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Saving, Investment, and the Financial
System
• The financial system consists of the group of
institutions in the economy that help to match
one person’s saving with another person’s
investment.
• It moves the economy’s scarce resources from
savers to borrowers.
© 2007 Thomson South-Western
FINANCIAL INSTITUTIONS IN
THE U.S. ECONOMY
• The financial system is made up of financial
institutions that coordinate the actions of
savers and borrowers.
• Financial institutions can be grouped into two
different categories:
– Financial markets
– Financial intermediaries
© 2007 Thomson South-Western
FINANCIAL INSTITUTIONS IN
THE U.S. ECONOMY
• Financial Markets
– Stock Market
– Bond Market
• Financial Intermediaries
– Banks
– Mutual Funds
© 2007 Thomson South-Western
FINANCIAL INSTITUTIONS IN
THE U.S. ECONOMY
• Financial markets are the institutions through
which savers can directly provide funds to
borrowers.
• Financial intermediaries are financial
institutions through which savers can
indirectly provide funds to borrowers.
© 2007 Thomson South-Western
Financial Intermediaries:
Banks
•
•
Banks take deposits from people who want
to save and use the deposits to make loans
to people who want to borrow.
Banks pay depositors interest on their
deposits and charge borrowers slightly
higher interest on their loans.
Financial Markets
• The Bond Market
• A bond is a certificate of indebtedness that specifies
obligations of the borrower to the holder of the
bond.
• Characteristics of a Bond
• Term: The length of time until the bond matures.
• Credit Risk: The probability that the borrower will fail to
pay some of the interest or principal.
• Tax Treatment: The way in which the tax laws treat the
interest on the bond.
• Municipal bonds are federal tax exempt.
© 2007 Thomson South-Western
• Bond Prices react to interest rates.
• If a bond is paying 10% and interest rates go to
5% is the bonds price going to go up or down?
• What if interest rates go to 15% what is that
bond going to be worth?
• See 2010 Question 2 AP Test.
• So if interest rates go up bond prices go down
and vice versa.
© 2007 Thomson South-Western
Financial Markets
• The Stock Market
• Stock represents a claim to partial ownership in a
firm and is therefore, a claim to the profits that the
firm makes.
• The sale of stock to raise money is called equity
financing.
• Compared to bonds, stocks offer both higher risk and
potentially higher returns.
• The most important stock exchanges in the United
States are the New York Stock Exchange, the
American Stock Exchange, and NASDAQ.
© 2007 Thomson South-Western
Banks
•
•
•
Banks help create a medium of exchange
by allowing people to write checks
against their deposits.
A medium of exchanges is an item that
people can easily use to engage in
transactions.
This facilitates the purchases of goods
and services.
National Income Accounts
• National saving-the
total income in the
economy that remains
after paying for the
consumption and
government purchases.
Y = C + I + G + NX
• Remember that GDP can be divided up into
four components: consumption, investment,
government purchases, and net exports.
National Savings
• To make the concept easy pretend we have
a closed economy where no trade occurs.
• So for our GDP equation it would be
• Y=C+I+G
National Savings
• So Y=C+G+I
• To isolate investment, we can subtract C and G from both sides:
• Y-C-G=I
• Or GDP-Consumption-Government Purchases =Investment
• What is left is called national savings.
• Savings=Y-C-G=I
• Savings =Investing
• You will have to keep reminding students
what the term “investment” means to
macroeconomists. Outside of the
economics profession, most people use the
terms “saving” and “investing”
interchangeably.
• In macroeconomics, investment refers to the
purchase of new capital, such as equipment
or buildings. (factories)
• If an individual spends less than he earns
and uses the rest to buy stocks or mutual
funds, economists call this saving.
• Definition of National Saving (Saving):
the total income in the economy that
remains after paying for consumption
and government purchases
Saving Continued
• Savings=GDP-Consumption-Govt Spending
• If T= Taxes and Transfer payments back to
SS and Welfare
It can be broken down also like this
S=(Y-T-C) + (T-G)
This breaks down into private savings and
public savings
• Private Saving: the income that households
have left after paying for taxes and
consumption.
• Public Saving: the tax revenue that the
government has left after paying for its
spending.
• Budget Surplus: an excess of tax revenue over
government spending.
• Budget Deficit: a shortfall of tax revenue from
government spending.
