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Business Cycle & Unemployment. The economy in flux. Examining the Economy. Need to address two Time Horizons Long-Run Over the Course of Several Years, what is GDP’s Trend? Short-Run What are GDP’s month-to-month or quarter-to-quarter fluctuations?. A Closer Look at Real GDP.

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Business Cycle & Unemployment

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Business cycle unemployment

Business Cycle & Unemployment

The economy in flux.

Examining the economy

Examining the Economy

Need to address two Time Horizons

  • Long-Run

    • Over the Course of Several Years, what is GDP’s Trend?

  • Short-Run

    • What are GDP’s month-to-month or quarter-to-quarter fluctuations?

A closer look at real gdp

A Closer Look at Real GDP[1][id]=GDPC96

Real gdp 1990 to today

Real GDP: 1990 to Today[1][id]=GDPC96



  • Business Cycle

    • Alternating periods of economic growth and contraction, measured by %GDP.

    • Avg. Cycle last about 8 - 10 years.

  • Trend Line

    • Shows Long-run GDP trend.

  • Economic Growth

    • Increase in national output measured by a positive %GDP.

Phases of the business cycle






Real GDP





Business Cycle

Phases of the Business Cycle

  • 4 Phases

    • Peak

      • Point where Real GDP reaches a local Max.

    • Recession

      • Period during which real GDP declines

      • (2 consecutive Quarters)

    • Trough

      • Point where real GDP reaches a local min.

    • Recovery/Boom

      • Period during which real GDP increases

Easier to look at growth rates

Growth rates can tell us the same info about the business cycle


Growth Rate > 0


Growth Rate < 0


Growth Rate = 0 & moving from + to -


Growth Rate = 0 & moving from - to +

Growth Rate







Easier to look at Growth Rates


Growth rate of real gdp

Growth Rate of Real GDP

Growth rate 1990 to today

Growth Rate: 1990 to today

Forecasting the business cycle

Forecasting the Business Cycle

  • Takes time to collect data on GDP.

    • 1 month lag for initial quarterly report

    • 6 month or longer for revised estimates

  • We need to know faster:

    • Use Indicators

      • Leading Indicators: Inventories, Avg. Work Week…

      • Coincidental Indicators:Industrial Production, Non-Ag. Payroll

      • Lagging Indicators: Unemployment, Duration of UE, Prime Rate

Economic goals

Economic Goals

  • Maintain Growth Trend

  • Minimize Size of Economic Fluctuations

    • Try to keep Business Cycle as close to Trend line as Possible

    • Why?

      • Economy potentially experiences problems when away from trend:

        • Below Trend: Unemployment Concerns

        • Above Trend: Inflation Concerns



  • Unemployment Rate:

    • The % of people in the labor force who are without jobs and are actively looking

Population break down

Working Age Population

Anyone over 16 years old

Not in Labor Force

Civilian Labor Force



Armed forces, household workers, volunteers, students, retirees, disabled, Institutionalized workers, Discouraged Workers

Member of working age population not listed to left

No job, but looking within last 2 weeks: New entrants, re-entrants, lost or quit last job & laid-off

Paying job or self-employed

Population Break Down

Discouraged Worker: a person who wants work, would take a job if found, but has given up looking.

Employment statistics

Employment Statistics

  • Unemployment Rate

    • UE% = # of Unemployed/(# in Labor Force)

      =UE / (LF)

      =UE / (UE + E)

    • Ex: Unemployed = 100; Employed = 900;

    • UE%= 100/(100+900) = 100/1000=.1=10%

  • Labor Force Participation Rate (LFPR)

    • LFPR = LF / Working Age Pop

  • Employment Ratio

    • ER = Employed / Working Age Pop

Unemployment history

Unemployment History

Avg. UE% = 5.6%

Employment ratio history

Employment Ratio History

Problems w unemployment measure

Problems w/ Unemployment Measure

  • UE% Overstated because:

    • No Black Markets

    • People lie to get Unemployment Compensation

  • UE% Understated because:

    • Discouraged Workers

    • Underemployed: Part-time workers who want full time work

To fix ue need to know the cause

To Fix UE need to know the cause

  • Types of Unemployment:

    • Frictional Unemployment

      • People who are in between jobs or just entered the job market:

    • Seasonal Unemployment

      • UE related to changing seasons: ex. Winter UE in agriculture or construction

      • Technically a sub category of frictional

To fix ue need to know the cause1

To Fix UE need to know the cause

  • Structural Unemployment

    • No longer have skill demanded by employers

    • Mismatch of skills

  • Cyclical Unemployment

    • Unemployment caused by economic fluctuations. Caused by the cycle.

Unemployment natural good sign

Unemployment: Natural? Good Sign?

  • Frictional, Seasonal & Structural

    • We expect these 3 types of UE will always exist

    • Maybe even good:

      • Frictional:

        • People leave jobs to find better ones, or graduate from school…Good.

      • Seasonal:

        • Necessary for the type of work, so expected.

      • Structural:

        • Implies new technology, more skills need. Good sign for the economy, not for the individual

Full employment

Full Employment

  • If we expect these types of UE, then we don’t worry when we have UE.

  • Full Employment Implies

    • UE% = Seasonal% + Structural% +Frictional %


Natural rate of unemployment

Natural Rate of Unemployment

  • The unemployment rate that exists at Full employment.

  • Estimated to be between 4% & 6%, so… aprox: 5%

Unemployment goal

Unemployment Goal

  • Keep Economy at Full Employment

  • Maintain the Natural Rate of UE

  • Keep Cyclical Unemployment = 0

  • Stay near trend line

Cost of unemployment

Cost of Unemployment

  • GDP Gap = Potential real GDP – actual Real GDP

    • Potential Real GDP

      • What GDP would have been if we were at Full Employment

    • Actual Real GDP

      • Real GDP actually produced

  • GDP Gap measures lost production caused by unemployment

  • “How Far Inside the PPC are we?”

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