Chapter 12 Business Cycles and Unemployment Lecture Slides Survey of Economics Irvin B. Tucker 1 © 2016 south-Western, a part of Cengage Learning

This chapter will answer these questions: How are cycles measured? What causes business cycles? What is unemployment? © 2016 south-Western, a part of Cengage Learning

What is a business cycle? Alternating periods of economic growth and contraction, which can be measured by changes in real GDP © 2016 south-Western, a part of Cengage Learning

What are the four phases of a business cycle? Peak Recession Trough Expansion © 2016 south-Western, a part of Cengage Learning

© 2016 south-Western, a part of Cengage Learning What is a peak? The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery © 2016 south-Western, a part of Cengage Learning

© 2016 south-Western, a part of Cengage Learning What is a recession? A downturn in the business cycle during which real GDP declines, and the unemployment rate rises. Also called a contraction. © 2016 south-Western, a part of Cengage Learning

How long before a downturn is a recession? As a general rule, at least two consecutive quarters in which real GDP declines © 2016 south-Western, a part of Cengage Learning

When is a downturn considered a depression? The term depression is primarily an historical reference to the extremely deep and long recession of the early 1930’s © 2016 south-Western, a part of Cengage Learning

© 2016 south-Western, a part of Cengage Learning What is a trough? The phase of the business cycle in which real GDP reaches its minimum after falling during a recession © 2016 south-Western, a part of Cengage Learning

© 2016 south-Western, a part of Cengage Learning What is a recovery? An upturn in the business cycle during which real GDP rises. Also called an expansion. © 2016 south-Western, a part of Cengage Learning

Exhibit 12-1(a) Hypothetical Business Cycle Peak Growth trend line Real GDP per year Peak Trough Recession Expansion One business cycle Year 11 11 © 2016 south-Western, a part of Cengage Learning

© 2016 south-Western, a part of Cengage Learning Exhibit 12.1(b) Actual Business Cycle 13.5 Peak 13.0 12.5 Trillions of 2005 dollars 12.0 Peak 11.5 11.0 Trough 10.5 Expansion Recession 10.0 2000 2001 2002 2003 2004 2005 2006 2007 One Business Cycle Year © 2016 south-Western, a part of Cengage Learning 12

Exhibit 12-2 Severity of Post-World War II Recessions © 2016 south-Western, a part of Cengage Learning 13

What is economic growth? An expansion in national output measured by the annual percentage increase in a nation’s real GDP © 2016 south-Western, a part of Cengage Learning 14

Why is growth an economic goal? It increases our standard of living - it creates a bigger “economic pie” © 2016 south-Western, a part of Cengage Learning

Annual Real GDP Growth Rate Exhibit 12-3 A Historical Record of Business Cycles in the United States, 1929-2013 20 Annual real GDP growth 15 Long-term average growth 10 Annual Real GDP Growth Rate 5 3.5 Zero growth -5 -10 -15 `29 `30 `35 `40 `45 `50 `55 `60 `65 `70 `75 `80 `85 `90 `95 `00 `05 `10 `15 Year 16 © 2016 south-Western, a part of Cengage Learning

Exhibit 12-4 An International Comparison of GDP Growth Rates, 2013 7.6% 4.4% Real GDP growth rates (percent) 1.9% 1.8% 1.5% 1.3% 1.1% 0.5% 0.3% China India United States United Kingdom Japan Russia Mexico Germany France Country © 2016 south-Western, a part of Cengage Learning 17

What are the three types of economic indicators? Leading Coincident Lagging © 2016 south-Western, a part of Cengage Learning

What is a leading indicator? Variables that change before real GDP changes © 2016 south-Western, a part of Cengage Learning

Exhibit 12-5 Leading Indicators Average workweek Unemployment claims New consumer goods orders Delayed deliveries New orders for plant and equipment New building permits Stock prices Money supply Interest rates Consumer expectations © 2016 south-Western, a part of Cengage Learning

What is a coincident indicator? Variables that change at the same time that real GDP changes © 2016 south-Western, a part of Cengage Learning

Exhibit 12-5 Coincident Indicators Nonagricultural payrolls Personal income minus transfer payments Industrial production Manufacturing and trade sales © 2016 south-Western, a part of Cengage Learning

What is a lagging indicator? Variables that change after real GDP changes © 2016 south-Western, a part of Cengage Learning

Exhibit 12-5 Lagging Indicators Unemployment rate Duration of unemployment Labor cost per unit of output Consumer price index for services Commercial and industrial loans Commercial credit to personal income ratio Prime interest rate © 2016 south-Western, a part of Cengage Learning

Changes in total spending cause the business cycle 25 © 2016 south-Western, a part of Cengage Learning

What is the unemployment rate? The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs © 2016 south-Western, a part of Cengage Learning