Breaking down National Savings
NS=(Y-T-C)
Private Savings
•Private Savings-is the
amount of income that
households have left after
paying their taxes and
paying for their
consumption
+
(T-G)
Public Savings
Public Savings-is
the amount of tax
revenue that the
government has
left after paying for
it spending
Types of Savings
• Budget surplus-If govt receives more
then they pay out. T-G is positive
Types of Savings
• Budget Deficit T-G is negative
• The important point to make here is that
with a government budget deficit, public
saving is negative and the public sector is
thus “dissaving.” To make up for this
shortfall, it must go to the loanable funds
market and borrow the money. This will
reduce the supply of loanable funds
available for investment.
New Stuff
Then, after many
With pressure from
bill collectors (and his
At first the job seeker rejections, he
wife), he holds up
optimistically looks becomes a reluctant
for his next job.
discouraged worker. an ATM called Kenny
and shoots it.
And his kids will
Eventually he is cry because they
can no longer go
caught and
to college.
incarcerated.
And – the Texas
Justice System will
tell him to,
“Take that.”
Crime rates move with the business cycle…rising
during periods of high unemployment and falling
during periods of low unemployment. The crime
statistics released in the fall of 1997 bear this out.
With unemployment at a 25-year low at 4.9% the
rate of violent crime was down for a fifth
consecutive year, and the murder rate fell to its
lowest level since 1969. FBI crime statistics show
that both property crime and violent crime
increased sharply between 1985 and 1991 and fell
dramatically from 1991 to 1997 in step with
unemployment.
Unemployment and social problems
Each one-point increase in the unemployment
rate for an extended period is associated with:
 920 more suicides
 650 more homicides
 4000 more people admitted to
state mental institutions
 3300 more people sent to state prisons
 37,000 more deaths
 increases in domestic violence and
homelessness
Stress Associated With
Joblessness and Other Events
Life Event
Death of Spouse
Going to jail
Fired from job
Close friend died
Laid off from job
Failed school
Child left home
Major change in
working conditions
Level of Stress
100
66
49
47
40
37
29
20
Unemployment Rates vary by race, sex, age, & education.
40
36
32
Adult Males
Adult Females
Teenagers
28
24.7
24
20
16.7
16
11.4
12
5.9
8
4
0
3.2
5.4
3.7
3.5
5.3
6.4
4.0
3.5
2.7
1.8
1.6
0.9
Demographics of Unemployment
1998 – 4.5% Unemployment
27.6%
12.5%
8.9% 8.9%
7.2% 7.1%
3.2% 3.4%
48.0%
2010 - 10% Unempl.
In Jan, 2010 as unemployment hit
10%, teenage unemployment
hit an all time high of 27%.
27.6%
20.4%
18.9%
17.2%
15.2%
13.9%
12.5%
9.3% 9.0%
3.2% 3.4%
8.9%
8.9%
7.2%
7.1%
2010 Overall Unemployment Rate = 9.8%
[Unemployment Rate & Median Earnings by Education]
16%
14%
15.6%
Unemployment Rate - 1998
12%
10%
8%
10.5%
$23K
$32K
7%
8.0%
6%
5%
5.0%
4%
3.8%
3%
2%
1%
0
Less
Than
High
School
Diploma
Advanced
Degree
3.0%
High
$38K
School
Associates
$53K
Grad
Degree
College
$60K
Master’s
$75K
7.1/153.1 x 100 = Unemployment Rate of 4.6%
Not in Labor Force: Kids, military
personnel, retired people, stay at
home moms and dads, full-time
students, your 35 year old uncle
who sleeps on the couch all day,
and most of the homeless.
Under 16
and/or
Institutionalized
(71.8 Million)
Not in
Labor Force
(78.7 Million)
[homemakers, students, retirees]
Total Population 303.6 Million)
Employed
(146 Million)
Unemployed 7.1 mil.
Labor
Force
(153.1 Million)
Defining/Measuring Unemployment
 An employed person is any person 16 years old or older:




who works for pay, either for someone else or in his or her own
business for 1 or more hours per week,
who works without pay for 15 or more hours per week in a family
enterprise, or
who has a job but has been temporarily absent, with or without pay.
An unemployed person is a person 16 years old or older who:




is not working,
is available for work, and
has made specific efforts to find work during the previous 4 weeks.
A person who is not looking for work, either because he or
she does not want a job or has given up looking, is not in
the labor force.
The discouraged-worker effect lowers the
unemployment rate.
BLS calls 60,000 households every month.
[Current Population Survey]
They ask three questions:
1. Are you working? If the answer is “yes”,
you are member of the labor force. But,
if the answer is no, you get a 2nd question.
