Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Fear of floating wikipedia , lookup
Edmund Phelps wikipedia , lookup
Nominal rigidity wikipedia , lookup
Monetary policy wikipedia , lookup
Business cycle wikipedia , lookup
Transformation in economics wikipedia , lookup
Interest rate wikipedia , lookup
Full employment wikipedia , lookup
26 Business Cycles, Unemployment, and Inflation McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. The Business Cycle • Introduction: This chapter looks at trends of real GDP growth and the macroeconomic problems of the business cycle, unemployment and inflation. • Learning objectives – After reading this chapter, students should be able to: • Describe the business cycle and its primary phases. • Illustrate how unemployment and inflation are measured. • Explain the types of unemployment and inflation and their various impacts. Prof. Mohammad El-Sakka – Kuwait University 26-2 The Business Cycle • Overview of the Business Cycle • Historical record: • 1. The United States’ impressive long-run economic growth has been interrupted by periods of instability. • 2. Uneven growth has been the pattern, with inflation often accompanying rapid growth, and declines in employment and output during periods of recession and depression (see Figure 26.1 and Table 26.1). Prof. Mohammad El-Sakka – Kuwait University 24-3 The Business Cycle U.S. Recessions since 1950 Period Duration, Months Depth (Decline in Real Output) 1953-54 10 -2.6% 1957-58 8 -3.7 1960-61 10 -1.1 1969-70 11 -0.2 1973-75 16 -3.2 1980 6 -2.2 1981-82 16 -2.9 1990-91 8 -1.4 2001 8 -0.4 2007-09 18 -3.7 Source: National Bureau of Economic Research, http://www.nber.org and Minneapolis Federal Reserve Bank, http://www.minneapolisfed.org Output data are in 2000 dollars LO1 26-4 The Business Cycle • Four phases of the business cycle are identified over a several-year period. (See Figure 26.1) • 1. A peak is when business activity reaches a temporary maximum with full employment and near-capacity output. • 2. A recession is a decline in total output, income, employment, and trade lasting six months or more. • 3. The trough is the bottom of the recession period. • 4. Recovery is when output and employment are expanding toward full-employment level. Prof. Mohammad El-Sakka – Kuwait University 24-5 The Business Cycle Peak Level of real output Peak Peak Trough Trough Time LO1 26-6 Causation: A First Glance • There are several theories about causation. • 1. Major innovations may trigger new investment and/or consumption spending. • 2. Changes in productivity may be a related cause. • 3. Monetary factors • 4. Political events • 5. Financial Stability • 6. Most agree that the level of aggregate spending is important, especially changes on capital goods and consumer durables. • Cyclical fluctuations: Durable goods output is more volatile than non-durables and services because spending on latter usually can not be postponed. Prof. Mohammad El-Sakka – Kuwait University 24-7 Unemployment • Unemployment (One Result of Economic Downturns) • Measuring unemployment (see Figure 26.2 for 2009): • 1. The population is divided into three groups: • those under age 16 or institutionalized, • those “not in labor force,” • the labor force that includes those age 16 and over who are willing and able to work, and actively seeking work (demonstrated job search activity within the last four weeks). • 2. The unemployment rate is defined as the percentage of the labor force that is not employed. (Note: Emphasize not the percentage of the population.) Prof. Mohammad El-Sakka – Kuwait University 24-8 Unemployment Total population (307.3 million) Under 16 and/or Institutionalized (71.4 million) Unemployment rate = # of unemployed X 100 labor force Not in labor force (81.7 million) Unemployment rate = Employed (139.9 million) 14,265,000 X 100 = 9.3% 154,142,000 Labor force (154.2 million) Unemployed (14.3 million) LO2 26-9 Unemployment • 3. The unemployment rate is calculated by random survey of 60,000 households nationwide. (Note: Households are in survey for four months, out for eight, back in for four, and then out for good; interviewers use the phone or home visits using laptops.) Two factors cause the official unemployment rate to understate actual unemployment. • a. Part-time workers are counted as “employed.” • b. “Discouraged workers” who want a job, but are not actively seeking one, are not counted as being in the labor force, so they are not part of unemployment statistic. Prof. Mohammad El-Sakka – Kuwait University 24-10 Types of Unemployment • Types of unemployment: • 1. Frictional unemployment: consists of those searching for jobs or waiting to take jobs soon; it is regarded as somewhat desirable, because it indicates that there is mobility as people change or seek jobs. • 2. Structural unemployment: due to changes in the structure of demand for labor; e.g., when certain skills become obsolete or geographic distribution of jobs changes. • 3. Cyclical unemployment: is caused by the recession phase of the business cycle. Prof. Mohammad El-Sakka – Kuwait University 