Mehdi Arzandeh, University of Manitoba PowerPoint Presentation by Mehdi Arzandeh, University of Manitoba

© 2016 McGraw‐Hill Education Limited Business Cycles, Unemployment, and Inflation 9 LEARNING OBJECTIVES LO9.1 Describe the business cycle and its primary phases. LO9.2 Illustrate how unemployment is measured and explain the different types of unemployment. LO9.3 Explain how inflation is measured and distinguish between cost-push inflation and demand-pull inflation. LO9.4 Understand how unanticipated inflation can redistribute real income. LO9.5 Discuss how inflation may affect the economy’s level of real output. © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.1 The Business Cycle Alternating increases and decreases in economic activity over time. Phases of the business cycle Peak Recession Trough Expansion LO1 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 FIGURE 9-1 The Business Cycle Peak Peak Trend Peak Growth Expansion Level of real output Recession Expansion Trough Recession Trough Time LO1 © 2016 McGraw‐Hill Education Limited

Depth (decline in real GDP, %) LO4.1 TABLE 9-1 Canadian Recessions Since 1930 Year Depth (decline in real GDP, %) 1930-1933 -27.5 1945 -2.4 1946 -2.2 1954 -1.1 1982 -3.2 1991 -1.7 2009 -2.7 Source: Statistics Canada. LO1 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 Percentage Change in Real GDP for Provinces and Territories, 2013 TABLE 9-2 2013 CANADA 2.0 Newfoundland and Labrador 7.2 Prince Edward Island Nova Scotia 0.2 New Brunswick -0.5 Quebec 0.9 Ontario 1.2 Manitoba 2.2 Saskatchewan 4.9 Alberta 3.8 British Columbia 1.9 Yukon -0.8 Northwest Territories 3.5 Nunavut 11.1 Source: Statistics Canada. LO1 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.1 The Business Cycle Causation: A First Glance Irregular innovation Productivity changes Monetary factors Political events Financial instability Recession of 2008-2009 LO1 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.1 The Business Cycle Cyclical Impact: Durables and Nondurables Durable goods affected most Capital goods Consumer durables Nondurable consumer goods affected less Services Food and clothing LO1 © 2016 McGraw‐Hill Education Limited

