macroeconomic mcgrowhill macro ch 9 19e use this one

09
Business Cycles, Unemployment,
and Inflation

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter Objectives
• The Business Cycle and its
Primary Phases
• How Unemployment and
Inflation are Measured
• The Types of Unemployment
and Inflation and their Various
Economic Impacts


The Business Cycle

• Alternating increases and decreases
•

LO1

in economic activity over time
Phases of the business cycle
• Peak
• Recession
• Trough

• Expansion
9-3


The Business Cycle
Peak

Rec
ess
io

an

si

on

h
t
w
o
Gr
n

Re
ces
sio
n

Ex

pa

Peak

ns
i on

d
Tren

Trough

Ex
p

Level of real output

Peak

Trough

Time

LO1

9-4


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, and Minneapolis Federal Reserve
Bank, Output data are in 2000 dollars
LO1

9-5


Causation: A First Glance

• Business cycle fluctuations
• Economic shocks
• Prices are “sticky” downwards
• Economic response entails
decreases in output and
employment

LO1

9-6

Causation: A First Glance

• Causes of shocks
• Irregular innovation
• Productivity changes
• Monetary factors
• Political events
• Financial instability
• Example: Recession of 2007
LO1

9-7


Cyclical Impact

• Durable goods affected most
• Capital goods
• Consumer durables
• Nondurable consumer goods affected
less
• Services
• Food and clothing
LO1

9-8


Unemployment

• Twin Problems of the Business Cycle
– Unemployment
– Inflation

• Measurement of Unemployment
• Labor Force
• Unemployment Rate
– Part-Time Employment
– Discouraged Workers
Unemployment Rate

=

W 7.2

Unemployed
Labor Force

x 100


Phillips Curve


Unemployment
Unemployment rate =

Under 16
and/or
Institutionalized

(71.4 million)

Total
population
(307.3
million)

# of unemployed
labor force

Not in
labor
force
(81.7 million)

Employed
(139.9 million)

X 100

Unemployment rate =

Labor
force
(154.2
million)

14,265,000
154,142,000

X 100 = 9.3%

Unemployed
(14.3 million)
LO2

9-11


Unemployment

• Criticisms of unemployment
• Involuntary part-time workers
counted as if full-time
• Discouraged workers are not
counted as unemployed

LO2

9-12


Types of Unemployment
• Frictional unemployment
• Individuals searching for jobs or waiting to
•
•

LO3

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

9-13


Definition of Full Employment

• Natural Rate of Unemployment (NRU)
• Full employment level of
unemployment
• Can vary over time

• Demographic changes
• Changing job search methods
• Public policy changes

• Actual unemployment can be above
or fall below the NRU
LO3

9-14


Economic Cost of Unemployment

• GDP Gap
• GDP gap = actual GDP – potential
•

LO3

GDP
• Can be negative or positive
Okun’s Law
• Every 1% of cyclical unemployment
creates a 2% GDP gap
9-15


Economic Cost of Unemployment
Economic Cost of Unemployment

LO3

9-16


Economic Cost of Unemployment

LO3

9-17

Unequal Burdens

• Occupation
• Age
• Race and ethnicity
• Gender
• Education
• Duration

LO3

9-18


Unequal Burdens
Unemployment Rates by Demographic Group: Full Employment Year (2007) and Recession Year (2009)*
Unemployment Rate
Demographic Group
Overall
Occupation:
Managerial and professional
Construction and extraction

Age:
16-19
African American, 16-19
White, 16-19
Male, 20+
Female, 20+

Race and ethnicity:
African American
Hispanic
White
Gender:
Women
Men

**

Education:
Less than high school diploma
High school diploma only
College degree or more
Duration:
15 or more weeks

LO3

2007

2009

4.6%

9.3%

2.1

4.6

7.6

19.7

15.7

24.3

29.4

39.5

13.9

21.8

4.1

9.6

4.0

7.5

8.3

14.8

5.6

12.1

4.1

8.5

4.5

8.1

4.7

10.3

7.1

14.6

4.4

9.7

2.0

4.6

1.5

4.7

9-19


Noneconomic Costs

• Loss of skills and loss of self-respect
• Plummeting morale
• Family disintegration
• Poverty and reduced hope
• Heightened racial and ethnic tensions
• Suicide, homicide, fatal heart attacks,
•
LO3

mental illness
Can lead to violent social and political
change
9-20


Global Perspective

LO3

9-21


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

207.3

-

201.6

201.6

x
x

100

100

= 2.8%
9-22


Inflation
Inflation Rates in Five Industrial Nations

LO2

9-23


Inflation

LO2

9-24


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
9-25