24-11 Types of Unemployment • As firms respond to insufficient demand for their goods and services, output and employment are reduced. • Extreme unemployment during the Great Depression (25 percent in 1933) was cyclical unemployment. • 4. It is sometimes not clear which type describes a person’s unemployment circumstances. Prof. Mohammad El-Sakka – Kuwait University 24-12 Definition of Full Employment • Definition of “Full Employment” • Full employment does not mean zero unemployment. • The full-employment unemployment rate is equal to the total frictional and structural unemployment. • The full-employment rate of unemployment is also referred to as the natural rate of unemployment. • The natural rate is achieved when labor markets are in balance; the number of job seekers equals the number of job vacancies. • The natural rate of unemployment is not fixed but depends on the demographic makeup of the labor force and the laws and customs of the nations. Prof. Mohammad El-Sakka – Kuwait University 24-13 Economic Cost of Unemployment • Recently the natural rate has dropped from 6% to 4 to 5% as demographic factors, job search methods, and public policies change. • Economic cost of unemployment: • GDP gap and Okun’s Law: GDP gap is the difference between potential and actual GDP. (See Figure 26.3) Economist Arthur Okun quantified the relationship between unemployment and GDP as follows: For every 1 percent of unemployment above the natural rate, a negative GDP gap of about 2 percent occurs. This is known as “Okun’s law.” • Unequal burdens of unemployment exist. (See Table 26.2) • Rates are lower for white-collar workers. • Teenagers have the highest rates. Prof. Mohammad El-Sakka – Kuwait University 24-14 • African-Americans have higher rates than whites. • Rates for males and females are historically comparable, though during the Great Recession females had a significantly lower rate. • Less educated workers, on average, have higher unemployment rates than workers with more education. • “Long-term” (15 weeks or more) unemployment rate is much lower than the overall rate, although it has nearly tripled from 1.5% in 2007 to 4.7% in 2009 due to the Great Recession. • Noneconomic costs include loss of self-respect and social and political unrest. • International comparisons. (See Global Perspective 26.1) Prof. Mohammad El-Sakka – Kuwait University 24-15 Unequal Burdens Unemployment Rates by Demographic Group: Full Employment Year (2007) and Recession Year (2009)* Unemployment Rate Demographic Group Overall Occupation: Managerial and professional Construction and extraction Age: 16-19 African American, 16-19 White, 16-19 Male, 20+ Female, 20+ Race and ethnicity: African American Hispanic White Gender: Women Men ** Education: Less than high school diploma High school diploma only College degree or more Duration: 15 or more weeks LO3 2007 2009 4.6% 9.3% 2.1 4.6 7.6 19.7 15.7 24.3 29.4 39.5 13.9 21.8 4.1 9.6 4.0 7.5 8.3 14.8 5.6 12.1 4.1 8.5 4.5 8.1 4.7 10.3 7.1 14.6 4.4 9.7 2.0 4.6 1.5 4.7 26-16 Global Perspective LO3 26-17 Economic Cost of Unemployment Economic Cost of Unemployment LO3 26-18 Economic Cost of Unemployment LO3 26-19 Inflation • Inflation: Defined and Measured • Definition: Inflation is a rising general level of prices (not all prices rise at the same rate, and some may fall). • The main index used to measure inflation is the Consumer Price Index (CPI). To measure inflation, subtract last year’s price index from this year’s price index and divide by last year’s index; then multiply by 100 to express as a percentage. • “Rule of 70” permits quick calculation of the time it takes the price level to double: Divide 70 by the percentage rate of inflation and the result is the approximate number of years for the price level to double. If the inflation rate is 7 percent, then it will take about ten years for prices to double. (Note: You can also use this rule to calculate how long it takes savings to double at a given compounded interest rate.) Prof. Mohammad El-Sakka – Kuwait University 24-20 Inflation • Facts of inflation: • In the past, deflation has been as much a problem as inflation. For example, between 2008 and 2009, the CPI decreased by.4%. The prospect of deflation has been a concern of economic policymakers. • All industrial nations have experienced the problem (see Global Perspective 26.2). • Some nations experience astronomical rates of inflation (Zimbabwe’s was 14.9 billion percent in 2008 before doing away with their existing currency). • The inside covers of the text contain historical rates for the U.S. Prof. Mohammad El-Sakka – Kuwait University 24-21 Inflation Inflation Rates in Five Industrial Nations LO2 26-22 Inflation LO2 26-23 Inflation • Causes and theories of inflation: • Demand-pull inflation: Spending increases faster than production. It is often described as “too much spending chasing too few goods.” • CONSIDER THIS … Clipping Coins • Princes would clip coins, paying peasants with the clipped coins and using the clippings to mint new coins. • Clipping was essentially a tax on the population as