Transcript Business Cycles, Unemployment, and Inflation

#6
Business Cycles, Unemployment, and
Inflation
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
The Business Cycle
• Alternating increases and decreases
•
LO1
in economic activity over time
Phases of the business cycle
• Peak
• Recession
• Trough
• Expansion
6-2
The Business Cycle
Peak
Level of real output
Peak
Peak
Trough
Trough
Time
LO1
6-3
The Business Cycle
Peak – the economy is at or near full employment and the level of
real output is at or very close to the economy’s capacity. The price
level is likely to rise at this level.
Recession – period of decline in total output, income, and
employment. The downturn, which lasts 6 months or more, is
marked by widespread contraction of business activity in many
industries. Significant increases in unemployment occur.
Trough – output and employment bottom out at their lowest levels.
The trough phase may be short or long.
Expansion – period in which real GDP, income, and employment
rise. The economy again approaches full employment. Spending
may surpass production capacity and inflation will occur.
6-4
The Business Cycle
U.S. Recessions since 1950
Period
Duration,
Months
Depth
(Decline in Real Output)
1953–54
10
-2.6%
1957–58
8
-3.7
1960–61
10
-1.1
1969–70
11
-0.2
1973–75
16
-3.2
1980
6
-2.2
1981–82
16
-2.9
1990–91
8
-1.4
2001
8
-0.4
2007–09
18
-3.7
Source: National Bureau of Economic Research, www.nber.org, and Minneapolis Federal Reserve Bank,
www.minneapolisfed.gov. Output data are in 2000 dollars.
LO1
6-5
Causes of Business Cycles
• Economic fluctuations are driven by demand
shocks and supply shocks, such as unexpected
changes in technology, productivity, or spending by
consumers, businesses, and the government.
• Firms cannot deal with shocks on their own
because of sticky prices, prices that are slow to
respond to changes in demand and supply.
Demand shocks are
unexpected changes in the
demand for goods and
services.
Supply shocks are
unexpected changes in the
supply of goods and
services.
LO: 6-1
6-6
Causes of Business Cycles
• Business cycle fluctuations
• Economic response entails
decreases in output and
employment
LO1
6-7
Cyclical Impact
• Durable goods affected most
• Capital goods
• Consumer durables
• Nondurable consumer goods affected
less
• Services
• Food and clothing
LO1
6-8
Causes of Business Cycles
• Causes of shocks
• Irregular innovation
• Productivity changes
• Monetary factors
• Political events
• Financial instability
• Recession of 2007
LO1
6-9
Unemployment
Under 16
and/or
Institutionalized
(70.9 million)
Total
population
(308.7
million)
Unemployment rate =
# of unemployed
× 100
Labor force
Not in
labor
force
(83.9 million)
Employed
(139.1 million)
Unemployment rate =
14,855,000
× 100 = 9.6%
153,889,000
Labor
force
(153.9
million)
Unemployed
(14.8 million)
LO2
6-10
Unemployment
• http://www.bls.gov/news.release/empsit.nr0.htm
• 4 problems with the measure
• (1) Some who work still not considered
employed (“not in labor force”)
• Full-time housekeepers/childcare providers
• Children under 16 working for no pay
• Unemployment rate overstated
• (2) Some who do not work are counted as
employed
• Illness, bad weather, labor disputes
• Unemployment rate understated
11
6-11
Unemployment
• (3) Part-time workers
•
•
•
•
•
Considered fully employed
Some want full-time work, but can’t find it
Lack of consumer demand
Partially unemployed
Unemployment rate understated
• (4) Discouraged workers
• Some who seek work and can’t find it
• Unemployment rate understated
12
6-12
Types of Unemployment
• Frictional unemployment
• Individuals searching for jobs or
•
•
LO3
waiting to take jobs soon
Structural unemployment
• Occurs due to changes in the
structure of the demand for labor
Cyclical unemployment
• Caused by the recession phase of
the business cycle
6-13
Definition of Full Employment
• Full employment is something less than
•
•
LO3
100 percent employment
Believed to occur when unemployment
rate is less than 5 percent
Potential output
6-14
Economic Cost of Unemployment
• GDP gap
• GDP gap = Actual GDP – Potential
•
LO3
GDP
• Can be negative or positive
Loss of income is unequal
6-15
Unemployment and GDP gap
12,000
GDP gap
(positive)
11,000
GDP (billions of
1996 dollars)
10,000
Potential GDP
9,000
GDP gap
(negative)
8,000
7,000
6,000
Actual GDP
Unemployment
(percent of civilian
labor force)
5,000
10
The Unemployment Rate
8
6
4
2
0
LO: 6-3
Source: Congressional Budget Office & Bureau of Economic Analysis
6-16
Unemployment Rates
LO3
6-17
Inflation
• General rise in the price level
• Inflation reduces the “purchasing
•
power” of money
Consumer Price Index (CPI)
CPI =
CPI =
LO2
Price of the most recent market
basket in the particular year
Price estimate of the market
basket in 1982–1984
218.1
-
214.5
×100
×100
= 1.6%
214.5
6-18
Inflation
Inflation Rates in Five Industrial Nations
LO2
6-19
Inflation
Annual Inflation Rates in the United States,
1960-2010
LO2
6-20
Types of Inflation
• Demand-pull inflation
• Excess spending relative to output
• Central bank issues too much
•
LO3
money
Cost-push inflation
• Due to a rise in per-unit input costs
• Supply shocks
6-21
Redistribution Effects of Inflation
• Nominal income
• Unadjusted for inflation
• Real income
• Nominal income adjusted for
•
inflation
Anticipated versus unanticipated
income
Percentage
change in
real income
LO3

=
Percentage
change in
nominal income
Percentage
change in
price level
6-22
Redistribution Effects of Inflation
Nominal Income vs. Real Income
%Real Income 
2%
% Nominal Income % Price Level
5%
3%
6-23
Who Is Hurt by Inflation?
• Fixed-income receivers
• Real incomes fall
• Savers
• Value of accumulated savings
•
LO3
deteriorates
Creditors
• Lenders get paid back in “cheaper
dollars”
6-24
Who Is Unaffected by Inflation?
• Flexible-income receivers
• COLAs
• Social Security recipients
• Union members
• Debtors
• Pay back the loan with “cheaper
dollars”
LO3
6-25
Anticipated Inflation
• Real interest rate
• Rates adjusted for inflation
• Nominal interest rate
• Rates not adjusted for inflation
LO3
6-26
Anticipated Inflation
6%
11%
=
+
5%
Nominal
interest
rate
LO3
Inflation
premium
Real
interest
rate
6-27
Does Inflation Affect Output?
• Cost-push inflation
• Reduces real output
• Redistributes a decreased level of
•
LO3
real income
Demand-pull inflation
• One view is that zero inflation is
best
• Another view is that mild inflation is
best
6-28
Hyperinflation
• Extraordinarily rapid inflation
• Devastates an economy
• Businesses don’t know what to charge
• Consumers don’t know what to pay
• Money becomes worthless
• Zimbabwe’s 14.9 billion percent
inflation in 2008
LO3
6-29