Chapter 16Business Cycles and Unemployment • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing
In this chapter, you will learn to solve these economic puzzles: What is the difference between a recession and a depression? Can an economy produce more output than its potential? Is a worker who has given up searching for work counted as unemployed?
What is aBusiness Cycle? Alternating periods of economic growth and contraction, which can be measured by changes in real GDP
What are the four phases of a Business Cycle? • Peak • Recession • Trough • Recovery
What is a Peak? The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery
What is a Recession? A downturn in the business cycle during which real GDP declines
What is a Trough? The phase of the business cycle in which real GDP reaches its minimum after falling during a recession
What is a Recovery? An upturn in the business cycle during which real GDP rises
Hypothetical Business Cycle Peak Real GDPper year Growth trend line Peak Trough Recession Recovery
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
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 The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s
What isEconomic Growth? An expansion in national output measured by the annual percentage increase in a nation’s real GDP
Why is Economic Growth one of our nation’s economic goals? It increases our standard of living - it creates a bigger “economic pie”
What are the three types of Economic Indicators? • Leading • Coincident • Lagging
What is aLeading Indicator? Variables that change before real GDP changes
Leading Indicators • Changes in business and consumer credit • New orders for plant and equipment • New consumer goods orders • Unemployment claims • Delayed deliveries • New business formed • Average workweek • New building permits • Changes in inventories • Material prices • Stock prices • Money supply
What is aCoincident Indicator? Variables that change at the same time that real GDP changes
Coincident Indicators • Nonagricultural payrolls • Personal income • Industrial Production • Manufacturing and trade sales
What is aLagging Indicator? Variables that change after real GDP changes
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
What causes Unemployment? When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory
Who is considered Unemployed? Anyone who is 16 years of age and above who is actively seeking employment
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
What is the Unemployment Rate? The percentage of people in the labor force who are without jobs and are actively seeking jobs
Unemployment rate unemployed civilian labor force X 100 =
How is the Unemployment Rate calculated? 56,000 households are surveyed each month
What is theCivilian Labor Force? People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions
Total Population age 16 and over Civilian labor force Not in Labor ForceArmed forcesHousehold workersStudentsRetireesPersons with disabilitiesInstitutionalizedDiscourage workers EmployedEmployeesSelf-employed UnemployedNew entrantsRe-entrantsLost last jobQuit last jobLaid off
Who is aDiscouraged 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
What is Underemployment? People working at jobs below their level of skills
What are criticisms of the Unemployment Rate? • Does not include discouraged workers • Includes part-time workers • Does not measure underemployment
The U.S. Unemployment Rate 25 20 15 10 5 1930 40 50 60 70 80 90 00
Unemployment Rates for Selected Nations 1998 12.4% 11.7% 8.3% 6.3% 6.3% 4.5% 4.3% Japan U.S. Germany U.K. Canada France Italy
What are the types of Unemployment? • Seasonal • Frictional • Structural • Cyclical
What is Seasonal Unemployment? Unemployment caused by recurring changes in hiring due to changes in weather conditions
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
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
What is Cyclical Unemployment? Unemployment caused by the lack of jobs during a recession
What isFull Employment? The situation in which an economy operates at an unemployment rate equal to the sum of the seasonal, frictional, and structural unemployment rates
What percent unemployment is considered Full Employment? The natural rate of unemployment changes over time, but today it is considered to be about 5%
What is the GDP Gap? The GDP gap is the difference between full-employment real GDP and actual real GDP
What is the Cost of Unemployment? The GDP gap
Civilian Unemployment Rates 1998 Demographic Groups OverallMaleFemaleWhiteBlackTeenagers (16 - 19 years)White malesBlack malesWhite femalesBlack femalesLess than high schoolHigh school graduatesCollege graduates 4.5%4.4%4.6%3.9%8.9%14.6%14.1%30.1%10.9%25.3%7.1%4.0%1.8%
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?
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?
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.
The generally accepted theory today is that changes in the forces of demand and supply cause business cycles.
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.