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

2. 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?

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

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

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

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

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

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

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

10. 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

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The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s

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

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

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

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

16. 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

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

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

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

20. 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

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

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

23. 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

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

25. Unemployment rate
unemployed
civilian labor force =
X 100

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

27. 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

28. 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

29. 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

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

31. What are criticisms of the unemployment rate?
Does not include discouraged workers
Includes part-time workers
Does not measure underemployment

32. The U.S. Unemployment Rate25 20 15 10 5
1930 40 50 60 70 80 90 00

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 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. Key Concepts

43. 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?

44. 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?

45. Summary

46. 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.

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

48. 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.

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

50. 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.

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

52. 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.

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

54. Seasonal unemployment is unemployment due to seasonal changes.

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

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

57. Cyclical unemployment is unemployment resulting from insufficient aggregate demand.

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

59. 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.

60. END