Chapter 26

 The business cycle shows changes over time in the economy regarding growth and recessions The black arrow indicates growth over time Recession

 The length on contractions versus expansion differ depending on the circumstances ◦ In other words, this chart will not tell us when the current recession/depression will end ◦ It does tell us that it is likely to end  At PEAK the economy is at or near full employment and the economy is producing maximum output ◦ Prices are likely to go up at this point  During a recession the economy total output, income and employment shrink ◦ This generally lasts 6+mos. and if it lasts long enough it becomes a depression—at this point prices will begin to fall

 During a TROUGH you experience output, employment, etc. at their lowest levels ◦ This can be short-lived or long term and you do not know you’ve experienced the trough until you have come out of it  During RECOVERY you being to increase output (thus employment increases) ◦ Prices may begin to rise again  The Great Depression is one of the most severe fluctuations we have seen ◦ Our current economic troubles are insignificant in comparison

 Growth can be seen over the course of time as depicted below:

 What causes the cycle to change? ◦ New technology/better efficiency ◦ Better productivity ◦ SPENDING!!!  If we aren’t spending the companies are producing, if companies aren’t producing they are laying off, if the companies are laying off, there are few people to spend…this is a vicious cycle that is very difficult to correct

Consumers stops spending Business stops producing Business lays off employees Goods that are durable (washers, cars, etc.) and capital goods (construction, heavy equipment, etc.) are hit first and hardest by this cycle. People are willing to make due with what they have when the economy starts slipping.

 When we talk about employment and the labor force, you need to know who counts and who doesn’t  To get the unemployment rate ◦ UR = unemployed/labor force x 100  [8,266,000/142,535,000] x 100 = 5.8% CountsDoesn’t Count People able and willing who are 16 or older <16 years old Institutionalized Eligible but not seeking work Part time employees (count as full time) People who have given up because the believe they won’t be able to find work

 There are four types of unemployment ◦ Frictional—people “between jobs”, temporary layoffs, are expecting to be back to work quickly  You still possess a valuable skill set ◦ Structural—when demand for your skill set disappears  Demand for farm labor decreases due to new technology ◦ Cyclical—when demand for goods and services decrease overall people get laid off due to the business cycle ◦ Seasonal—jobs that can only be done during certain seasons  Santa Claus impersonators are laid off after Christmas

 Because some unemployment is expected, achieve 100% employment doesn’t happen ◦ Full employment occurs when there is no cyclical unemployment and the number of job seekers equals the number of job vacancies ◦ When this happens we are operating at the Natural rate of unemployment-NRU (NOTE: this rate will change…there is no consistent natural rate) ◦ Sometimes the economy can function below the NRU—people who had not been in the labor force join and skew the numbers ◦ The NRU is roughly 4-5% today…

 What is the cost of unemployment? ◦ When we have people willing and able to produce who don’t have jobs we are losing what they could have produced ◦ This is called the GDP gap  Okun’s law states that for every 1% that the actual unemployment exceeds the natural rate, a 2% GDP gap is seen  If you have a positive GDP gap (you are producing more than was thought possible) you will run into the issue of inflation, thus positive GDP cannot be sustained long term

 Certain groups bear the burden of unemployment more than others ◦ People with lesser skills are prone to longer terms of structural unemployment ◦ Teenagers have higher unemployment than others because of transportation issues, lack of skills, and lack of maturity ◦ Minorities tend to have higher unemployment due to educational attainment and discrimination ◦ Education plays a large role in employed versus unemployed—less education, less likely to keep a job

 Unemployment is a social nightmare ◦ Leads to loss of self-respect, poor morale, family disintegration, and political unrest ◦ Chronically unemployed have higher suicide rates, heart attacks, strokes, mental illness, and homicide  We can compare unemployment to other countries, but we have to bare in mind that other countries may be in a different part of the business cycle

 Inflation is a general rise in prices ◦ Gas10 years ago was $0.99, now its about $3.60 ◦ Inflation reduces your purchasing power ◦ One of the difficult parts of factoring for inflation is that prices rise erratically and illogically  The main measure of inflation is the Consumer Price Index (CPI) ◦ The government uses CPI to determine adjustments in Social Security Benefits and tax brackets  They use a market basket made up of 300 typical consumer goods purchased by an urban family in a month

 When calculating CPI the Bureau of Labor Statistics arbitrarily chooses as their baseline ◦ CPI = Price of the current market basket Price of same market basket from  To find inflation ◦ Inflation Rate = current year-base year base year X 100