McConnell Economics, Chapter 8

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Jin+Guice
Posts: 708
Joined: Sat Jun 30, 2018 8:15 am

McConnell Economics, Chapter 8

Post by Jin+Guice »

Discussion of the curriculum McConnell, Brue, Flynn Economics text, chapter 8.

Jin+Guice
Posts: 708
Joined: Sat Jun 30, 2018 8:15 am

Re: McConnell Economics, Chapter 8

Post by Jin+Guice »

Chapter 8 deals with growth which is measured as an increase in gdp per capita. The "business cycle" consists of a peak, recession, trough and recovery. During each phase of the cycle, certain businesses do better than others.

The text specifies three types of unemployment: frictional, structural and cyclical. Frictional unemployment occurs when people change jobs.

Structural unemployment occurs when consumer demand changes reducing the demand for some types of labor. Cyclical unemployment is caused by a non-structural decrease in demand. It's likely to occur during the recession part of the business cycle.

Frictional and structural unemployment are considered "natural" by economists. Frictional and structural unemployment do not cause a reduction in output, but cyclical unemployment does. During cyclical unemployment in-demand labor is not able to find employment, while this is not true for structural or frictional unemployment. Economists therefore define the "natural" rate of unemployment as frictional plus structural unemployment and are willing to accept that these forms of unemployment will always exist.

Economists measure the difference between potential GDP and actual GDP and call it the GDP gap. According to economist Arthur Okun, every 1% of "actual" (i.e. non-natural) unemployment increases the GDP gap is ~2%.

Inflation is a general rise in the prices across the economy. It is often formally defined as a percentage change in the CPI. Modern industrial nations usually seek to have a certain low range of inflation, as the economy grows. The text defines two different types of inflation, demand-pull and cost-push. Demand-pull inflation happens when consumers demand more goods than the economy can produce causing prices to rise. Cost-push occur when input prices for goods rise (labor, raw materials) causing supplies to need to charge more to cover costs. In reality it is often difficult for economists to differentiate between the two based on observation alone. Inflation benefits debtors while hurting creditors and savers who hold paper assets that do not rise with inflation.

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