Transcript PP - Personal.kent.edu

Unemployment and
Business Cycles
SLR
SSR
w*
w’
D
Here,
U = Un
H’
H*
Lectures in Macroeconomics- Charles W. Upton
Counter-Cyclical and
Pro-Cyclical Indicators
Business Failures
New Business Starts
Unemployment
Average Work Week
Average Wage Rate
Capital Utilization
GDP
Counter-Cyclical
Pro-Cyclical
Counter-Cyclical
Pro-Cyclical
Pro-Cyclical
Pro Cyclical
Pro-Cyclical
Unemployment and Business Cycles
Counter-Cyclical and
Pro-Cyclical Indicators
Business Failures
New Business Starts
Unemployment
Average Work Week
Average Wage Rate
Capital Utilization
GDP
Counter-Cyclical
Pro-Cyclical
Counter-Cyclical
Pro-Cyclical
Pro-Cyclical
Pro Cyclical
Pro-Cyclical
Unemployment and Business Cycles
A Change in Demand
SLR
SSR
w*
w’
D
Here,
U = Un
H’
H*
Unemployment and Business Cycles
A Change in Demand
SLR
SSR
w*
w’
D
D’
H’
H*
Unemployment and Business Cycles
A Change in Demand
SLR
w*
We know a
w’temporary
demand
reduction
causes a
business cycle
SSR
D
D’
H’
H*
Unemployment and Business Cycles
A Change in Demand
SLR
w*
We know a
w’temporary
demand
reduction
causes a
business cycle
So what does it
do to
unemployment?
H’
H*
Unemployment and Business Cycles
SSR
D
D’
A Modest Proposal
H * H 
Uknow
 Ua n So what does it
w*
We
w’temporary
H
*
do to
SLR
demand
reduction
causes a
business cycle
unemployment?
H’
H*
Unemployment and Business Cycles
D’
SSR
D
A Modest Proposal
H * H 
Uknow
 Ua n So what does it
w*
We
w’temporary
H
*
do to
SLR
demand
reduction
causes a
business cycle
SSR
D
Ergo, U is
unemployment?
counter cyclicalD’
H’
H*
Unemployment and Business Cycles
The Formal Relation
• GDP
– Actual GDP = what you think it is
– Potential GDP = GDP when U = Un
Unemployment and Business Cycles
The Formal Relation
• GDP
– Actual GDP = what you think it is
– Potential GDP = GDP when U = Un
• Employment
– Actual Employment = CLF(1-U)
– Potential Employment = CLF(1-Un)
Unemployment and Business Cycles
GDP and Unemployment
1
3
t
2
3
t
GDPActual  At K [CLF (1  U )]
Unemployment and Business Cycles
Potential GDP & the Natural Rate
1
3
t
2
3
t
GDPPotential  At K [CLF (1  U n )]
Unemployment and Business Cycles
GDP and Unemployment
1
3
t
GDPPotential  At K [CLF (1  U n )]
1
3
t
GDPActual  At K [CLF (1  U )]
Unemployment and Business Cycles
2
3
t
2
3
t
The Relation
GDPPotential  GDPActual  2 
  (U  U n )
GDPActual
3
Unemployment and Business Cycles
Unemployment and GDP
GDPPotential  GDPActual
U  U n  1.5
GDPActual
Unemployment and Business Cycles
An Illustration
GDPPotential  GDPActual  2 
  (U  U n )
GDPActual
3
GDP is $10 trillion; Un = 4%;U = 7%
Unemployment and Business Cycles
An Illustration
GDPPotential  $10  2 
   ( 7  4)
$10
3
GDPPotential  $10.2 Trillion
GDP is $10 trillion; Un = 4%;U = 7%
Unemployment and Business Cycles
A Second Illustration
GDPPotential  GDPActual  2 
  (U  U n )
GDPActual
3
GDP grew from $10 Trillion to $10.45 Trillion
What will happen to U?
Unemployment and Business Cycles
A Second Illustration
GDPPotential GDPActual  2 

  U
GDPPotential
GDPActual
3
GDP grew from $10 Trillion to $10.45 Trillion
What will happen to U?
Unemployment and Business Cycles
A Second Illustration
GDPPotential
 3.5% a year
GDPPotential
GDPActual  2 
GDPPotential

  U
GDPPotential
GDPActual
3
GDP grew from $10 Trillion to $10.45 Trillion
What will happen to U?
Unemployment and Business Cycles
A Second Illustration
2
3.5%  4.5%   U
3
U  1.5%
GDP grew from $10 Trillion to $10.45 Trillion
What will happen to U?
Unemployment and Business Cycles
Okun’s Law
GDPPotential  GDPActual  2 
  (U  U n )
GDPActual
3
Unemployment and Business Cycles
Okun’s Law
GDPPotential  GDPActual  1 
  (U  U n )
GDPActual
2
Unemployment and Business Cycles
The Facts
Change in U
Change in GDP vs Change in U
-20.0000
2.0000
1.5000
1.0000
0.5000
0.0000
-0.5000
-10.0000
0.0000
-1.0000
-1.5000
10.0000
Change in GDP
Unemployment and Business Cycles
20.0000
The Facts
Change in U
Change in GDP vs Change in U
-20.0000
2.0000
1.5000
1.0000
0.5000
0.0000
-0.5000
-10.0000
0.0000
-1.0000
-1.5000
10.0000
Change in GDP
Unemployment and Business Cycles
20.0000
Unemployment data from
BLS, GDP data from Dept of
Commerce
End
©2004 Charles W. Upton.
All rights reserved
Unemployment and Business Cycles