XI. Economic growth

• Economic growth is defined as a real increase in the gross domestic product (GDP) of a country occurring over a period of time.

• Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation.

• Economic growth rate is the pace at which economic growth increases during a given interval.

• Positive impacts of economic growth on national economy:

increase of profitability

rising shareholders’ and high banking confidence

launching new, innovative products

fundamentals reinforcement

erosion of price sensitivity

• Negative implications of economic growth on national economy:

- too much business optimism

- the probable build-up of inefficiencies in business

- breeding a more complacent culture

XII. Business Cycle

• Business cycle or trade cycle is the periodic but irregular up-and-down movements in economic activity. It is measured by fluctuations in real GDP and other macroeconomic variables such as employment, industrial productivity, and interest rates.

• Main periods of a business cycle are: a peak, a contraction, a trough, an expansion.

• Peak is the phase of the business cycle in which real GDP reaches its maximum after rising during a recovery.

• Recession is a downturn in the business cycle during which real GDP declines.

• Recovery is an upturn in the business cycle during which real GDP rises; also called an expansion.

• Trough is the phase of the business cycle in which real GDP reaches its minimum after falling during a recession.

• Theories of a business cycle:

Internal (or endogenous) theories consider it to be self-generating, regular, and indefinitely repeating. The business cycle results from people infecting one another with optimistic or pessimistic expectations. When economic times are good or when people feel good about the future, they spend, and run up debts and vice-versa.

External (or exogenous) theories, on the contrary, look for causes outside economic activity: scientific advances, natural disasters, elections or political shocks, demographic changes, and so on.

XIII. Unemployment and its costs

• Unemployment is the number of adult workers who are not employed and are seeking jobs.

• The labour force is the total number of employed and unemployed workers. The unemployment rate is unemployment expressed as a percentage of the labour force.

• Economic costs of unemployment:

loss of output and the loss of income

loss of tax revenue

an increase in government expenditure

Personal costs of unemployment:

lowering the value of a person’s human capital

an increase in the amount of crime

loss of self-esteem that is human dignity

• Full employment is the situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates. Full employment therefore is the rate of unemployment that exists without cyclical unemployment.