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Business Cycles and Unemployment Economics for Today by Irvin Tucker, 6th edition ©2009 South-Western College Publishing 1 What puzzles will I learn to solve? • What is the difference between a recession and a depression? • Is a worker who has given up searching for work counted as unemployed? • Can an economy produce more output than its potential? 2 This chapter will answer these questions: • How are cycles measured? • What causes business cycles? • What is unemployment? 3 What is a business cycle? Alternating periods of economic growth and contraction, which can be measured by changes in real GDP 4 What are the four phases of a business cycle? • Peak • Recession • Trough • Recovery 5 What is a peak? The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery 6 What is economic growth? An expansion in national output measured by the annual percentage increase in a nation’s real GDP 7 Why is growth an economic goal? It increases our standard of living - it creates a bigger “economic pie” 8 What is a trough? The phase of the business cycle in which real GDP reaches its minimum after falling during a recession 9 What is a recession? A downturn in the business cycle during which real GDP declines 10 How long before a downturn is a recession? At least two consecutive quarters in which GDP declines 11 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 The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s 12 What is a recovery? An upturn in the business cycle during which real GDP rises 13 Hypothetical Business Cycle Peak Real GDP per year Peak Trough Recession Recovery 14 Severity of Post-World War II Recessions Recession Dates Duration % Decline in GNP Peak Unemployment Rate Nov 1948-Oct 1949 11 -1.7 7.9% July 1953 – May 1954 10 -2.7 5.9 Aug 1957 – Apr 1958 8 -1.2 7.4 Apr 1960 – Feb 1961 10 -1.6 6.9 Dec 1969 – Nov 1970 11 -0.6 5.9 Nov 1973 – Mar 1975 16 -3.1 8.6 Jan 1980 – July 1980 6 -2.2 7.8 July 1981 – Nov 1982 16 -2.9 10.8 July 1990 – Mar 1991 8 -1.3 6.8 Mar 2001 – Nov 2001 8 -0.5 5.6 Average 10 -1.8 7.4 15 Business Cycles in the U.S. 1929-2006 20 15 10 Annual real GDP growth Long-term average growth 5 0 -5 Zero growth -10 -15 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 16 What are the three types of economic indicators? • Leading • Coincident • Lagging 17 What is a leading indicator? Variables that change before real GDP changes 18 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 19 What is a coincident indicator? Variables that change at the same time that real GDP changes 20 Coincident Indicators •Nonagricultural payrolls •Personal income •Industrial Production •Manufacturing and trade sales 21 What is a lagging indicator? Variables that change after real GDP changes 22 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 23 10 9 8 7 6 5 4 3 2 1 China Russia Mexico U.S. Canada Germany U.K. Japan France 24 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 25 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 26 What causes unemployment? When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory 27 Who is considered unemployed? Anyone who is 16 years of age and above who is actively seeking employment 28 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 29 What is the unemployment rate? The percentage of people in the labor force who are without jobs and are actively seeking jobs 30 unemployed Unemployment X 100 = rate civilian labor force 31 How is the unemployment rate calculated? 60,000 households are surveyed each month 32 Who is a discouraged worker? A person who wants to work, but who has given up searching for work 33 What is underemployment? People working at jobs below their level of skills 34 What are criticisms of the unemployment rate? • Does not include discouraged workers • Includes part-time workers • Not measure underemployment 35 25 The U.S. Unemployment Rate 1929-2006 20 15 10 5 1930 40 50 60 70 80 90 05 00 36 What are the types of unemployment? • Seasonal • Frictional • Structural • Cyclical 37 What is seasonal unemployment? Unemployment caused by recurring changes in hiring due to changes in weather conditions 38 What is frictional unemployment? Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force 39 What is structural unemployment? A mismatch of the skills of workers out of work and the skills required for existing job opportunities 40 What is cyclical unemployment? Unemployment caused by the lack of jobs during a recession 41 What is full employment? Unemployment equals the sum of seasonal, frictional, and structural unemployment 42 What is considered full employment? The natural rate of unemployment changes over time, but today it is considered to be about 5% 43 12 9.0% 10 8.1% 6.3% 8 6 3.4% 4.1% 4.6% 6.8% 5.4% 4 2 0 Switzerland Japan U.S. U.K. Canada Italy Germany France 44 What is the GDP gap? The difference between full-employment real GDP and actual real GDP 45 What is the cost of unemployment? The GDP gap 46 Conclusion? The gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment 47 END 48