Download Economic Fluctuations, Unemployment, and Inflation

Fluctuations in
Economic
Output,
Unemployment,
and Inflation
The Business Cycle
• The phases of the business cycle are:
•
•
•
•
Recovery or Expansion,
Peak or Boom (shaded green)
Recession or Contraction
trough or Depression (blue shaded areas).
Real GDP
Business
peak
Trend line
Business
peak
Depression
or trough
Depression
or trough
Time
The Business Cycle
• Cycles are irregular
•Annual growth
rate of real GDP
•8
•Long-run growth rate
(approx. 3%)
•6
•4
•2
•0
•- 2
•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005 •2009
•Source: Economic Report of the President, various issues.
• Ups and downs characterize business activity.
• There has been an upward trend in real GDP in the
United States and other industrial nations.
The Business Cycle
• Cycles are irregular
•Share of labor
force unemployed
•10
•Actual rate of
unemployment
•8
•6
•4
•2
•Natural rate of
unemployment
•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005 •2009
• Ups and downs characterize business activity.
• There has been an upward trend in real GDP in the
United States and other industrial nations.
Actual and Potential GDP
• Potential output :
Maximum sustainable output level consistent with the
economy’s resources,
(on the production possibilities curve.)
• Actual and potential output will be equal when the
economy is at full employment.
Actual & Potential GDP, 1960 - 2009
•Real GDP
(billions of 2000 $)
•12,000
•2001
recession
•10,000
•8,000
•Potential
GDP
•Actual
GDP
•6,000
•4,000
•2,000
•2008-09
recession
•1990-91
recession
•1960
recession
•1970
recession
•1982
recession
•1980
recession
•1974-75
recession
•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005 •2010
Note the gap (shaded area) between actual and
potential GDP during periods of recession.
Economic Fluctuations
and the Labor Market
1. Employed
– a person (16 years old or over) who is
• working for pay at least one hour per week,
• self employed, or,
• working 15 hours or more each week without
pay in a family-operated enterprise.
2. Unemployed
– a person not currently employed who is either
• actively seeking a job, or,
• waiting to begin or return to a job.
3. Civilian Labor force
– civilians (16 years and older) who are either
employed or unemployed.
4. Not in the labor force
– persons (16 years and older) who are neither
employed
nor unemployed (like retirees,
4 Labor Market
Classifications
students, homemakers, or disabled persons).
Economic Fluctuations
and the Labor Market
• The non-institutional civilian adult population
is grouped into two broad categories:
• Persons not in the labor force, and,
• persons in the labor force.
Labor Force
Participation Rate
=
# in the Labor Force
Civilian population (16+)
Recall the Labor Force = Employed + Unemployed
• To be classified as unemployed, one must
either be on layoff or actively seeking work.
Rate of
Unemployment
=
# Unemployed
# in the Labor Force
Unemployment and
Measurement Problems
• The definition of unemployed involves some
subjectivity.
• Some argue the employment/population ratio
is a better indicator of job availability than the
unemployment rate.
Employment /
Population Ratio
=
# employed
Civilian population (16+)
U.S. Population, Employment,
and Unemployment: 2001
211.9 million
Civilian population
16 and over
141.8 million
70.1 million
Civilian
labor force
Not in the
labor force
• Household workers
• Students
• Retirees
• Disabled
135.1 million
Labor Force
Participation Rate
Employment /
Population Ratio
Rate of
Unemployment
Employed
Unemployed
• Employees
• Self-employed
workers
• New entrants
• Reentrants
• Lost last job
• Quit last job
• Laid off
=
Civilian labor force
Civilian population (16+)
=
66.9%
=
Number employed
Civilian population (16+)
=
63.8%
=
4.8%
=
6.7 million
Number unemployed
Civilian labor force
U.S. Population, Employment,
and Unemployment: 2004
223.4 million
Civilian population
16 and over
147.4 million
76.0 million
Civilian
labor force
Not in the
labor force
• Household workers
• Students
• Retirees
• Disabled
139.3 million
Labor Force
Participation Rate
Employment /
Population Ratio
Rate of
Unemployment
=
Civilian labor force
Civilian population (16+)
=
Number employed
Civilian population (16+)
=
Number unemployed
Civilian labor force
