time. Growth lessens the burden of scarcity and provides increases in real GDP that can
be used to resolve socioeconomic problems. Since World War II, real GDP growth in Canada has been
slightly more than 4 percent annually; real GDP per capita has grown at about a 2 percent annual rate.
- Canada and other industrial economies have gone through periods of fluctuations in real GDP, employment,
and the price level. Although they have certain phases in common—peak, recession, trough, recovery—business
cycles vary greatly in duration and in intensity.
- Although economists explain the business cycle in terms of such causal factors as major innovations, political
events, and money creation, they generally agree that the level of total spending is the immediate determinant
of real output and employment.
- The business cycle affects all sectors of the economy, though in varying ways and degrees. The cycle has
greater effects on output and employment in the capital goods and durable consumer goods industries than
in the services and non-durable goods industries.
- Economists distinguish between frictional, structural, and cyclical unemployment. The full-employment or
natural rate of unemployment, which is made up of frictional and structural unemployment, is currently
between 6 and 7 percent. The presence of part-time and discouraged workers makes it difficult to measure
unemployment accurately.
- The economic cost of unemployment, as measured by the GDP gap, consists of the goods and services forgone
by society when its resources are involuntarily idle. Okun's law suggests that every one percentage
point increase in unemployment above the natural rate causes an additional 2 percent GDP gap.
- Unemployment rates and inflation rates vary widely globally. Unemployment rates differ because nations
have different natural rates of unemployment and often are in different phases of their business cycles. Inflation
and unemployment rates in Canada recently have been in the lower range compared with rates in other
industrial nations.
- Economists discern both demand-pull and cost-push (supply-side) inflation. Demand-pull inflation results
from an excess of total spending relative to the economy's capacity to produce. The main source of costpush
inflation is abrupt and rapid increases in the prices of key resources. These supply shocks push up perunit
production costs and ultimately the prices of consumer goods.
- Unanticipated inflation arbitrarily redistributes real income at the expense of fixed-income receivers, creditors,
and savers. If inflation is anticipated, individuals and businesses may be able to take steps to lessen
or eliminate adverse redistribution effects.
- When inflation is anticipated, lenders add an inflation premium to the interest rate charged on loans.
The nominal interest rate thus reflects the real interest rate plus the inflation premium (the expected rate of
inflation).
- Cost-push inflation reduces real output and employment. Proponents of zero inflation argue that even mild
demand-pull inflation (1–3 percent) reduces the economy's real output. Other economists say that mild inflation
may be a necessary by-product of the high and growing spending that produces high levels of output,
full employment, and economic growth. Hyperinflation, usually associated with injudicious government policy,
may undermine the monetary system and cause severe declines in real output.
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2002 McGraw-Hill Higher Education