2. Did you work at all this month-even 1 day?
If “yes”, you are a member of the LF. But,
if the answer is no, you get a 3rd question.
3. Did you look for work during the last month?
[agency, resume, interview] A “yes” counts you as
part of the LF. A “no” means you are not counted.
You are a “discouraged worker.” The labor force
consists of the employed and unemployed.
How is Unemployment Measured?
• Natural Rate of Unemployment
• The natural rate of unemployment is unemployment
that does not go away on its own even in the long
run.
• It is the amount of unemployment that the economy
normally experiences.
© 2007 Thomson South-Western
How Is Unemployment Measured?
• Cyclical Unemployment
• Cyclical unemployment refers to the year-to-year
fluctuations in unemployment around its natural
rate.
• It is associated with with short-term ups and downs
of the business cycle.
© 2007 Thomson South-Western
How Is Unemployment Measured?
• Describing Unemployment: Three Basic
Questions
• How does government measure the economy’s rate
of unemployment?
• What problems arise in interpreting the
unemployment data?
• How long are the unemployed typically without
work?
© 2007 Thomson South-Western
How Is Unemployment Measured?
• Employed vs. unemployed
• The BLS considers a person an adult if he or she is over 16
years old.
• A person is considered employed if he or she has spent some
of the previous week working at a paid job.
• A person is unemployed if he or she is on temporary layoff,
is looking for a job, or is waiting for the start date of a new
job.
• A person who fits neither of these categories, such as a fulltime student, homemaker, or retiree, is not in the labor force.
© 2007 Thomson South-Western
UNEMPLOYMENT
• 3 GROUPS
• 1st
• UNDER 16 YEARS
OLD
• Institutionalized or
prison don’t count
UNEMPLOYMENT
• 2nd
• Not in labor forcethose who could but
choose not to work.
Like my wife who is
staying home with our
kids
UNEMPLOYMENT
• 3rd Labor force
• Those who are able and
willing to work.
• About half the population
last year.
• GOVT surveys 60k
households to determine
unemployement
How Is Unemployment Measured?
• Labor Force
• The labor force is the total number of workers,
including both the employed and the unemployed.
• The BLS defines the labor force as the sum of the
employed and the unemployed.
© 2007 Thomson South-Western
Labor force = Number of employed + Number of unemployed
Unemployment rate
• Unemployed
•
*100
• Labor Force
How Is Unemployment Measured?
• The unemployment rate is calculated as the
percentage of the labor force that is
unemployed.
Number unemployed
Unemployment rate =
 100
Labor force
© 2007 Thomson South-Western
How Is Unemployment Measured?
• The labor-force participation rate is the
percentage of the adult population that is in the
labor force.
Labor force participation rate
Labor force X
=
100
Adult population
© 2007 Thomson South-Western
ALTERNATIVE CLASSROOM EXAMPLE:
The country of Bada has collected the following information:
Population
240,000
Employed
180,000
Unemployed
30,000
Labor Force = 180,000 + 30,000 = 210.000
Unemployment rate = (30,000/210,000) × 100% = 14.3%
Labor-force participation rate = (210,000/240,000) × 100% = 87.5%
Figure 1 The Breakdown of the Population in 2004
Employed
(139.3 million)
Labor Force
(147.4 million)
Adult
Population
(223.4 million)
Unemployed (8.1 million)
Not in labor force
(76.0 million)
© 2007 Thomson South-Western
Figure 2 Unemployment Rate Since 1960
Percent of
Labor Force
10
Unemployment rate
8
6
Natural rate of
unemployment
4
2
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
© 2007 Thomson South-Western
Table 1 The Labor-Market Experiences of Various
Demographic Groups
© 2007 Thomson South-Western
Figure 3 Labor Force Participation Rates for Men and
Women Since 1950
Labor-Force
Participation
Rate (in percent)
100
80
Men
60
40
Women
20
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
© 2007 Thomson South-Western
Problems with Unemployment Rate
• Part time workers are counted as fully
employed
• Must be actively seeking employment.
Some get discouraged and are not seeking
employment. So they don’t count in the
labor force.
Does the Unemployment Rate Measure
What We Want It To?
• It is difficult to distinguish between a person
who is unemployed and a person who is not in
the labor force.
• Discouraged workers, people who would like to
work but have given up looking for jobs after an
unsuccessful search, don’t show up in
unemployment statistics.
• Other people may claim to be unemployed in order
to receive financial assistance, even though they
aren’t looking for work.