How is the unemployment rate calculated? Each month, the Bureau of Labor Statistics (BLS) surveys 60,000 households at random © 2016 south-Western, a part of Cengage Learning

What is the civilian labor force? People 16 years or older who are either employed or actively seeking a job, excluding members of the armed forces, homemakers, and people in institutions © 2016 south-Western, a part of Cengage Learning

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 © 2016 south-Western, a part of Cengage Learning

Who is considered unemployed? Anyone who is 16 years of age and above who is actively seeking employment © 2016 south-Western, a part of Cengage Learning

Who is a discouraged worker? A person who wants to work, but who has given up searching for work © 2016 south-Western, a part of Cengage Learning

Total Population age 16 and over Employed Employees Self-employed Exhibit 12-6 Civilian labor force Not in Labor Force Armed forces Household workers Students Retirees Persons with disabilities Institutionalized persons Discouraged workers Employed Employees Self-employed Unemployed New entrants Re-entrants Lost last job Quit last job Laid off © 2016 south-Western, a part of Cengage Learning

© 2016 south-Western, a part of Cengage Learning unemployed civilian labor force Unemployment rate = X 100 © 2016 south-Western, a part of Cengage Learning

Number of Persons (millions) Exhibit 12-6 Population, Employment, and Unemployment, 2013 Number of Persons (millions) Total civilian population age 16 and over 245.7 Not in labor force -90.3 Civilian force 155.4 Employed 143.9 Unemployed 11.5 Civilian unemployment rate 7.4% 33 © 2016 south-Western, a part of Cengage Learning

U.S. Unemployment Rate (percent) Exhibit 12-7 The U.S. Unemployment Rate, 1929-2013 25 20 U.S. Unemployment Rate (percent) 15 10 5 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Year 35 © 2011 South-Western, a part of Cengage Learning

Exhibit 12-8 Unemployment Rates for Selected Nations, 2013 27.3% 24.7% Unemploy-ment rate (percent) 7.6% 7.4% 7.1% 5.3% 4.9% 4.1% 4.0% Greece South Africa United Kingdom United States Canada Germany Mexico China Japan Country © 2016 south-Western, a part of Cengage Learning

What are criticisms of the unemployment rate? Does not include discouraged workers Includes part-time workers Not measure underemployment © 2016 south-Western, a part of Cengage Learning

What is underemployment? People working at jobs below their level of skills © 2016 south-Western, a part of Cengage Learning

What are the types of unemployment? Frictional Structural Cyclical © 2016 south-Western, a part of Cengage Learning

What is frictional unemployment? Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force, or seasonally unemployed © 2016 south-Western, a part of Cengage Learning

What is structural unemployment? A mismatch of the skills of workers out of work and the skills required for existing job opportunities © 2016 south-Western, a part of Cengage Learning

What is the difference between outsourcing and offshoring? Outsourcing is the practice of a company having its work done by another company in another country. Offshoring occurs when a U.S. company hires employees from another country to perform jobs once done by the company’s American employees. © 2016 south-Western, a part of Cengage Learning 42

What is cyclical unemployment? Unemployment caused by the lack of jobs during a recession © 2016 south-Western, a part of Cengage Learning

What is full employment? When an economy operates at an unemployment rate equal to the sum of frictional and structural unemployment rates. Also called the natural rate of unemployment. © 2016 south-Western, a part of Cengage Learning

What rate is considered full employment? The natural rate of unemployment changes over time, but today it is considered to be about 5 percent © 2016 south-Western, a part of Cengage Learning

© 2016 south-Western, a part of Cengage Learning What is the GDP gap? The difference between actual real and full-employment real GDP GDP = actual real GDP – potential real GDP © 2016 south-Western, a part of Cengage Learning

What is the cost of cyclical unemployment? The GDP gap © 2016 south-Western, a part of Cengage Learning

Exhibit 12-9 Actual and Potential GDP, 1998-2013 16.5 16.0 15.5 15.0 Potential real GDP 14.5 14.0 GDP GAP (negative) Trillions of 2009 dollars 13.5 13.0 12.5 Actual real GDP 12.0 11.5 GDP GAP (positive) 11.0 `98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10 `11 `12 `13 Year 48 © 2014 South-Western, a part of Cengage Learning

© 2016 south-Western, a part of Cengage Learning Conclusion? The gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment © 2016 south-Western, a part of Cengage Learning

Unemployment Rate (percent) Exhibit 12-10 Civilian Unemployment Rates by Selected Demographic Groups, 2013 Unemployment Rate (percent) Demographic Group Overall 7.4% Sex Male 7.6 Female 7.1 Race White 6.5 Hispanics 9.1 African American 16.0 Teenagers (16-19 years old) All 22.9 White 20.3 Hispanics 27.5 African American 38.8 Education Less than high school diploma 11.0 High school graduates 7.5 Bachelor’s degree or higher 3.7 48 © 2016 south-Western, a part of Cengage Learning

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