Presentation on theme: "Economic Fluctuations, Unemployment, and Inflation"— Presentation transcript:
1 Economic Fluctuations, Unemployment, and Inflation Macro Chapter 8Economic Fluctuations, Unemployment, and Inflation
2 “Prosperity is when the prices of things that you sell are rising; inflation is when the prices of things that you buy are rising. Recession is when other people are unemployed; depression is when you are unemployed.”Anonymous quote
3 5 Learning Goals Characterize fluctuations in economic growth. Relate fluctuations in GDP to employment and the demand for labor.Classify unemployment into three categories.Distinguish the difference between full employment and the natural rate of unemployment and correlate both to potential GDP.Determine inflation’s effect on the economy.
5 Instability in the Growth of Real GDP Annual Rate of Growth in Real GDP (long-run growth rate approximately 3%)Although real GDP in the United States has grown at an average rate of approximately 3%, the growth has been characterized by economic ups-and-downs. Note: periods of recession are indicated with shading.8%6%4%2%0%-2%-4%19601965197019751980198519901995200020052010Source: Economic Report of the President, various issues.
6 The Hypothetical Business Cycle 4/14/2017The Hypothetical Business CycleReal GDPBusinesspeakTrend lineBusinesspeakRecessionarytroughExpansionContractionRecessionarytroughTimeThe four phases of the business cycle are expansion, peak, contraction, and recessionary trough.
7 Key Points: The business cycle varies and is unpredictable The average annual growth rate is 3%
9 Q8.1 A person not working is considered unemployed. TrueFalse
10 This section describes the categories of people Total population divided into two categories:(1) Under age 16 & institutionalized people(2) Over age 16Over age 16 divided into two categories:(1) Not in labor force – students, retirees, disabled(2) In labor forceIn labor force divided into two categories:(1) Employed(2) Unemployed, but want to be employed
11 Definition of unemployed: A person not currently employed but (1) actively seeking a job, or (2) waiting to begin or return to a jobSee BLS FAQs (BLS_FAQS.pdf)
12 U.S. Population, Employment, and Unemployment 4/14/2017U.S. Population, Employment,and UnemploymentCivilian population16 and overNot in thelabor forceHousehold workersStudentsRetireesDisabledCivilianlabor forceEmployedEmployeesSelf-employedworkersUnemployedNew entrantsReentrantsLost last jobQuit last jobLaid offLabor Force Participation Rate=Civilian labor forceCivilian population (16+)Employment / Population Ratio=Number employedCivilian population (16+)Rate of Unemployment=Number unemployedCivilian labor force
13 See Current Population Survey (CPS_Aug_2012.pdf)
14 Q8.2 Mary is a homemaker. Last week, she was busy with her normal household chores. She is a member of the civilian labor force who is employed.a member of the civilian labor force who is unemployed.a member of the civilian labor force who is underemployed.a discouraged worker who is not a member of the labor force.not a member of the labor force.
15 Two calculations to know Labor force participation rate = (employed + unemployed) / civilian pop. over age 16Unemployment rate = unemployed / (employed + unemployed) OR unemployed / labor force
16 Q8.3 Which of the following would be officially classified as unemployed? a school administrator who has been working as a substitute teacher one day per week while looking for a full-time job in administrationa mathematician who returned to graduate school after failing to find a job the last four monthsa 60-year-old former steel worker who would like to work but has given up actively seeking employmenta laid-off construction worker waiting to return to a previous job
19 Please see article “15 Statistics about the jobs market Please see article “15 Statistics about the jobs market.pdf” (the data are a little old, but still informative)
20 The unemployment rate climbed to 8. 3% in February, 2009 The unemployment rate climbed to 8.3% in February, It’s stayed over 8% since (that’s 43 months).The unemployment rate climbed to 9.4% in May, It stayed over 9% until September, 2011 (except for March, 2011 at 8.9%). That’s 28 out of 29 months.The previous longest streak above 8% was 27 months, from 1981 to 1984.
25 Example of workers moving to a new industry: Watch video- Treycycle employs NASA engineers
26 Q8.4 Which of the following is a positive effect of job search and the unemployment that often accompanies it?It keeps wages and income levels low.It permits individuals to better match their skills and preferences with the requirements of a job.It reduces the wage gap between high skill workers and those with few skills.It creates political pressure for an increase in the minimum wage, which will reduce the rate of unemployment in the long run.
27 Some unemployment is unavoidable and arguably desirable Natural rate of unemployment: “normal” frictional and structural unemploymentThe natural rate occurs when the economy is operating at a sustainable rateFull employment is when the natural rate of unemployment existsNatural rate equals about 5%
28 Q8.5 Full employment is the situation in which the economy operates at an unemployment rate equal to the sum ofstructural and frictional unemployment.cyclical and frictional unemployment.structural and cyclical unemployment.structural, frictional, and cyclical unemployment.
30 Potential output is the economy’s maximum sustainable output; occurs when the natural rate of unemployment exists; occurs when full employment existsPotential output is perhaps best thought of as the 3% growth rate discussed earlierActual output can be greater than or less than potential; again, think about the actual growth rate
31 Trend line = maximum sustainable rate Business Cycle = actual output Real GDPBusinesspeakTrend lineBusinesspeakRecessionarytroughExpansionContractionRecessionarytroughTimeTrend line = maximum sustainable rateBusiness Cycle = actual output
32 Actual & Potential GDP, 1960-2011 Real GDP (billions of 2000 $)14,000Potential GDPActual GDP12,000recessionHere we illustrate both actual GDP and potential GDP.Note the gap (shaded area) between actual and potential GDP during periods of recession.recession2001 recession10,0001970 recession8,0001960 recession6,0001980 recession1982 recession4,000recession2,00019601965197019751980198519901995200020052011
33 Another way to think about these: When you read the BEA report about quarterly GDP, if the reported (actual) growth rate is near 3%, then the economy is at it’s potential output.At 3% actual growth, the unemployment rate will likely be around 5% (i.e. full employment is 95%)The economy can never eliminate frictional and structural unemployment for an extended period.
34 Q8.6 Actual GDP will be below potential GDP when the economy is at full employment.during an economic boom.when resources are fully utilized.during a recession.
36 Actual & Potential GDP, 1960-2011 average inflation rate = 1.6 %Between 1956 and 1965, the general price level increased at an average annual rate of only 1.6%.In contrast, the inflation rate averaged 9.2% from 1973 to 1981, reaching double-digits during several years.Since 1982, the average rate of inflation has been lower (2.9% from ) and more stable.average inflation rate = 9.2 %15%average inflation rate = 2.9 %10%5%0%-5%195619601965197019751985199019952000200520112011
38 Q8. 7 Suppose you received a 3 percent increase in your nominal wage Q8.7 Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6 percent. Which of the following is true?Your real wage fell.Your nominal wage fell.Both your nominal and real wages decreased.Although your nominal wage fell, your real wage increased.Both nominal and real wages increased.
39 Inflation is a persistent increase in the general level of prices
40 Case Study: ZimbabweIn February, 2008 a loaf of bread was 200,000 Zimbabwe dollarsIn August, 2008, that same loaf of bread was 1.6 trillion dollarsThat’s 11.2 million percent!
41 Watch Video: Ducktales-inflation (just for fun)
42 Why is inflation “bad”?It reduces investment: long-term projects are more riskyIt distorts information delivered by prices: relative prices are skewed because some prices adjust more quickly than othersIt results in less productive use of resources: people will spend more time trying to combat the effects of inflation rather than engaging in productive activity