Transcript Document

Chapter 12
Business Cycles
and Unemployment
• Key Concepts
• Summary
©2000 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
usually considers a recession
to be at least two consecutive
quarters in which there is a
decline in GDP
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primarily an historical
reference to the extreme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
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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
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
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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
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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
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5.9%
4.8%
4.2%
Japan
U.S.
12.1%
11.1%
9.1%
7.8%
U.K. Canada Germany 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%
39
What is the GDP gap?
The GDP gap is the
difference between fullemployment real GDP
and actual real GDP
40
What is the cost of
unemployment?
The GDP gap
41
Civilian Unemployment Rates 1999
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
4.2%
4.1%
4.3%
3.7%
8.0%
13.7%
12.6%
30.9%
11.3%
25.1%
6.7%
3.5%
1.8%
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Key Concepts
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Key Concepts
•
•
•
•
•
•
•
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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?
44
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?
45
Summary
46
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.
47
The generally accepted theory
today is that changes in the forces of
demand and supply cause business
cycles.
48
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.
49
Hypothetical Business Cycle Peak
Real GDP
per year
Peak
Trough
Recession
Recovery
50
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.
51
Leading, coincident, and
lagging indicators are economic
variables that change before, at the
same time as, and after changes in
real GDP, respectively.
52
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.
53
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.
54
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.
59
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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END
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