the increased money supply caused inflation and reduced the purchasing power of each coin. Prof. Mohammad El-Sakka – Kuwait University 24-24 Inflation • Cost-push or supply-side inflation: Prices rise because of rise in per-unit production costs (Unit cost = total input cost/units of output). • Output and employment decline while the price level is rising. • Supply shocks have been the major source of cost-push inflation. These typically occur with dramatic increases in the price of raw materials or energy. • Complexities: It is difficult to distinguish between demand-pull and cost-push causes of inflation, although cost-push will die out in a recession if spending does not also rise. Prof. Mohammad El-Sakka – Kuwait University 24-25 Inflation • Core Inflation • Food and energy prices are very volatile due to changes in supply and demand which are usually temporary changes. • To prevent a misinterpretation of the changes in the CPI that might be due to temporary changes in supply and demand, economists use core inflation. • Core inflation doesn’t include food and energy goods. • If core inflation is low and stable, current policy may not need to be changed even if the CPI is rising. • Economists will be greatly concerned if core inflation increases. Prof. Mohammad El-Sakka – Kuwait University 24-26 Inflation • Redistributive effects of inflation: • The price index is used to deflate nominal income into real income. Inflation may reduce the real income of individuals in the economy, but won’t necessarily reduce real income for the economy as a whole (someone receives the higher prices that people are paying). • Unanticipated inflation has stronger impacts; those expecting inflation may be able to adjust their work or spending activities to avoid or lessen the effects. • Fixed-income groups will be hurt because their real income suffers. Their nominal income does not rise with prices. • Savers will be hurt by unanticipated inflation, because interest rate returns may not cover the cost of inflation. Their savings will lose purchasing power. Prof. Mohammad El-Sakka – Kuwait University 24-27 Inflation • Debtors (borrowers) can be helped and lenders hurt by unanticipated inflation. Interest payments may be less than the inflation rate, so borrowers receive “dear” money and are paying back “cheap” dollars that have less purchasing power for the lender. • If inflation is anticipated, the effects of inflation may be less severe, since wage and pension contracts may have inflation clauses built in, and interest rates will be high enough to cover the cost of inflation to savers and lenders. • “Inflation premium” is amount that interest rate is raised to cover effects of anticipated inflation. • “Real interest rate” is defined as nominal rate minus inflation premium. (See Figure 26.5) Prof. Mohammad El-Sakka – Kuwait University 24-28 Inflation • Final points • Unexpected deflation, a decline in price level, will have the opposite effect of unexpected inflation. • Many families are simultaneously helped and hurt by inflation because they are both borrowers and earners and savers. • Effects of inflation are arbitrary, regardless of society’s goals. Prof. Mohammad El-Sakka – Kuwait University 24-29 Anticipated Inflation 6% 11% = + 5% Nominal Interest Rate LO3 Inflation Premium Real Interest Rate 26-30 Inflation • Output Effects of Inflation • Cost-push inflation, where resource prices rise unexpectedly, could cause both output and employment to decline. Real income falls. • Mild inflation (<3%) has uncertain effects. It may be a healthy by-product of a prosperous economy, or it may have an undesirable impact on real income. • Danger of creeping inflation turning into hyperinflation, which can cause speculation, reckless spending, and more inflation (see examples in text of Japan following World War II, and Germany following World War I). Prof. Mohammad El-Sakka – Kuwait University 24-31 Last word • LAST WORD: The Stock Market and The Economy: How, if at all, do changes in stock prices relate to macroeconomic stability? • Do changes in stock prices and stock market wealth cause instability? The answer is yes, but usually the effect is weak. • There is a wealth effect: Consumer spending rises as asset values rise and vice versa if stock prices decline substantially. • Also, there is an investment effect: Rising share prices lead to more capital goods investment and the reverse in true for falling share prices. Prof. Mohammad El-Sakka – Kuwait University 24-32 Last word • Stock market “bubbles” can hurt the economy by encouraging reckless speculation with borrowed funds or savings needed for other purposes. A “crash” can cause unwarranted pessimism about the underlying economy. • A related question concerns forecasting value of stock market averages. Stock price averages are included as one of ten “Leading Indicators” used to forecast the future direction of the economy. (See Last Word, Chapter 30). However, by themselves, stock values are not a reliable predictor of economic conditions. Prof. Mohammad El-Sakka – Kuwait University 24-33