1 Chapter 12 Business Cycles and Unemployment Key Concepts Key Concepts Summary ©2000 South-Western College Publishing

2 What is a business cycle? Alternating periods of economic growth and contraction, which can be measured by changes in real GDP

3 What are the four phases of a business cycle? Peak Recession Trough Recovery

4 What is a peak? The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery

5 What is a recession? A downturn in the business cycle during which real GDP declines

6 What is a trough? The phase of the business cycle in which real GDP reaches its minimum after falling during a recession

7 What is a recovery? An upturn in the business cycle during which real GDP rises

8 Hypothetical Business Cycle Peak Trough RecessionRecovery Growth trend line Real GDP per year

9 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

10 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 The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s

11 What is economic growth? An expansion in national output measured by the annual percentage increase in a nation’s real GDP

12 Why is economic growth one of our nation’s economic goals? It increases our standard of living - it creates a bigger “economic pie”

13 What are the three types of economic indicators? Leading Coincident Lagging

14 What is a leading indicator? Variables that change before real GDP changes

15 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

16 What is a coincident indicator? Variables that change at the same time that real GDP changes

17 Coincident Indicators Nonagricultural payrolls Personal income Industrial Production Manufacturing and trade sales

18 What is a lagging indicator? Variables that change after real GDP changes

19 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

20 What causes unemployment? When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory

21 Who is considered unemployed? Anyone who is 16 years of age and above who is actively seeking employment

22 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

23 What is the unemployment rate? The percentage of people in the labor force who are without jobs and are actively seeking jobs

24 Unemployment rate unemployed civilian labor force X 100 =

25 How is the unemployment rate calculated? 56,000 households are surveyed each month

26 What is the civilian labor force? People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions

27 Total Population age 16 and over Not in Labor Force Armed forces Household workers Students Retirees Persons with disabilities Institutionalized Discourage workers Civilian labor force Employed Employees Self-employed Unemployed New entrants Re-entrants Lost last job Quit last job Laid off

28 Who is a discouraged 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

29 What is underemployment? People working at jobs below their level of skills

30 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

32 4.2% 4.8% 5.9% 7.8% 9.1% 11.1% 12.1% JapanU.S.GermanyU.K.CanadaItalyFrance

33 What are the types of unemployment? Seasonal Frictional Structural Cyclical

34 What is seasonal unemployment? Unemployment caused by recurring changes in hiring due to changes in weather conditions

35 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

36 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

37 What is cyclical unemployment? Unemployment caused by the lack of jobs during a recession

38 What is full employment? The situation in which an economy operates at an unemployment rate equal to the sum of the seasonal, frictional, and structural unemployment rates

39 What percent unemployment is considered full employment? The natural rate of unemployment changes over time, but today it is considered to be about 5%

40 What is the GDP gap? The GDP gap is the difference between full- employment real GDP and actual real GDP

41 What is the cost of unemployment? The GDP gap

42 Demographic Groups Civilian Unemployment Rates 1999 Overall Male Female White Black Teenagers ( years) White males Black males White females Black females Less than high school High school graduates College graduates 4.2% 4.1% 4.3% 3.7% 8.0% 13.7% 12.6% 30.9% 11.3% 25.1% 6.7% 3.5% 1.8%

43 Key Concepts

44 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?

45 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 percent unemployment is considered Full Employment? What is the Cost of Unemployment?

46 Summary

47 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.

48 The generally accepted theory today is that changes in the forces of demand and supply cause business cycles.

49 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.

50 Hypothetical Business Cycle Peak Trough RecessionRecovery Growth trend line Real GDP per year

51 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.

52 Leading, coincident, and lagging indicators are economic variables that change before, at the same time as, and after changes in real GDP, respectively.

53 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.

54 Discouraged workers are a reason critics say the unemployment rate is understated. Discouraged workers are persons who want to work, but who have given up. Another criticism of the unemployment rate is that it overstates unemployment because respondents can falsely report they are seeking a job.

55 Seasonal unemployment is unemployment due to seasonal changes.

56 Frictional unemployment results when workers are seeking new jobs that exist. The problem is that imperfect information prevents matching the applicants with available jobs.

57 Structural unemployment is unemployment caused by factors in the economy, including lack of skills, changes in product demand, and technological change.

58 Cyclical unemployment is unemployment resulting from insufficient aggregate demand.

59 Full employment occurs when the unemployment rate is equal to the total of the seasonal, frictional, and structural unemployment rates. Currently, the full-employment rate of unemployment in the United States is considered to be close to 5 percent. At this rate of unemployment, the economy is producing at its maximum potential.

60 The 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.

61 END