Quiz 26: Economic Growth


The trend rate of growth for the country over this ten year period is simply the average growth per year. We are given that the country grew at 5, 3, 4, -1, -2, 2, 3, 4, 6, anD3 percent over a ten year period. Thus, we take the average of these 10 growth rates and find that the economy grew at an average of 2.7 percent img per year. If the trend growth rate is at 2.7 percent, the years that clearly demonstrate an expansionary phase of the business cycle will be the years where growth was above 2.7 percent. We see first that from yearS1 to 3, the growth rate was 5, 3, and 4 percent. This is clearly higher than the 2.7 percent trend and thus the economy was in an expansionary phase during that period. We also see that in years 7-10, the growth rate waS3, 4, 6, anD3 percent. This also shows a period of expansion in the economy. Since the trend rate iS2.7 percent, so, the years that clearly demonstrate a recessionary phase of the business cycle will be the years where growth was below 2.7 percent. We see that in years 4-6, the growth rate was -1, -2, anD2 percent. This shows a period of growth that is below the trend of 2.7 percent per year. Thus, the economy was in a recessionary phase between years 4-6.

The four phases of the business cycle are peak, recession, trough, and expansion. There are significant variations in the duration for which business cycles last. Seasonal variations and long-run trends complicate measurement of the business cycle because an interaction between the two produces the business cycles with significant variations in their duration and intensity. The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing consumer nondurables because the spending on the former goods could be postponed but it is difficult to cut back on the latter. Moreover, in recession, the firms may postpone the investments or may use the unused capacity

The unemployment rate is the percentage of the labor force that is unemployed. Note that the unemployment rate is a percentage of the labor force and not the total population. Thus, we can define the unemployment rate as: img The labor force does not include any part of the population that is under 1st years of age or institutionalized, nor does it count the population that is not working or looking for work (i.e. those who are retired, stay at home parents, etc). We are given that the total population of this country is 500, and there are 120 people who are under 16 or institutionalized. Right away, we know that these 120 people will not count toward the labor force. Also, we are given that the number of people who are not in the labor force iS150. Therefore, a total of 270 people img of the 500 people in the country will not be counted in the labor force. This leaves a total of 230 who are in the labor force. Of the 230 people in the labor force, there are 23 people who are unemployed. We count 10 people who are part-time workers looking for full-time jobs as fully employed because this way the Bureau of Labor Statistics choose to classify all part-time workers. Thus, the unemployment rate in this economy is: img

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