Business Cycles and Unemployment. Key Concepts Summary. ©2005 South-Western College Publishing. This chapter will answer these questions:.
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©2005 South-Western College Publishing
How are the expansions and contractions of business cycles measured? And what causes the business-cycle roller coaster? What are the different types of unemployment?
Alternating periods of economic growth and contraction, which can be measured by changes in real GDP
The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery
A downturn in the business cycle during which real GDP declines
The phase of the business cycle in which real GDP reaches its minimum after falling during a recession
An upturn in the business cycle during which real GDP rises
Real GDPper year
Growth trend line
The Department of Commerce considers a recession to be at least two consecutive quarters in which GDP declines
The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s
An expansion in national output measured by the annual percentage increase in a nation’s real GDP
It increases our standard of living - it creates a bigger “economic pie”
Variables that change before real GDP changes
Variables that change at the same time that real GDP changes
Variables that change after real GDP changes
When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory
Anyone who is 16 years of age and above who is actively seeking employment
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
The percentage of people in the labor force who are without jobs and are actively seeking jobs
civilian labor force
56,000 households are surveyed each month
People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions
Civilian labor force
Not in Labor ForceArmed forcesHousehold workersStudentsRetireesPersons with disabilitiesInstitutionalizedDiscourage workers
UnemployedNew entrantsRe-entrantsLost last jobQuit last jobLaid off
A person who wants to work, but who has given up searching for work. He or she believes there will be no job offers
People working at jobs below their level of skills
Unemployment caused by recurring changes in hiring due to changes in weather conditions
Unemployment caused by the normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force
Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities
Unemployment caused by the lack of jobs during a recession
The situation in which an economy operates at an unemployment rate equal to the sum of the seasonal, frictional, and structural unemployment rates
The natural rate of unemployment changes over time, but today it is considered to be about 5%
The GDP gap is the difference between full-employment real GDP and actual real GDP
The GDP gap
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.
Hypothetical Business Cycle 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.
Real GDPper year
Growth trend line
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.
Leading, coincident, and lagging indicators are economic variables that change before, at the same time as, and after changes in real GDP, respectively.
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.
Discouraged workers are persons who want to work , but who have given up looking for work.
Seasonal unemployment have given up looking for work. is unemployment due to seasonal changes.
Frictional unemployment have given up looking for work. results when workers are seeking new jobs that exist.
Structural unemployment have given up looking for work. is unemployment caused by factors in the economy, including lack of skills, changes in product demand, and technological change.
Cyclical unemployment have given up looking for work. is unemployment resulting from insufficient aggregate demand.
Full employment have given up looking for work. occurs when the unemployment rate is equal to the total of the seasonal, frictional, and structural unemployment rates.
The have given up looking for work. 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.