Chapter 16 Business Cycles and Unemployment Key Concepts Summary Practice Quiz Internet Exercises ©2002 South-Western College Publishing

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 The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s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 economic growth one of our nation’s economic goals? 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 percent unemployment 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

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?

Key Concepts cont. 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.

©2002 South-Western College Publishing Chapter 16 Quiz ©2002 South-Western College Publishing

1. The phases of a business cycle are a. upswing and downswing. b. full employment and unemployment. c. peak, recession, trough, and recovery. d. full employment, depression, expansion, and plateau. C. These are the four phases of changes in real GDP which mirrors changes in employment and other key measures of the macro economy.

2. The phase of a business cycle during which real |GDP reaches its minimum level is the a. recession. b. depression. c. recovery. d. trough. D. Recession is the phase during which real GDP fall and recovery is the phase during which real GDP rises. Depression is an historical reference to the deep and long recession of the early 1930’s.

3. Which of the following is not a variable in the index of leading indicators? a. New consumer goods orders. b. Delayed deliveries. c. New businesses formed. d. Prime rate. D. The prime rate is a lagging indicator.

4. Which of the following is a coincident indicator? a. Personal income. b. Industrial production. c. Manufacturing and trade sales. d. All of the above. D. All of these will change at the same time that real GDP changes.

5. The labor force consists of all persons a. 21 years of age and older. b. 21 years of age and older who are working. c. 16 years of age and older. d. 16 years of age and older who are working or actively seeking work. D. The labor force also includes the armed forces, but excludes the category called “persons not in labor force.”

6. People who are not working will be counted as employed if they are a. on vacation. b. absent from their job because of bad weather. c. absent from their job because of a labor dispute. d. all of the above. D. A person who works at least 1 hour per week for pay or at least 15 hours per week as an unpaid worker in a family business is counted as employed regardless of the special situations listed in a, b, and c.

7. The number of people officially unemployed is not the same as the number of people who can’t find a job because a. people who have jobs continue to look for better ones. b. the armed forces are included. c. discouraged workers are not counted. d. of all of the above. C. A person can quit looking for a job because he is discouraged after trying to find one, but wants to work if he could find a job, yet this person is not considered unemployed because he is not actively seeking employment.

8. Frictional unemployment applies to a. workers with skills not required for existing jobs. b. short periods of unemployment needed to match jobs and job seekers. c. people who spend long periods of time out of work. d. unemployment related to the ups and downs of the business cycle. B. Frictional unemployment includes people changing jobs, initially entering the labor force, or re-entering the labor force.

9. Structural employment is caused by a. shifts in the economy that make certain job skills obsolete. b. temporary layoffs in industries such as construction. c. the impact of the business cycle on job opportunities. d. short-term changes in the economy. A. Structural unemployment is long-term unemployment because the skills of unemployed workers do not match the skills required for existing jobs.

10. Unemployment that is due to a recession is a. involuntary unemployment. b. frictional unemployment. c. structural unemployment. d. cyclical unemployment. D. Only cyclical unemployment is attributable directly to the business cycle.

11. Seasonal, frictional and structural unemployment is equal to a. frictional unemployment. b. structural unemployment. c. cyclical unemployment. d. full employment. D. Full employment does not mean zero unemployment. Even in the best times, there is always seasonal, frictional, and structural unemployment.

12. Which of the following statements is true? a. The four phases of the business cycle, in order, are peak, recovery, trough, and recession. b. When unemployment is rising, then real GDP is rising. c. The economic problem typically associated with a recovery is rising unemployment. d. Full employment exists in an economy when the unemployment rate equals the sum of seasonal, frictional, and structural unemployment rates. D. There will always be some people looking for work.

13. Which of the following groups typically has the highest unemployment rate? a. White men and women. b. African-American men and women as a group. c. Teenagers. d. Persons who completed high school. B.

14. Which of the following is true? a. The GDP gap is the difference between full employment real GDP and actual real GDP. b. We desire economic growth because it increases the nation’s real GDP. c. Economic growth is measured by the annual percentage increase in a nation’s real GDP. d. Discouraged workers are a reason critics say the unemployment rate is understated. e. All of the above are true. E.

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