Transcript Economics for Today 2nd edition Irvin B. Tucker

Chapter 16
Business Cycles
and Unemployment
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2000 South-Western College Publishing
1
In this chapter, you will
learn to solve these
economic puzzles:
Canisan
thewho
economy
difference
IsWhat
a worker
has given
produce
between
more
a recession
output
up
searching
for
work
and
thanaits
depression?
potential?
counted
as
unemployed?
2
What is a
Business Cycle?
Alternating periods of
economic growth and
contraction, which can
be measured by
changes in real GDP
3
What are the four phases
of a Business Cycle?
• Peak
• Recession
• Trough
• Recovery
4
What is a Peak?
The phase of the business
cycle during which real
GDP reaches its
maximum after rising
during a recovery
5
What is a Recession?
A downturn in the
business cycle during
which real GDP declines
6
What is a Trough?
The phase of the business
cycle in which real GDP
reaches its minimum after
falling during a recession
7
What is a Recovery?
An upturn in the
business cycle during
which real GDP rises
8
Hypothetical Business Cycle Peak
Real GDP
per year
Peak
Trough
Recession
Recovery
9
How long before a
downturn is a Recession?
The Department of Commerce
usually considers a recession
to be at least two consecutive
quarters in which there is a
decline in GDP
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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primarily an historical
reference to the extreme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
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 Economic Growth
one of our nation’s
economic goals?
It increases our standard
of living - it creates a
bigger “economic pie”
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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
•Material prices
•Delayed deliveries
•New business formed •Stock prices
•Money supply
•Average workweek
•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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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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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 is the
Unemployment Rate?
The percentage of people
in the labor force who are
without jobs and are
actively seeking jobs
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unemployed
Unemployment
X
100
=
rate
civilian labor force
25
How is the Unemployment
Rate calculated?
56,000 households are
surveyed each month
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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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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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Who is a
Discouraged Worker?
A person who wants to
work, but who has given
up searching for work.
He or she believes there
will be no job offers
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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
• Does not measure
underemployment
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The U.S. Unemployment Rate
25
20
15
10
5
1930
40
50
60
70
80
90
00
32
6.3%
4.5%
4.3%
12.4%
11.7%
8.3%
6.3%
Japan U.S. Germany U.K. Canada France Italy
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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?
Unemployment caused by
the 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?
Unemployment caused by
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?
The situation in which an
economy operates at an
unemployment rate equal
to the sum of the seasonal,
frictional, and structural
unemployment rates
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What percent
unemployment 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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What is the GDP Gap?
The GDP gap is the
difference between fullemployment real GDP
and actual real GDP
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What is the Cost of
Unemployment?
The GDP gap
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Civilian Unemployment Rates 1998
Demographic Groups
Overall
Male
Female
White
Black
Teenagers (16 - 19 years)
White males
Black males
White females
Black females
Less than high school
High school graduates
College graduates
4.5%
4.4%
4.6%
3.9%
8.9%
14.6%
14.1%
30.1%
10.9%
25.3%
7.1%
4.0%
1.8%
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Key Concepts
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Key Concepts
•
•
•
•
•
•
•
•
What is a Business Cycle?
What are the phases of a Business Cycle?
How long before a downturn is a Recession?
What are the types of Economic Indicators?
What causes Unemployment?
Who is considered Unemployed?
Who is considered Employed?
What is the Unemployment Rate?
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Key Concepts cont.
•
•
•
•
•
•
What is the Civilian Labor Force?
Who is a Discouraged Worker?
What is Underemployment?
What are the types of Unemployment?
What is Full Employment?
What percent unemployment is
considered Full Employment?
• What is the Cost of Unemployment?
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Summary
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Business cycles are recurrent
rises and falls in real GDP over a
period of years. Business cycles
vary greatly in duration and
intensity. A cycle consists of four
phases: peak, recession, trough and
recovery.
48
The generally accepted theory
today is that changes in the forces of
demand and supply cause business
cycles.
49
A recession is officially defined
as at least two consecutive quarters
of real GDP decline. A trough is the
turning point in national output
between recession and recovery.
During a recovery, there is 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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Economic growth is measured
by the annual percentage change I
real GDP in a nation. The long-term
annual average growth rate in the
United States is 3 percent.
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Leading, coincident, and
lagging indicators are economic
variables that change before, at the
same time as, and after changes in
real GDP, respectively.
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The unemployment rate is the
ratio of the number of unemployed
to the number in the labor force
multiplied by 100. The nation’s
labor force consists of people who
are employed plus those who are out
of work, but seeking employment.
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Discouraged workers are a
reason critics say the unemployment
rate is understated. Discouraged
workers are persons who want to
work , but who have given up.
Another criticism of the
unemployment rate is that it
overstates unemployment because
respondents can falsely report they
are seeking a job.
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Seasonal unemployment is
unemployment due to seasonal
changes.
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Frictional unemployment
results when workers are seeking
new jobs that exist. The problem is
that imperfect information prevents
matching the applicants with
available jobs.
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Structural unemployment is
unemployment caused by factors in
the economy, including lack of
skills, changes in product demand,
and technological change.
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Cyclical unemployment is
unemployment resulting from
insufficient aggregate demand.