© 2007 Thomson South-Western
How Long Are the Unemployed without
Work?
• Most spells of unemployment are short.
• Most unemployment observed at any given
time is long-term.
• Most of the economy’s unemployment problem
is attributable to relatively few workers who are
jobless for long periods of time.
© 2007 Thomson South-Western
• Frictional Unemployment: unemployment due to the
natural “frictions” of the economy, which is caused by
changing market conditions and is represented by “qualified
individuals” with “transferable skills” who change jobs.
• Structural Unemployment: unemployment due to
structural changes in the economy that eliminate some jobs and
create others for which the unemployed are “not qualified”.
So they have “nontransferable skills”.
• Natural Unemployment Rate: The sum of the Frictional
Unemployment Rate and the Structural Unemployment Rate.
• Full Employment: when the unemployment rate is equal to
the natural unemployment rate.
• Cyclical Unemployment Rate: the difference
between the unemployment rate and the natural unemployment
rate. This is due to deficient demand & implies a “recession”.
Frictional – “temporary”, “transitional”, “short-term.”
(“between jobs” or “search” unemployment)
Examples:
1. People who get “fired” or “quit”
to look for a better one. [30 mil. a yr]
[6 million U.S. workers get laid off each year]
2. “Graduates” from high school or
college who are looking for a job.
3. “Seasonal” or weather-dependent jobs such as
“agricultural”, “construction”, “retail”, or “tourism”.
[lifeguards, resort workers, Santa’s, & migrant workers.]
Frictional unemployment signals that “new jobs” are available
and reflects “freedom of choice”.
These are qualified workers with “transferable” skills.
• Frictional unemployment refers to the
unemployment that results from the time
that it takes to match workers with jobs.
– In other words, it takes time for workers to
search for the jobs that are best suit their tastes
and skills.
Types of Unemployment
• Frictional-people
between jobs.
Voluntarily going from
low pay to higher pay
jobs
• 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.
Why Some Frictional Unemployment Is
Inevitable
• Search unemployment is inevitable because the
economy is always changing.
• Changes in the composition of demand among
industries or regions are called sectoral shifts.
• It takes time for workers to search for and find
jobs in new sectors.
© 2007 Thomson South-Western
• Frictional unemployment often occurs because of a
change in the demand for labor among different firms.
• a. When workers decide to stop buying a good
produced by Firm A and instead start buying a good
produced by Firm B, some workers at Firm A will
likely lose their jobs.
• b. New jobs will be created at Firm B, but it will take
some time to move the displaced workers from Firm A
to these openings.
• c. The result of this transition is temporary
unemployment.
• d. The same type of situation can occur across
industries as well.
© 2007 Thomson South-Western
2. Structural Unemployment
Structural – “technological” or “long term”.
There are basic changes in the “structure” of the labor
force which make certain “skills obsolete”. [also caused by
“international competition”]
Automation may result in job losses.
Consumer taste may make a good “obsolete”.
The auto reduced the need for carriage makers.
Farm machinery reduced the need for farm laborers.
“Creative destruction” means as jobs are created,
other jobs are lost. Jobs of the future destroy jobs of
today. Frictional and Structural make up the “natural
rate of unemployment”.
“These jobs do not come back.”
“Non-transferable skills” – choice is
prolonged unemployment or retraining.
• Structural unemployment is the unemployment
that results because the number of jobs
available in some labor markets is insufficient
to provide a job for everyone who wants one.
© 2007 Thomson South-Western
Types of Unemployment
• Structural-Skills
become obsolete-some
one who used to be a
cotton picker. Then the
cotton gin comes and
they are out of a job.
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
• a. Glass blowers were replaced by bottle-making
machines.
• b. Oil-field workers were displaced when oil
demand fell in 1980s.
• c. Airline mergers displaced many airline
workers in 1980s.
• d. Foreign competition has led to downsizing in
U.S. industry and loss of jobs.
• e. Military cutbacks have led to displacement of
workers in military-related industries.
The difference between the Two
• Frictionally unemployed have able skills
• Usually short term
• Structurally unemployed need to be
retrained in skills that are needed
• Longer term
Public Policy and Job Search
• Structural unemployment occurs when the
quantity of labor supplied exceeds the quantity
demanded.
• Structural unemployment is often thought to
explain longer spells of unemployment.
• Why is there Structural Unemployment?
• Minimum-wage laws
• Unions
• Efficiency wages
© 2007 Thomson South-Western
3. Cyclical Unemployment
Cyclical – “economic downturns”
in the business cycle.