8.1 million
Employed
Unemployed
• Employees
• Self-employed
workers
• New entrants
• Reentrants
• Lost last job
• Quit last job
• Laid off
=
147.4
223.4
=
66.0%
=
139.3
223.4
=
62.3%
=
8.1
147.4
=
5.5%
• U.S. Population, Employment,
• and Unemployment: 2006
•228.6 million
•77.4 million
•Civilian population
•16 and over
•Civilian
•labor force
•Not in the
•labor force
• Household workers
• Students
• Retirees
• Disabled
•Employed
•144.4 million
•Rate of
Unemployment
• Employees
•
• Self-employed
•workers
•Civilian labor force
=•Civilian
•=
population (16+)
•151.8
•228.6
• =•66.4%
•Number employed
•=
•= •Civilian
population (16+)
•144.4
•228.6
•= •63.2%
•Labor Force •
Participation Rate
•Employment /
Population Ratio
•151.8 million
•=
•Number unemployed
•Civilian labor force
• =
•7.0
•
•151.8
= •4.6%
•7.0
million
•Unemployed
• New entrants
• Reentrants
• Lost last job
• Quit last job
• Laid off
•2001
Labor Force
Participation Rate
Employment /
Population Ratio
Rate of
Unemployment
=
Civilian labor force
Civilian population (16+)
=
Number employed
Civilian population (16+)
=
Labor Force
Participation Rate
•2003
Employment /
Population Ratio
Rate of
Unemployment
=
Civilian labor force
Civilian population (16+)
=
Number employed
Civilian population (16+)
•Employment /
Population Ratio
•Rate of
Unemployment
=
66.9%
=
135.1
211.9
=
63.8%
=
6.7
141.8
=
4.8%
=
147.4
223.4
=
66.0%
=
139.3
223.4
=
62.3%
=
8.1
147.4
=
5.5%
•Civilian labor force
=•Civilian
•=
population (16+)
•151.8
•228.6
• =•66.4%
•Number employed
•=
•= •Civilian
population (16+)
•144.4
•228.6
•= •63.2%
=
•Labor Force •
Participation Rate
•2006
Number unemployed
Civilian labor force
=
141.8
211.9
•=
Number unemployed
Civilian labor force
•Number unemployed
•Civilian labor force
• =
•7.0
•
•151.8
= •4.6%
Composition of the Unemployed by
Reason
• There are various reasons why
persons were unemployed in 2006.
• A little less than two-fifths (39.1%)
of the unemployed were dismissed
from their previous jobs.
• 43.6% of the unemployed were
either new entrants or reentrants
into the labor force.
•Source: www.bls.gov.
•Job
•leavers
•12.5 %
•New
entrants
9.5%
•Reentrants
34.1%
•Dismissed from
•previous jobs
39.1%
•On
•layoff
•13.3%
Classify each of the following as (a) employed,
(b) unemployed, or (c) not in the labor force:
a. a person who is not working but applied for a job at WalMart last week
b. a person working part-time who is searching diligently
for a full-time job
c. an auto worker vacationing in Florida during a layoff at a
General Motors plant who expects to be recalled in a
couple of weeks
d. a 17-year-old who works six hours per week as a route
person for the local newspaper
e. homemaker working 70 hours a week preparing meals
and performing other household services
f. a college student who spends between 50 and 60 hours
per week attending classes and studying
g. a retired Social Security recipient
•a
•b
•c
2. The figures below (in millions) are for the U.S.
during the year 2006.
Population (age 16 and over) 299.8
Civilian pop. (age 16 and over) 228.6
Employed
144.4
Unemployed
7.0
a. Calculate the unemployment rate.
•7.0
•7.0 • 144.4
b. Calculate the labor force participation rate.
•7.0 • 144.4
•228.6
c. Calculate the employment/ population ratio
• 144.4
•228.6
1. Frictional
2. Structural
3. Cyclical
4. Seasonal
between jobs
job replaced
less business
temporary job
Deals with which
type?
1. Frictional?
2. Structural?
3. Cyclical?
• 1. A student who decides at midsemester to devote the rest of the term
to studying quits her part-time job
• 2. A graphic artist who is out of work
because a computer now does her job.
• 3. A waiter who quits his job and is
applying for the same type of work in a
restaurant where morale is better.
• 4. The son of a local farmer who works
20-hour weeks without pay on the farm
while waiting for a job at a nearby
factory.
• 5. A travel agent who is laid off
because the economy is in a slump and
vacation travel is at a minimum.
• 6. A plumber who works 5 hours per
week for his church (on a paid basis) until
he can get a full-time job
At full employment there
will still be some:
1. Frictional
2. Structural
but no Cyclical
actual unemployment
may only get as low as
4–5%
• Inflation is an increase in the general level of prices.