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Full employment occurs when
the unemployment rate is equal to
the total of the seasonal, frictional,
and structural unemployment rates.
Currently, the full-employment rate
of unemployment in the United
States is considered to be close to 5
percent. At this rate of
unemployment, the economy is
producing at its maximum potential.
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The GDP gap is the difference
between full employment, or
potential real GDP, and actual real
GDP. Therefore, the GDP gap
measures the loss of output due to
cyclical unemployment.
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Chapter 16 Quiz
©2000 South-Western College Publishing
62
1. The phases of a business cycle are
a. upswing and downswing.
b. full employment and unemployment.
c. peak, recession, trough, and recovery.
d. full employment, depression, expansion,
and plateau.
C. These are the four phases of changes
in real GDP which mirrors changes in
employment and other key measures of
the macro economy.
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2. The phase of a business cycle during which real
GDP reaches its minimum level is the
a. recession.
b. depression.
c. recovery.
d. trough.
D. Recession is the phase during which real
GDP fall and recovery is the phase during
which real GDP rises. Depression is an
historical reference to the deep and long
recession of the early 1930’s.
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3. Which of the following is not a variable in
the index of leading indicators?
a. New consumer goods orders.
b. Delayed deliveries.
c. New businesses formed.
d. Prime rate.
D. The prime rate is a lagging indicator.
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4. Which of the following is a coincident
indicator?
a. Personal income.
b. Industrial production.
c. Manufacturing and trade sales.
d. All of the above.
D. All of these will change at the same
time that real GDP changes.
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5. The labor force consists of all persons
a. 21 years of age and older.
b. 21 years of age and older who are working.
c. 16 years of age and older.
d. 16 years of age and older who are working
or actively seeking work.
D. The labor force also includes the armed
forces, but excludes the category called
“persons not in labor force.”
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6. People who are not working will be counted as
employed if they are
a. on vacation.
b. absent from their job because of bad
weather.
c. absent from their job because of a labor
dispute.
d. all of the above.
D. A person who works at least 1 hour per
week for pay or at least 15 hours per week
as an unpaid worker in a family business is
counted as employed regardless of the
special situations listed in a, b, and c.
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7. The number of people officially unemployed is
not the same as the number of people who can’t
find a job because
a. people who have jobs continue to look for
better ones.
b. the armed forces are included.
c. discouraged workers are not counted.
d. of all of the above.
C. A person can quit looking for a job because
he is discouraged after trying to find one, but
wants to work if he could find a job, yet this
person is not considered unemployed because
he is not actively seeking employment.
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8. Frictional unemployment applies to
a. workers with skills not required for existing
jobs.
b. short periods of unemployment needed to
match jobs and job seekers.
c. people who spend long periods of time out of
work.
d. unemployment related to the ups and downs
of the business cycle.
B. Frictional unemployment includes people
changing jobs, initially entering the labor
force, or re-entering the labor force.
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9. Structural unemployment is caused by
a. shifts in the economy that make certain job
skills obsolete.
b. temporary layoffs in industries such as
construction.
c. the impact of the business cycle on job
opportunities.
d. short-term changes in the economy.
A. Structural unemployment is long-term
unemployment because the skills of
unemployed workers do not match the
skills required for existing jobs.
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10. Unemployment that is due to a recession is
a. involuntary unemployment.
b. frictional unemployment.
c. structural unemployment.
d. cyclical unemployment.
D. Only cyclical unemployment is
attributable directly to the business cycle.
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11. Seasonal, frictional and structural
unemployment is equal to
a. frictional unemployment.
b. structural unemployment.
c. cyclical unemployment.
d. full employment.
D. Full employment does not mean zero
unemployment. Even in the best times,
there is always seasonal, frictional, and
structural unemployment.
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12. Which of the following statements is true?
a. The four phases of the business cycle, in
order, are peak, recovery, trough, and
recession.
b. When unemployment is rising, then real
GDP is rising.
c. The economic problem typically associated
with a recovery is rising unemployment.
d. Full employment exists in an economy when
the unemployment rate equals the sum of
seasonal, frictional, and structural
unemployment rates.
D. There will always be some people
looking for work.
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13. Which of the following groups typically has
the highest unemployment rate?
a. White men and women.
b. African-American men and women as a
group.
c. Teenagers.
d. Persons who completed high school.
B. In 1998 the unemployment rate of black
males was 30.1% and black males was 25.3%.
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Civilian Unemployment Rates 1998
Demographic Groups
Overall
Male
Female
White
Black
Teenagers (16 - 19 years)
White males
Black males
White females
Black females
Less than high school
High school graduates
College graduates
4.5%
4.4%
4.6%
3.9%
8.9%
14.6%
14.1%
30.1%
10.9%
25.3%
7.1%
4.0%
1.8%
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14. Which of the following is true?
a. The GDP gap is the difference between full
employment real GDP and actual real GDP.
b. We desire economic growth because it
increases the nation’s real GDP.
c. Economic growth is measured by the annual
percentage increase in a nation’s real GDP.
d. Discouraged workers are a reason critics say
the unemployment rate is understated.
e. All of the above are true.
E. All of the above are true.
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END
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