“Cyclical fluctuations” caused by “deficient AD”
“Durable goods jobs” are impacted the most.
These can be postponed because they can be repaired.
“Cyclical unemployment” is “real unemployment.”
“These jobs do come back.”
Stagflation
Inflation & unemployment exist at the same time.
[The economy is stagnating and inflating]
PL AD2 AD1
AS2
AS
PL
AD
10%
3%
1%
3%
10% 5%
“Disinflationary Recession”
10% 5%
AS1
Cyclical Unemployment
“These jobs do come back.”
If Arnold S. gets laid off producing autos, he says,
Types of Unemployment
• Cyclical-When
economy down turns
and spending drops
these unemployed are
called cyclical. Most
during great
depression were
cyclical
unemployment.
Cyclical Unemployment
•
•
Cyclical unemployment refers to the
year-to-year fluctuations in
unemployment around its natural rate.
It is associated with with short-term ups
and downs of the business cycle.
• 3. Cyclical
unemployment is
caused by the
recession phase of the
business cycle, which
is sometimes called
deficient demand
unemployment
Full Employment
• Because Frictional and Structural unemployment
are unavoidable does not count against
unemployment.
• Cyclical unemployment does.
• Thus 100 percent employment is not truly 100
percent.
• If there were no cyclical unemployed in the
economy we would have 100 percent employed.
If Full Employment
• Economist call this full employment rate of
unemployment or natural rate of
unemployment. (NRU)
• At NRU the economy is said to be
producing at its potential output.
• NRU occurs when the number of job
seekers equals the number of job vacancies.
Work requirements under the new welfare laws and the doubling of the prison population
since 1985 has removed relatively high unemployment individuals from the labor force and
lowered the overall unemployment rate to between 4 and 5%.
Natural Rate of Unemployment
•
•
The natural rate of unemployment is
unemployment that does not go away on
its own even in the long run.
It is the amount of unemployment that
the economy normally experiences.
• This implies that, because the economy is
always changing, search unemployment is
inevitable. Workers in declining industries
will find themselves looking for new jobs,
and firms in growing industries will be
seeking new workers
• Definition of “Full Employment”
• 1. Full employment does not mean zero unemployment.
• 2. The full-employment unemployment rate is equal to
the total frictional and structural unemployment.
• 3. The full-employment rate of unemployment is also
referred to as the natural rate of unemployment.
• 4. The natural rate is achieved when labor markets are in
balance; the number of job seekers equals the number of
job vacancies. At this point the economy’s potential output
is being achieved. 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. The
recent drop in the natural rate from 6% to 5.5% has
occurred mainly because of the aging of the work force
and increased competition in product and labor markets.
GDP Gap
• The problem with unemployment is that society is
not utilizing its resources as efficiently as possible.
People that are willing and able to work and
cannot find a job creates lost production of goods
and services
• If at Natural Rate - economy is on the PPC curve
• If not at Natural Rate economy would be inside
the PPC curve
• Economist say the difference is called the GDP
GAP
Why Are There Always Some People
Unemployed?
• In an ideal labor market, wages would adjust to
balance the supply and demand for labor,
ensuring that all workers would be fully
Labor Supply
employed. Wage
WE
Labor Demand
QE
Quantity of labor
© 2007 Thomson South-Western
Public Policy and Job Search
• Government programs can affect the time it
takes unemployed workers to find new jobs.
• These programs include the following:
• Government-run employment agencies
• Public training programs
• Unemployment insurance
© 2007 Thomson South-Western
Public Policy and Job Search
• Unemployment insurance is a government
program that partially protects workers’
incomes when they become unemployed.
• Offers workers partial protection against job
losses.
• Offers partial payment of former wages for a
limited time to those who are laid off.
© 2007 Thomson South-Western
Public Policy and Job Search
• Unemployment insurance
• increases the amount of search unemployment.
• reduces the search efforts of the unemployed.
• may improve the chances of workers being matched
with the right jobs.
© 2007 Thomson South-Western
MINIMUM-WAGE LAWS
• When the minimum wage is set above the level
that balances supply and demand, it creates
unemployment.
© 2007 Thomson South-Western
Figure 4 Unemployment from a Wage Above the Equilibrium
Level
Wage
Labor
supply
Surplus of labor =
Unemployment
Minimum
wage
WE
Labor
demand
0
LD
LE
LS
Quantity of
Labor
© 2007 Thomson South-Western
Summary
• The unemployment rate is the percentage of
those who would like to work but don’t have
jobs.
