Download Chapter 09_20e

9
Business Cycles, Unemployment, and
Inflation
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Business Cycle
• Alternating increases and decreases
•
•
LO1
in economic activity (GDP,
employment, income) over time
Vary in duration and magnitude
Phases of the business cycle
• Peak
• Recession – 6 months or more
• Trough
• Expansion
The Business Cycle
Peak
Level of real output
Peak
Peak
Trough
Trough
Time
LO1
The Business Cycle
TABLE 26.1 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, www.nber.org, and Minneapolis Federal Reserve Bank,
www.minneapolisfed.gov. Output data are in 2000 dollars
LO1
Cyclical Impact
• Durable & capital goods affected
•
LO1
most during recessions
• Postponability
Nondurable consumer goods affected
less
Unemployment
Under 16
and/or
Institutionalized (71.6
million)
Total
population
(314.9
million)
Not in
labor
force
(88.3 million)
Employed
(142.5 million)
Unemployed
(12.5 million)
LO2
Labor force
(155
million)
Unemployment
Unemployed
• Unemployment Rate = Labor Force
• Criticisms
• Involuntary part-time workers
x 100
counted as if full-time
• Discouraged workers are not
counted as unemployed
• http://www.youtube.com/watch?v=Ulu3SCAm
eBA
LO2
Types of Unemployment
• Frictional unemployment
• Individuals searching/waiting for
•
LO3
jobs
• Shorter term
Structural unemployment
• Occurs due to changes in the
structure of the demand for labor
• Longer term
Types of Unemployment
• Frictional and structural
•
LO3
unemployment are unavoidable and
beneficial
Cyclical unemployment
• Caused by a recession – decrease
in total spending
Definition of Full Employment
• Natural Rate of Unemployment (NRU)
• Full employment level of
•
LO3
unemployment
• Zero cyclical unemployment
• Can vary over time
• Actual unemployment can be above
or fall below the NRU
Potential GDP is GDP associated
with NRU
Economic Cost of Unemployment
• Irretrievable loss of goods and
•
LO3
services
GDP Gap
• Amount of goods and services
sacrificed due to cyclical
unemployment
• GDP gap = actual GDP – potential
GDP
Economic Cost of Unemployment
• Negative GDP gap occurs because
•
LO3
there is cyclical unemployment;
potential GDP exceeds actual GDP
Positive GDP occurs because the
actual unemployment rate is less than
the NRU; actual GDP is greater than
potential GDP.
Economic Cost of Unemployment
• Okun’s Law
• Every 1% of cyclical unemployment
creates a 2% GDP gap
LO3
Economic Cost of Unemployment
LO3
Global Perspective
LO3
Inflation
• General rise in the price level
• Consumer Price Index (CPI) is used
• Can use the “rule of 70”
LO2
Inflation
LO2
Inflation
LO2
Types of Inflation
• Demand-Pull inflation
• “Too much spending chasing too
few goods”
• Central bank issues too much
money
• More likely to occur the closer the
economy is to full-employment
LO3
Types of Inflation
• Cost-Push inflation
• Due to a rise in per-unit input costs
• Supply shocks
LO3
Inflation
• Core inflation
• Excludes volatile food and energy
goods
• Focuses on more stable prices
LO3
Redistribution Effects of Inflation
• Nominal income
• Unadjusted for inflation
• Real income
• Nominal income adjusted for
inflation
• Real income can fall if nominal
income increases by less than
inflation
• Income is redistributed
LO3
Who is Hurt by Inflation?
• Fixed-income receivers
• Real incomes fall
• Savers
• Value of accumulated savings
•
LO3
deteriorates
Creditors
• Lenders get paid back in “cheaper
dollars”
Who is Unaffected by Inflation?
• Flexible-income receivers
• COLAs
• Social Security recipients
• Union members
• Debtors
• Pay back the loan with “cheaper
dollars”
LO3