1. Business Cycles and Unemployment

2. Four phases of a business cycle
Alternating periods of economic growth and contraction, which can be measured by changes in real GDP
Four phases of a business cycle
Peak
Recession
Trough
Recovery

3. Why is growth an economic goal?
Peak
the phase of the business cycle during which real GDP reaches its maximum after rising during a recovery
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”

4. Government Recession Definition
Trough
the phase of the business cycle in which real GDP reaches its minimum after falling during a recession
Recession
a downturn in the business cycle during which real GDP declines
Government Recession Definition
at least two consecutive quarters in which GDP declines

5. The Depression Recovery
The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s
Recovery
An upturn in the business cycle during which real GDP rises

6. Hypothetical Business Cycle
Peak
Real GDP
Growth trend line
Peak
Trough
Recession
Recovery

7. Post-World War II Recessions
Recession Dates
Duration
% Decline in GNP
Peak Unemployment Rate
Nov 1948-Oct 1949 11
-1.7
7.9%
July 1953 – May 1954 10
-2.7
5.9
Aug 1957 – Apr 1958 8
-1.2
7.4
Apr 1960 – Feb 1961
-1.6
6.9
Dec 1969 – Nov 1970
-0.6
Nov 1973 – Mar 1975 16
-3.1
8.6
Jan 1980 – July 1980 6
-2.2
7.8
July 1981 – Nov 1982
-2.9
10.8
July 1990 – Mar 1991
-1.3
6.8
Mar 2001 – Nov 2001
-0.5
5.6
Mar Nov. 2001
-3.5
9.5
Dec June 2009 18
-4.1
9.7
Average
-2.0
7.6

8. Business Cycles in the U.S. 1929-2010
Annual real GDP growth 15
Long-term average growth 10 5
Annual Real GDP Growth Rate (percent)
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

9. Three types of economic indicators
Leading
Coincident
Lagging
Leading Indicator
Variables that change before real GDP changes
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

10. Coincident Indicator Lagging Indicator
Variables that change at the same time that real GDP changes
Nonagricultural payrolls
Personal income
Industrial Production
Manufacturing and trade sales
Lagging Indicator
Variables that change after real GDP changes
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

11. Who is considered employed?
Civilian Labor Force
People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions
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

12. Primary Cause of 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

13. Total Population age 16 and over
Not in Labor Force
Civilian 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

14. Where to find current 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 =
Calculated
60,000 households are surveyed each month
Where to find current unemployment rate?

15. Civilian non-institutional population
Current Population Estimates
Year
Civilian non-institutional population
Labor Force
Unemployed
Unemployment Rate
Not in Labor Force
2000
212,577
142,583
5,692
4.0
69,994
2001
215,092
143,734
6,801
4.7
71,359
2002
217,570
144,863
8,378
5.8
72,707
2003
221,168
146,510
8,774
6.0
74,658
2004
223,357
147,401
8,149
5.5
75,956
2005
226,082
149,320
7,591
5.1
76,762
2006
228,815
151,428
7,001
4.6
77,387
2007
231,867
153,124
7,078
78,743
2008
233,788
154,287
8,924
79,501
2009
235,801
154,142
14,265
9.3
81,659
2010
237,830
153,889
14,825
9.6
83,941
Unemployment rate
unemployed
civilian labor force
X 100 =
9.6%
14,825
153,889
X 100 =

16. Criticisms of the Unemployment Rate
Discouraged Worker
a person who wants to work, but who has given up searching for work
Underemployment
people working at jobs below their level of skills
Criticisms of the Unemployment Rate
Does not include discouraged workers
Includes part-time workers
Does not measure underemployment

17. U.S. Unemployment Rate (percent)25 20
U.S. Unemployment Rate (percent) 15 10 5

18. Seasonal Unemployment
Types of Unemployment
Seasonal
Frictional
Structural
Cyclical
Seasonal Unemployment
Unemployment caused by recurring changes in hiring due to changes in weather conditions

19. Cyclical Unemployment
Frictional Unemployment
Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force
Structural Unemployment
A mismatch between unemployed worker skills and the skills required for existing job opportunities
Cyclical Unemployment
Unemployment caused by the lack of jobs during a recession

20. What is considered full employment?
Unemployment equals the sum of seasonal, frictional, and structural unemployment
What is considered full employment?
The natural rate of unemployment changes over time, but today it is considered to be about 3% - 5%
GDP Gap
The difference between full-employment real GDP and actual real GDP

21. Cost of Unemployment
GDP Gap - the gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment 16 14
GDP GAP (positive) 13
GDP GAP (negative)
Actual real GDP 12 11
Potential real GDP 10
`97 `98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10 `11 `12 `13 `14