Chapter 8 “The Business Cycle”

Overview  Our economy has experienced a pattern of uneven growth throughout our history.  Some periods are marked by rapid growth while during others the economy declines.

Phases of the Business Cycle  1. Peak – temporary period of full employment and near capacity output.  2. Trough – bottom of a recessionary period.  3. Recession – decline from peak to trough.  4. Recovery – expansion from trough to peak.

Causes of fluctuation  1. Irregular innovation or random events causes changes in business cycle.  2. Aggregate spending is the key.

Non-cyclical fluctuations  Seasonal variations are not the business cycle. (more sales around Christmas, etc.)  Secular Trends- long term movements of the economy. (cover periods of years.)

Durable and Nondurable goods  Durable good and construction industries feel the most impact of the business cycle.  These purchases can be postponed.  Firms in these industries have monopoly power. They can reduce output when sales go down instead of lowering their price.

Types of Unemployment  1. Frictional – short term, less than 6 weeks. People in between jobs. Somewhat desirable, indicates mobility in the economy.

Types of Unemployment  2. Structural – caused by changes in the structure of the demand for labor. Occurs when jobs become obsolete or geographic need for jobs changes.

Types of Unemployment  3. Cyclical – caused by the recession phase of the business cycle. People who are laid off as we enter a recession.

Full Employment  Does not mean zero unemployment. Occurs when cyclical is zero and structural and frictional reach levels that are seen as unavoidable.

Labor Force  All persons between ages 16-65, not institutionalized, who are actively looking for a job.  Unemployment rate =percentage of labor force that is unemployed.

How is this % calculated  A random telephone survey of households is taken.  Part time workers count as full time.  Discouraged workers are not counted as unemployed.

Unemployment Rate  This rate is inaccurate because of the manner in which it is calculated.  People lie to the telephone survey takers.  The survey is biased against people without phones.

Inflation  1.Rise in the general level of prices.  2. Rising price of one good does not constitute inflation.

Cost of Unemployment = lost output  1. GDP Gap – amount by which actual GDP falls below potential GDP.  2. Okun’s Law – for every 1% unemployment exceeds full (4.5%) there is a corresponding 2.5% GDP gap.  1 : 2.5

Unequal Burden of Unemployment  1. Occupation  2. Age  3. Race  4. Gender

Types of Inflation  1. Demand Pull Inflation – a rise in prices caused by excess demand.  2. Cost Push Inflation – as production costs increase, they are passed on to consumers in the form of higher prices.

Who is hurt by inflation?  1. Fixed Income receivers  2. Savers  3. Creditors

Who is helped by inflation?  1. Flexible income receivers  2. Borrowers/debtors

Hyperinflation and Breakdown  1. extremely rapid inflation, devastating to an economy. A. Post WW1 Germany B. Argentina, Bolivia, Brazil, C. Yugoslavia

Hyperinflation  A 500,000,000,000 (500 billion) Yugoslav dinar banknote circa 1993, the largest nominal value ever officially printed in Yugoslavia, the final result of hyperinflation. Yugoslav dinarbanknotenominal valueYugoslavia