What’s in This Chapter?

Now that we know what GDP is and how it is measured, we are ready to analyze GDP changes. Studying business fluctuations teaches us that during most years in politically stable, mixed or capitalist economies, real GDP rises. Advances in technology, low rates of inflation and interest rates, reasonably low taxes and regulations that encourage hard work and innovation, and a solid financial and monetary system all contribute to long-term economic growth.

This unit will look at reasons why real GDP decreases at times. In addition, we will take an in-depth look at the causes of the 2008/2009 economic downfall.

Later in the unit we will discuss what economists mean by “full employment”. Keynesian economists believe that the economy cannot perform better than a rate of between 5 and 6% unemployment. Some economists question this though. During the 1980s and 1990s in the United States, unemployment was frequently close to, and sometimes even below, 4%. At the same time, inflation rates remained low. This suggests that an economy can grow at a rapid pace, without causing inflation. John Maynard Keynes predicted that if unemployment drops below 5% in an expanding economy, it would cause inflation. However, while prices generally rise at a faster pace in an expanding economy, we will learn in a later unit that inflation is a long-run phenomenon that is caused by an increasing money supply, not a rapidly expanding economy.

At the end of this unit, we will take a closer look at unemployment rates in countries around the world and in the various states of the United States, and we will study unemployment rates of various demographic and ethnic groups in the United States.