Unemployment rate = # of unemployed labour force X 100 The Labour Force, Employment, and Unemployment, 2014 FIGURE 9-2 Under 15 and/or Institutionalized (6.6 million) Unemployment rate = # of unemployed labour force X 100 Not in labour force (9.8 million) Total population (35.5 million) Unemployment rate = 1.32 million 19.1 million X 100 = 6.9% Employed (17.8 million) Labor force (19.1 million) Unemployed (1.3 million) Source: Statistics Canada. LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.2 Unemployment Measurement of Unemployment The unemployment rate is the percentage of the labour force that is unemployed. How the unemployment rate is understated: Part-Time Employment Statistics Discouraged Workers LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.2 Unemployment Types of Unemployment FRICTIONAL UNEMPLOYMENT caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs STRUCTURAL UNEMPLOYMENT caused by Changes over time in consumer demand and in technology alter the “structure” of the total demand for labour, both occupationally and geographically CYCLICAL UNEMPLOYMENT caused by a decline in total spending (or by insufficient aggregate demand) SEASONAL UNEMPLOYMENT caused by seasonal factors LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.2 Unemployment Definition of Full Employment Natural rate of unemployment (NRU) At NRU, the economy is at Potential GDP NOT zero unemployment Occurs when there is no cyclical unemployment Not automatic Varies over time LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.2 Unemployment Economic Costs of Unemployment GDP Gap GDP gap = actual GDP – potential GDP Can be negative or positive Okun’s Law Every 1% of cyclical unemployment creates a 2% GDP gap LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 Actual and Potential GDP and the Unemployment rate FIGURE 9-3 Source: (a) Adapted from the Bank of Canada, Monetary Policy Report, October 2014; (b) Statistics Canada at www.stats.gov.nl.ca/statistics/Labour/PDF/UnempRate.pdf. Accessed June 10, 2015. LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.2 Unemployment Economic Costs of Unemployment Given for 2009: Unemployment rate is 8.3% Natural rate is 6.5% Potential GDP is $1360 billion What is the GDP gap? 8.3%  6.5% = 1.8% (gap in % terms) 1.8% X 2 = 3.6% (apply Okun’s Law) 3.6% of $1360 billion = $49 billion LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.2 Unemployment Economic Costs of Unemployment UNEQUAL BURDENS Occupation Age Gender Education Duration LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 Unemployment by Demographic Group: Full Employment (2008) and Recession (2009) TABLE 9-3 Demographic group Unemployment rate, February 2008 August 2009 Overall 5.8% 8.7% Age 15-24 years 11.4 16.2 25 years and over 4.7 7.2 Sex Male 4.9 8.4 Female 4.5 6.0 Source: Statistics Canada. Table: Employment by age, sex, type of work, class of worker and province (monthly). LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.2 Unemployment Noneconomic Costs of Unemployment Unemployment means idleness Increases poverty, heightens racial and ethnic tensions, and reduces hope for material advancement Severe unemployment can lead to rapid and violent social and political change Higher unemployment linked to increases in suicide, homicide, and physical and mental illness LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 Provincial Breakdown of the Unemployment Rate, 2014 TABLE 9-4 Region Unemployment rate (%) CANADA 6.9 Newfoundland and Labrador 11.9 Prince Edward Island 10.6 Nova Scotia 9.0 New Brunswick 9.9 Quebec 7.7 Ontario 7.3 Manitoba 5.4 Saskatchewan 3.8 Alberta 4.7 British Columbia 6.1 Source: Statistics Canada. LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.1 GLOBAL PERSPECTIVE Unemployment Rates in Six Industrial Nations, 2002-2012 LO2 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.3 Inflation Meaning of Inflation A rise in the general level of prices Consumer Price Index (CPI) An index that measures the prices of a fixed market basket of goods and services that is bought by a typical consumer. Statistics Canada sets the CPI for 2002 equal to 100, so the CPI for any particular year is CPI= 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 2002 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑎𝑟𝑡𝑖𝑐𝑢𝑙𝑎𝑟 𝑦𝑒𝑎𝑟 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑠𝑎𝑚𝑒 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟(2002) 𝑥 100% LO3 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.3 Inflation Measurement of Inflation Example: the CPI was 125.2 in 2014, up from 122.8 in 2013. Thus, the rate of inflation for 2014 is 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛= 𝐶𝑃𝐼 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟−𝐶𝑃𝐼 𝑖𝑛 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟 𝐶𝑃𝐼 𝑖𝑛 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟 𝑥 100% LO3 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 Annual Inflation Rates in Canada, 1960-2014 (December to December changes in the CPI) FIGURE 9-4 Source: Statistics Canada. LO3 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.2 GLOBAL PERSPECTIVE Inflation Rates in Six Industrial Nations, 2002-2012 LO3 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.3 Inflation Types of Inflation DEMAND-PULL INFLATION Excess demand COST-PUSH INFLATOIN Due to a rise in per-unit production costs Supply shocks Complexities LO3 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited 9.3 Inflation Core Inflation The underlying increases in the Consumer Price Index after volatile food and energy prices are removed. Policymakers become greatly concerned when core inflation is high and rising. LO3 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited Redistribution Effects of Inflation 9.4 Nominal Income and Real Income 𝑅𝑒𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒= 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑥 100% Percentage Percentage Percentage change in ≈ change in ̶ change in real income nominal income price LO4 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited Redistribution Effects of Inflation 9.4 Expectations Unanticipated inflation Real income and wealth will be redistributed Anticipated inflation People can avoid or lessen the redistribution effects LO4 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited Redistribution Effects of Inflation 9.4 Who Is Hurt by Inflation? Assuming Unanticipated Inflation Those with Fixed Incomes Savers Creditors LO4 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited Redistribution Effects of Inflation 9.4 Who Is Unaffected or Helped by Inflation? Assuming Unanticipated Inflation Those with Flexible Incomes Debtors LO4 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited Redistribution Effects of Inflation 9.4 Anticipated Inflation Effects are lessened to the extent inflation is correctly anticipated Cost-of-living adjustment clauses Inflation premium on loans Nominal interest rate = real interest rate + inflation premium LO4 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 The Inflation Premium, and Nominal and Real Interest Rates FIGURE 9-5 The inflation premium—the expected rate of inflation—gets built into the nominal interest rate. 11% 6% = + 5% Nominal Interest Rate Real Interest Rate Inflation Premium LO4 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited Redistribution Effects of Inflation 9.4 Other Redistribution Issues Deflation Mixed Effects Arbitrariness LO4 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited Does Inflation Affect Output? 9.5 Cost-Push Inflation and Real Output Demand-Pull Inflation and Real Output Business costs of changing prices Time and effort spent obtaining information People limit money that they carry Hyperinflation LO5 © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 Unemployment After the Great Recession: Canada versus U.S. The LAST WORD Canada The Great Recession started in late 2008 and it ended by the third quarter of 2009 GDP declined by 3.3% The unemployment rate increased from 6.1% to 8.7% Export decreased 16% and investment fell 22% The U.S. It started in December 2007 and ended in June 2009 GDP dropped by 4.7% in the U.S. 8.7 million people lost their jobs © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 Unemployment After the Great Recession: Canada versus U.S. The LAST WORD Deeper Recession and Slower Recovery in the U.S. Higher Federal Minimum Wage Longer Unemployment Benefits Structural Adjustments Higher Labour Costs © 2016 McGraw‐Hill Education Limited

© 2016 McGraw‐Hill Education Limited LO4.1 Chapter Summary LO9.1 Describe the business cycle and its primary phases. LO9.2 Illustrate how unemployment is measured and explain the different types of unemployment. LO9.3 Explain how inflation is measured and distinguish between cost-push inflation and demand-pull inflation. LO9.4 Understand how unanticipated inflation can redistribute real income. LO9.5 Discuss how inflation may affect the economy’s level of real output. © 2016 McGraw‐Hill Education Limited