Transcript Economics for Today 2nd edition Irvin B. Tucker

Chapter 16
Business Cycles
and
Unemployment
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
1
What is a
business cycle?
Alternating periods of
economic growth and
contraction, which can
be measured by
changes in real GDP
2
What are the four
phases of a
business cycle?
• Peak
• Recession
• Trough
• Recovery
3
What is a peak?
The phase of the
business cycle during
which real GDP reaches
its maximum after rising
during a recovery
4
What is a recession?
A downturn in the
business cycle during
which real GDP
declines
5
What is a trough?
The phase of the
business cycle in which
real GDP reaches its
minimum after falling
during a recession
6
What is a recovery?
An upturn in the
business cycle during
which real GDP rises
7
Hypothetical Business Cycle Peak
Real GDP
per year
Peak
Trough
Recession
Recovery
8
How long before a
downturn is a
recession?
The Department of
Commerce considers a
recession to be at least
two consecutive quarters
in which GDP declines
9
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primarily an historical
reference to the extreme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
10
What is
economic growth?
An expansion in national
output measured by the
annual percentage
increase in a nation’s
real GDP
11
Why is economic growth
one of our nation’s
economic goals?
It increases our
standard of living it creates a bigger
“economic pie”
12
What are the three
types of economic
indicators?
• Leading
• Coincident
• Lagging
13
What is a
leading indicator?
Variables that change
before real GDP
changes
14
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
15
What is a
coincident indicator?
Variables that change
at the same time that
real GDP changes
16
Coincident Indicators
•Nonagricultural payrolls
•Personal income
•Industrial Production
•Manufacturing and trade sales
17
What is a
lagging indicator?
Variables that change
after real GDP changes
18
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
19
What causes
unemployment?
When total spending falls,
businesses will find it
profitable to produce a
lower volume of goods and
avoid unsold inventory
20
Who is considered
unemployed?
Anyone who is 16
years of age and
above who is
actively seeking
employment
21
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
22
What is the
unemployment rate?
The percentage of
people in the labor
force who are without
jobs and are actively
seeking jobs
23
unemployed
Unemployme
=
nt rate
civilian labor
force
X 100
24
How is the
unemployment rate
calculated?
56,000 households are
surveyed each month
25
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
26
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
27
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
28
What is
underemployment?
People working at jobs
below their level of skills
29
What are criticisms of
the unemployment rate?
• Does not include
discouraged workers
• Includes part-time workers
• Does not measure
underemployment
30
The U.S. Unemployment Rate
25
20
15
10
5
1930 40
50
60
70
80
90
00
31
What are the types of
unemployment?
• Seasonal
• Frictional
• Structural
• Cyclical
32
What is seasonal
unemployment?
Unemployment caused
by recurring changes
in hiring due to
changes in weather
conditions
33
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
34
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
35
What is cyclical
unemployment?
Unemployment caused
by the lack of jobs
during a recession
36
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
37
What percent
unemployment is
considered full
employment?
The natural rate of
unemployment changes
over time, but today it is
considered to be about 5%
38
What is the GDP gap?
The GDP gap is the
difference between fullemployment real GDP
and actual real GDP
39
What is the cost of
unemployment?
The GDP gap
40
Key Concepts
41
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?
42
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?
43
Summary
44
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.
45
The generally accepted theory
today is that changes in the forces
of demand and supply cause
business cycles.
46
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.
47
Hypothetical Business Cycle Peak
Real GDP
per year
Peak
Trough
Recession
Recovery
48
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.
49
Leading, coincident, and lagging
indicators are economic
variables that change before, at
the same time as, and after
changes in real GDP,
respectively.
50
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.
51
Discouraged workers are
persons who want to work ,
but who have given up
looking for work.
52
Seasonal unemployment is
unemployment due to
seasonal changes.
53
Frictional unemployment
results when workers are
seeking new jobs that exist.
54
Structural unemployment is
unemployment caused by factors in
the economy, including lack of skills,
changes in product demand, and
technological change.
55
Cyclical unemployment is
unemployment resulting from
insufficient aggregate demand.
56
Full employment occurs when
the unemployment rate is equal
to the total of the seasonal,
frictional, and structural
unemployment rates.
57
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
©2002 South-Western College Publishing
59
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 employment 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.
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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.
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END
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