9
Business Cycles, Unemployment,
and Inflation
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
The Business Cycle
• Alternating increases and decreases in
•
•
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economic activity (GDP, employment, income)
over time
Vary in duration and magnitude
Phases of the business cycle
• Peak
• Recession – 6 months or more
• Trough
• Expansion
The Business Cycle
Peak
Rec
ess
io
n
ns
io
n
Trough
Time
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Re
ces
sio
n
ns
io
h
t
w
o
Gr
Ex
pa
Peak
n
d
Tren
Ex
pa
Level of real output
Peak
Trough
The Business Cycle
TABLE 26.1 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, www.nber.org, and Minneapolis Federal Reserve Bank,
www.minneapolisfed.gov. Output data are in 2000 dollars
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Cyclical Impact
• Durable & capital goods affected
•
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most during recessions
• Postponability
Nondurable consumer goods affected
less
Unemployment
Under 16
and/or
Institutionalized
(69.5 million)
Total
population
(321.4
million)
Not in
labor
force
(94.1 million)
Employed
(149.9 million)
Unemployed
(7.9 million)
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Labor force
(157.8
million)
Unemployment
Unemployed
• Unemployment Rate = Labor Force x 100
• Criticisms
• Involuntary part-time workers counted
as if full-time
• Discouraged workers are not counted
as unemployed
• />u3SCAmeBA
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Types of Unemployment
• Frictional unemployment
• Individuals searching/waiting for jobs
• Shorter term
• Structural unemployment
• Occurs due to changes in the
structure of the demand for labor
• Longer term
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Types of Unemployment
• Frictional and structural
•
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unemployment are unavoidable and
beneficial
Cyclical unemployment
• Caused by a recession – decrease
in total spending
Definition of Full Employment
• Natural Rate of Unemployment (NRU)
• Full employment level of
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unemployment
• Zero cyclical unemployment
• Can vary over time
• Actual unemployment can be above
or fall below the NRU
Potential GDP is GDP associated with
NRU
Economic Cost of Unemployment
• Irretrievable loss of goods and services
• GDP Gap
• Amount of goods and services
sacrificed due to cyclical
unemployment
• GDP gap = actual GDP – potential
GDP
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Economic Cost of Unemployment
• Negative GDP gap occurs because
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there is cyclical unemployment;
potential GDP exceeds actual GDP
Positive GDP occurs because the
actual unemployment rate is less than
the NRU; actual GDP is greater than
potential GDP.
Economic Cost of Unemployment
• Okun’s Law
• Every 1% of cyclical unemployment
creates a 2% GDP gap
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Economic Cost of Unemployment
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Global Perspective
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Inflation
• General rise in the price level
• Consumer Price Index (CPI) is used
• Can use the “rule of 70”
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Inflation
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Inflation
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Types of Inflation
• Demand-Pull inflation
• “Too much spending chasing too
few goods”
• Central bank issues too much
money
• More likely to occur the closer the
economy is to full-employment
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Types of Inflation
• Cost-Push inflation
• Due to a rise in per-unit input costs
• Supply shocks
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Inflation
• Core inflation
• Excludes volatile food and energy
goods
• Focuses on more stable prices
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Redistribution Effects of Inflation
• Nominal income
• Unadjusted for inflation
• Real income
• Nominal income adjusted for inflation
• Real income can fall if nominal income
increases by less than inflation
• Income is redistributed
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Who is Hurt by Inflation?
• Fixed-income receivers
• Real incomes fall
• Savers
• Value of accumulated savings
•
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deteriorates
Creditors
• Lenders get paid back in “cheaper
dollars”
Who is Unaffected by Inflation?
• Flexible-income receivers
• COLAs
• Social Security recipients
• Union members
• Debtors
• Pay back the loan with “cheaper
dollars”
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