• The Bureau of Labor Statistics calculates this
statistic monthly.
• The unemployment rate is an imperfect
measure of joblessness.
© 2007 Thomson South-Western
Summary
• In the U.S. economy, most people who become
unemployed find work within a short period of
time.
• Most unemployment observed at any given
time is attributable to a few people who are
unemployed for long periods of time.
© 2007 Thomson South-Western
Summary
• One reason for unemployment is the time it
takes for workers to search for jobs that best
suit their tastes and skills.
• A second reason why our economy always has
some unemployment is minimum-wage laws.
• Minimum-wage laws raise the quantity of
labor supplied and reduce the quantity
demanded.
© 2007 Thomson South-Western
Summary
• A third reason for unemployment is the market
power of unions.
• A fourth reason for unemployment is
suggested by the theory of efficiency wages.
• High wages can improve worker health, lower
worker turnover, increase worker effort, and
raise worker quality.
© 2007 Thomson South-Western
Through the 1990s, the unemployment rate fell in the U.S.
Unemployment rates fell in Canada and
the United Kingdom, but rose in Japan.
The average unemployment rate in France,
Germany, & Italy and Canada remained high.
European labor markets are less flexible.
Recessionary Gap:
Potential GDP[$12 tr.] > Actual GDP[$11 tr.]
AD1 AS
AD2
AD2
AD1
- unemployment rate is too high
(cyclical unemployment)
- under utilized resources
Inflationary Gap:
Potential GDP[12] < Actual GDP[13]
YR Y
YI
$11
$13
$12
-unemployment rate is too low
- an overheated economy
Unemployment Rates vary by race, sex, age, & education.
40
36
32
Adult Males
Adult Females
Teenagers
28
24.7
24
20
16.7
16
11.4
12
5.9
8
4
0
3.2
5.4
3.7
3.5
5.3
6.4
4.0
3.5
2.7
1.8
1.6
0.9
Demographics of Unemployment
1998 – 4.5% Unemployment
27.6%
12.5%
8.9% 8.9%
7.2% 7.1%
3.2% 3.4%
48.0%
2010 - 10% Unempl.
In Jan, 2010 as unemployment hit
10%, teenage unemployment
hit an all time high of 27%.
27.6%
20.4%
18.9%
17.2%
15.2%
13.9%
12.5%
9.3% 9.0%
3.2% 3.4%
8.9%
8.9%
7.2%
7.1%
2010 Overall Unemployment Rate = 9.8%
[Unemployment Rate & Median Earnings by Education]
16%
14%
15.6%
Unemployment Rate - 1998
12%
10%
8%
10.5%
$23K
$32K
7%
8.0%
6%
5%
5.0%
4%
3.8%
3%
2%
1%
0
Less
Than
High
School
Diploma
Advanced
Degree
3.0%
High
$38K
School
Associates
$53K
Grad
Degree
College
$60K
Master’s
$75K
Unemployment and social problems
Each one-point increase in the unemployment
rate for an extended period is associated with:
 920 more suicides
 650 more homicides
 4000 more people admitted to
state mental institutions
 3300 more people sent to state prisons
 37,000 more deaths
 increases in domestic violence and
homelessness
Stress Associated With
Joblessness and Other Events
Life Event
Death of Spouse
Going to jail
Fired from job
Close friend died
Laid off from job
Failed school
Child left home
Major change in
working conditions
Level of Stress
100
66
49
47
40
37
29
20
June, 2010
30
Four Phases of the Business Cycle
PEAK
Level of business activity
PEAK
TROUGH
Trough
Time
[Real GDP per year]
Peak
Peak
Trough
One Cycle
Time
[Have averaged five years]
Expansion: an upturn - real GDP rises.
Peak: real GDP reaches its maximum.
Recession: real GDP declines 6 months.
Trough: real GDP reaches its minimum.
Business Cycles
Real GDP
Peak
6000
5200
Peak
4600
‘80
Trough
82
‘85
One Cycle
‘90
Characteristics of Expansions and Recessions
Expansions
1. Less unemployment
2. Increase in real GDP
3. Rapid job growth
4. Increasing interest rate
5. Increasing prices
6. Fewer social problems
(alcoholism, domestic violence,
divorce, and suicides)
Recessions
1. More unemployment
2. Decrease in Real GDP
3. Reduced job growth
4. Lower interest rates
5. Decreasing prices
6. More social problems
(alcoholism, domestic violence,
divorce and suicide)
Postwar Expansions/Recessions
72
01-07
30
June,10