Business Cycles and Unemployment Key Concepts Summary ©2005 South-Western College Publishing

This chapter will answer these questions: How are the expansions and contractions of business cycles measured? And what causes the business-cycle roller coaster? What are the different types of unemployment?

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

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

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

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

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

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

Hypothetical Business Cycle Peak Real GDP per year Growth trend line Peak Trough Recession Recovery

How long before a downturn is a recession? The Department of Commerce considers a recession to be at least two consecutive quarters in which GDP declines

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 The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s

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

Why is growth an economic goal? It increases our standard of living - it creates a bigger “economic pie”

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

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

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

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

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

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

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

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

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

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

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

Unemployment rate unemployed civilian labor force = X 100

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

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

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

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

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

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 25 20 15 10 5 1930 40 50 60 70 80 90 00

What are the types of unemployment? Seasonal Frictional Structural Cyclical

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

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

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

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

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

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

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

What is the cost of unemployment? The GDP gap

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?

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 is the cost of unemployment?

Summary

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.

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

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.

Hypothetical Business Cycle Peak Real GDP per year Growth trend line Peak Trough Recession Recovery

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.

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

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.

Discouraged workers are persons who want to work , but who have given up looking for work.

Seasonal unemployment is unemployment due to seasonal changes.

Frictional unemployment results when workers are seeking new jobs that exist.

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

Cyclical unemployment is unemployment resulting from insufficient aggregate demand.

Full employment occurs when the unemployment rate is equal to the total of the seasonal, frictional, and structural unemployment rates.

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.

END