• The Rate of Inflation is calculated as:
Inflation
rate =
This year’s
price index
-
Last year’s
price index
Last year’s
price index
* 100
The Inflation Rate, 1956-2009
•Inflation rate
•15
•10
•1973-1981 average
inflation rate = 9.2 %
•1956-1965 average
inflation rate = 1.6 %
•1983-2009 average
inflation rate = 3.1 %
•5
•0
•1956•1960 •1965 •1970 •1975 •1980 •1985 •1990 •1995 •2000 •2005 •2010
• Between 1956 and 1965, the general price level
increased at an average annual rate of only 1.3%.
• In contrast, the inflation rate averaged 9.2% from 1973
to 1981, reaching double-digits during several years.
• Since 1982, the average rate of inflation has been lower
(3.1% from 1983-2009) and more stable.
There are 2 Kinds of Inflation
1. Anticipated inflation:
A widely expected change in the price level.
2. Unanticipated inflation:
An increase in the price level that comes as
a surprise, at least for most individuals.
1. Hyperinflation
2. Money loses value
1. Savings
Lose value
2. Loans Are easier to repay
3. Wealth
May increase
• Nearly all economists believe
that rapid expansion in the
money supply is the primary
cause of inflation.
1. Demand-Pull
2. Cost-Push
1. Demand-Pull
Price
S1
New price
and output
P2
Orig. price
and output
P1
D2(increase in demand)
D1
Q1 Q2
Quantity
buyers demands greater than
producers supply
2. Cost Push
Price
S2(new equilibrium)
S1(initial equilibrium)
P2
P1
D
Q2
Q1
Quantity/time
sellers’ costs are passed
on to buyers
• a slowing of the
inflation rate
• the aim of policies
• usually phrased as “slowing
inflation”
•http://abcnews.go.com/Video/playerIndex?id=6484348
• 4. How would an unanticipated 5 percent jump in
inflation impact the wealth of:
• a. Joe, who has a 30-year home mortgage at a fixed
interest rate
• b. The McCoy's, who hold most of their wealth in
long-term fixed yield bonds
• c. Hanna, a retiree drawing a pension of a fixed
dollar amount
• d. Jose, a heavily indebted small-business owner.
• e. Mike, the owner of an apartment complex with
substantial debt at a fixed interest rate
• f. Tina, a worker whose wages are determined by a
3-year union contract ratified three months ago
•1. During this century, the growth rate of real GDP in
the United States has averaged approximately
6%
•a. 1 % •b. 3 % •c.
•d. 10 %
•2. Economists use the term “business cycle” to refer to
•a.
•b.
•c.
•d.
the growth of small businesses into major corporations.
changes in products that occur from improved technology.
fluctuations in the level of real output and employment.
periods of increases and decreases in the rate of inflation.
•3. The labor force participation rate of women in the
United States has been
a.
b.
•c.
•d.
increasing for several decades.
decreasing for the past several decades after increasing
dramatically in the early 1900s.
approximately constant during the last three decades.
decreasing since the early 1900s.
•4.
Suppose there was a country with an adult (age 16 and over)
population of 1,000, of which 100 were unemployed and 700 were
employed. Which of the following is true?
•a.
The employment population ratio is 87.5 percent.
•b.
The labor force participation rate is 70 percent.
•c.
The unemployment rate is 12.5 percent.
•d.
There are 700 individuals in this country’s labor force.
•5.
The type of unemployment caused by changes in the business
cycle is
•b. natural
•c. frictional
•a. cyclical
•d. structural.
•6.
Frictional unemployment is the result of
•a.
not enough jobs for everyone to be employed.
•b.
unemployed workers’ skills not matching those needed for the
available jobs.
•c.
a decline in the demand for labor, such as during a recession.
•d.
imperfect information and temporary periods of
unemployment while workers are changing jobs.
•7.
Which of the following individuals would be considered
unemployed by the official government definition?
• George, who returned to graduate school after failing to find a
a.
job
• the last four months
b.
• Gwen, a medical student, who is still in college and is not working
c. Morgan, who is employed part-time but desires a full-time job
•
•d. Ralph, an auto worker vacationing in Florida during a layoff at
a General Motors plant.
•8.
Suppose that the consumer price index at year-end 2004 was
140 and by year-end 2005 had risen to 150. What was the inflation
rate during 2005?
•a.
7.1 %
•b.
10 %
•c.
14.2 % •d.
50 %
•9.
Which of the following is true?
•a. Anticipated inflation is an increase in the price level that comes
as a surprise, at least to most individuals
•b. Unanticipated inflation is a change in the price level that is
widely expected.
•c. Decision makers are generally able to anticipate slow steady
rates of inflation with a fairly high degree of accuracy.
•d. Inflation will increase the prices of goods and services that
households purchase but not the wage rates of workers