Download Chpt 12 PP

Business
Cycles and
Unemployment
Economics for Today by Irvin Tucker, 6th edition
©2009 South-Western College Publishing
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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?
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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
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What are the four
phases of a
business cycle?
• Peak
• Recession
• Trough
• Recovery
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What is a peak?
The phase of the
business cycle during
which real GDP reaches
its maximum after rising
during a recovery
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What is
economic growth?
An expansion in national
output measured by the
annual percentage
increase in a nation’s
real GDP
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Why is growth an
economic goal?
It increases our standard
of living - it creates a
bigger “economic pie”
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What is a trough?
The phase of the
business cycle in which
real GDP reaches its
minimum after falling
during a recession
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What is a recession?
A downturn in the business
cycle during which real
GDP declines
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How long before a
downturn is a
recession?
At least two consecutive
quarters in which GDP
declines
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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primarily an historical
reference to the extreme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
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What is a recovery?
An upturn in the
business cycle during
which real GDP rises
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Hypothetical Business Cycle Peak
Real GDP
per year
Peak
Trough
Recession Recovery
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Severity of Post-World War II Recessions
Recession Dates
Duration % Decline in GNP
Peak Unemployment Rate
Nov 1948-Oct 1949
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-1.7
7.9%
July 1953 – May 1954
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-2.7
5.9
Aug 1957 – Apr 1958
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-1.2
7.4
Apr 1960 – Feb 1961
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-1.6
6.9
Dec 1969 – Nov 1970
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-0.6
5.9
Nov 1973 – Mar 1975
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-3.1
8.6
Jan 1980 – July 1980
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-2.2
7.8
July 1981 – Nov 1982
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-2.9
10.8
July 1990 – Mar 1991
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-1.3
6.8
Mar 2001 – Nov 2001
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-0.5
5.6
Average
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-1.8
7.4
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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
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What are the three
types of economic
indicators?
• Leading
• Coincident
• Lagging
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What is a
leading indicator?
Variables that change
before real GDP
changes
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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
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What is a
coincident indicator?
Variables that change
at the same time that
real GDP changes
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Coincident Indicators
•Nonagricultural payrolls
•Personal income
•Industrial Production
•Manufacturing and trade sales
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What is a
lagging indicator?
Variables that change
after real GDP changes
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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
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10
9
8
7
6
5
4
3
2
1
China
Russia Mexico U.S.
Canada Germany U.K.
Japan
France
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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
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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
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What causes
unemployment?
When total spending falls,
businesses will find it
profitable to produce a
lower volume of goods and
avoid unsold inventory
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Who is considered
unemployed?
Anyone who is 16
years of age and
above who is actively
seeking employment
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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
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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
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How is the
unemployment rate
calculated?
60,000 households are
surveyed each month
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Who is a
discouraged worker?
A person who wants to
work, but who has given
up searching for work
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What is
underemployment?
People working at jobs
below their level of skills
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What are criticisms of the
unemployment rate?
• Does not include discouraged
workers
• Includes part-time workers
• Not measure underemployment
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25
The U.S. Unemployment Rate
1929-2006
20
15
10
5
1930 40
50
60
70
80
90
05
00
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What are the types of
unemployment?
• Seasonal
• Frictional
• Structural
• Cyclical
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What is seasonal
unemployment?
Unemployment caused
by recurring changes
in hiring due to
changes in weather
conditions
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What is frictional
unemployment?
Normal search time
required by workers with
marketable skills who are
changing jobs, entering, or
re-entering the labor force
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What is structural
unemployment?
A mismatch of the skills of
workers out of work and
the skills required for
existing job opportunities
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What is cyclical
unemployment?
Unemployment caused
by the lack of jobs
during a recession
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What is
full employment?
Unemployment equals the
sum of seasonal,
frictional, and structural
unemployment
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What is considered
full employment?
The natural rate of
unemployment
changes over time, but
today it is considered
to be about 5%
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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
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What is the GDP gap?
The difference between
full-employment real GDP
and actual real GDP
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What is the cost of
unemployment?
The GDP gap
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Conclusion?
The gap between actual
and potential real GDP
measures the monetary
losses of real goods and
services when at less
than full employment
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END
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