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Lecture notes: Economic fluctuations and unemployment
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Unit 13: EconomicFluctuations and
Unemployment
Growth and Fluctuations
Why should we care about economic fluctuations or business cycles?
Impact on unemployment → income → people’s wellbeing
Gross Domestic Product
Gross Domestic Product (GDP) is the total value of all final goods and services produced
within the national boundaries of a country in a particular period.
- Calculating quarterly and yearly
- Falls for 2 quarters → in recession
Nominal GDP is the value of final goods and services produced in a given year when valued
at the prices of that year (current prices).
Real GDP is the value of final goods and services produced in a given year when valued at
the prices of a reference base year (constant prices).
- Interest in quantity
Nominal and real GDP
To calculate economic growth, real GDP values are required to ensure we measure the
amount by which output has changed due to production increases rather than the amount
by which it has changed due to price increases.
GDP 2016 = R2 356
GDP 2017 = R3 457
Growth in the GDP
When GDP increases, either: Growth =
(3 457−2 356)
×100
- More goods and services are produced or 2 356
- Higher prices were paid
Economic growth is the percentage change in real GDP between two periods.
Real GDP∈current year−Real GDP∈ previous year
Real GDP growthrate= ×100
Real GDP∈ previous year
*To calculate economic growth, real GDP values are required to ensure we measure the amount
by which output has changed due to production increases rather than the amount by which
output has changed to production increases rather than the amount by which it has changed
due to price increases.
, GDP per capita is the average annual income of the people in the economy it is calculated
by dividing GDP by the total population
GDP
Total population
Economic growth is the annual rate of increase in total production in the economy
measured as real GDP.
- Positive economic growth occurs when the rate of economic growth increases faster
than the population growth rate, or when there is an increase in per capita GDP.
The business cycle
Economic growth is not a smooth process.
Business cycle: Alternating periods of positive and negative growth rates.
The business cycle has four phases: troughs, an upswing (expansion/boom), a peak and
downswing.
Recession: Extended period when output is declining or below its potential level. Negative
economic growth for two consecutive quarters.
NB
The business cycle affects labour
market outcomes.
Output growth and changes in unemployment
Okun’s Law
Okun’s Law: a strong and stable (empirically observed) relationship between unemployment
and GDP growth (losses in a country’s production).
Changes in the rate of GDP growth are negatively correlated with the unemployment rate.
NB
Increase in production → Increase in demand for labour → Decrease in unemployment
Output falls → Unemployment rises → Well-being falls
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