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Chapter 16 Business Cycles and Unemployment • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2002 South-Western College Publishing 1 What is a business cycle? Alternating periods of economic growth and contraction, which can be measured by changes in real GDP 2 What are the four phases of a business cycle? • Peak • Recession • Trough • Recovery 3 What is a peak? The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery 4 What is a recession? A downturn in the business cycle during which real GDP declines 5 What is a trough? The phase of the business cycle in which real GDP reaches its minimum after falling during a recession 6 What is a recovery? An upturn in the business cycle during which real GDP rises 7 Hypothetical Business Cycle Peak Real GDP per year Peak Trough Recession Recovery 8 How long before a downturn is a recession? The Department of Commerce considers a recession to be at least two consecutive quarters in which GDP declines 9 When is a downturn considered a depression? The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s 10 What is economic growth? An expansion in national output measured by the annual percentage increase in a nation’s real GDP 11 Why is economic growth one of our nation’s economic goals? It increases our standard of living it creates a bigger “economic pie” 12 What are the three types of economic indicators? • Leading • Coincident • Lagging 13 What is a leading indicator? Variables that change before real GDP changes 14 Leading Indicators •Changes in business and consumer credit •New orders for plant and equipment •New consumer goods orders •Unemployment claims •Delayed deliveries •Material prices •New business formed •Stock prices •Average workweek •Money supply •New building permits •Changes in inventories 15 What is a coincident indicator? Variables that change at the same time that real GDP changes 16 Coincident Indicators •Nonagricultural payrolls •Personal income •Industrial Production •Manufacturing and trade sales 17 What is a lagging indicator? Variables that change after real GDP changes 18 Lagging Indicators •Unemployment rate •Duration of unemployment rate •Labor cost per unit of output •Inventories to sales ratio •Outstanding commercial loans •Commercial credit to personal income ratio •Prime interest rate 19 What causes unemployment? When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory 20 Who is considered unemployed? Anyone who is 16 years of age and above who is actively seeking employment 21 Who is considered employed? Anyone who works at least one hour a week for pay or at least 15 hours per week as an unpaid worker in a family business 22 What is the unemployment rate? The percentage of people in the labor force who are without jobs and are actively seeking jobs 23 unemployed Unemployme = nt rate civilian labor force X 100 24 How is the unemployment rate calculated? 56,000 households are surveyed each month 25 What is the civilian labor force? People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions 26 Total Population age 16 and over Not in Labor Force Armed forces Household workers Students Retirees Persons with disabilities Institutionalized Discourage workers Civilian labor force Employed Employees Self-employed Unemployed New entrants Re-entrants Lost last job Quit last job Laid off 27 Who is a discouraged worker? A person who wants to work, but who has given up searching for work. He or she believes there will be no job offers 28 What is underemployment? People working at jobs below their level of skills 29 What are criticisms of the unemployment rate? • Does not include discouraged workers • Includes part-time workers • Does not measure underemployment 30 The U.S. Unemployment Rate 25 20 15 10 5 1930 40 50 60 70 80 90 00 31 What are the types of unemployment? • Seasonal • Frictional • Structural • Cyclical 32 What is seasonal unemployment? Unemployment caused by recurring changes in hiring due to changes in weather conditions 33 What is frictional unemployment? Unemployment caused by the normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force 34 What is structural unemployment? Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities 35 What is cyclical unemployment? Unemployment caused by the lack of jobs during a recession 36 What is full employment? The situation in which an economy operates at an unemployment rate equal to the sum of the seasonal, frictional, and structural unemployment rates 37 What percent unemployment is considered full employment? The natural rate of unemployment changes over time, but today it is considered to be about 5% 38 What is the GDP gap? The GDP gap is the difference between fullemployment real GDP and actual real GDP 39 What is the cost of unemployment? The GDP gap 40 Key Concepts 41 Key Concepts • What is a business cycle? • What are the phases of a business cycle? • How long before a downturn is a recession? • What are the types of economic indicators? • What causes unemployment? • Who is considered unemployed? • Who is considered employed? • What is the unemployment rate? 42 Key Concepts cont. • • • • • • What is the civilian labor force? Who is a discouraged worker? What is underemployment? What are the types of unemployment? What is full employment? What percent unemployment is considered full employment? • What is the cost of unemployment? 43 Summary 44 Business cycles are recurrent rises and falls in real GDP over a period of years. Business cycles vary greatly in duration and intensity. A cycle consists of four phases: peak, recession, trough and recovery. 45 The generally accepted theory today is that changes in the forces of demand and supply cause business cycles. 46 A recession is officially defined as at least two consecutive quarters of real GDP decline. A trough is the turning point in national output between recession and recovery. During a recovery, there is an upturn in the business cycle during which real GDP rises. 47 Hypothetical Business Cycle Peak Real GDP per year Peak Trough Recession Recovery 48 Economic growth is measured by the annual percentage change I real GDP in a nation. The long-term annual average growth rate in the United States is 3 percent. 49 Leading, coincident, and lagging indicators are economic variables that change before, at the same time as, and after changes in real GDP, respectively. 50 The unemployment rate is the ratio of the number of unemployed to the number in the labor force multiplied by 100. The nation’s labor force consists of people who are employed plus those who are out of work, but seeking employment. 51 Discouraged workers are persons who want to work , but who have given up looking for work. 52 Seasonal unemployment is unemployment due to seasonal changes. 53 Frictional unemployment results when workers are seeking new jobs that exist. 54 Structural unemployment is unemployment caused by factors in the economy, including lack of skills, changes in product demand, and technological change. 55 Cyclical unemployment is unemployment resulting from insufficient aggregate demand. 56 Full employment occurs when the unemployment rate is equal to the total of the seasonal, frictional, and structural unemployment rates. 57 The GDP gap is the difference between full employment, or potential real GDP, and actual real GDP. Therefore, the GDP gap measures the loss of output due to cyclical unemployment. 58 END 59