Business Cycles and Fluctuations. Chapter 14.

Phases of the Business Cycle. Trough. Expansion. Peak. Contraction. Recession: Two back to back quarters declining G.D.P Depression: Three consecutive declining quarters in a row.

THE BUSINESS CYCLE Phases of the Business Cycle GROWTH TREND Time PEAK RECESSION TROUGH RECOVERY GROWTH TREND Level of business activity Time

Costs of Unemployment Personal Cost Economic Cost Loss of paycheck Loss of self-esteem Increase in stress related psychological problems Increase in incidence of crime, suicide, and mental illness Economic Cost Loss in output

Sources of Unemployment Frictional Seasonal Structural Cyclical

Frictional Unemployment Caused by time required to bring together labor suppliers and labor demanders Employers need time to learn about the talent available Job seekers need time to learn about employment opportunities Generally short-term and voluntary

Seasonal Unemployment Caused by seasonal changes in labor demand during the year To eliminate the impact of such changes, monthly unemployment statistics are seasonally adjusted, which smoothes out these factors

Structural Unemployment Exists because unemployed workers often Do not have the skills demanded by employers, or Do not live where their skills are in demand Occurs because changes in tastes, technology, taxes, or competition reduce the demand for certain skills and increase the demand for other skills

Cyclical Unemployment Fluctuates with the business cycle, increasing during contractions and decreasing during expansions Government policies to stimulate aggregate demand recessions is aimed at reducing this type of unemployment

UNEMPLOYMENT Measurement of Unemployment, 2002 Under 16 and/or institutionalized 74,700,000 Not in labor force 71,400,000 Total Population 288,600,000 Employed 134,200,000 Labor force 142,500,000 Unemployed 8,300,000

Unemployment and the Business Cycle.

Exhibit 1: The Adult Population Sums the Employed, the Unemployed, and Those Not in the Labor Force

Trend of Unemployment Rate Decline in the unemployment rate over last 20 years Overall growth in the economy Relatively fewer teenagers in the work force Unemployment rate says nothing about who is unemployed or for how long – differs across Race Gender Age Geographical area Occupational group

Unemployment Rates for Various Groups

The U.S. Unemployment Rate Since 1900

Unemployment Compensation Cash transfers for those who lose their jobs and actively seek employment Applies to unemployed workers who meet certain qualifications Problems with unemployment compensation: Workers who receive benefits tend to search less actively than those who don’t May reduce the urgency of finding work

Full Employment Occurs only if there is no cyclical unemployment Occurs when the only unemployment is frictional, structural, or seasonal Does not mean zero unemployment Frictional, seasonal, and structural unemployment can still occur Occurs when from 4% to 6% of the labor force is unemployed

INFLATION = CPI x 100 Defined and Measurement Consumer Price Index A rising general level of prices Rate of inflation calculated using index numbers Consumer Price Index = Price of the same market basket in 1982-1984 x 100 CPI Price of most recent market basket in the particular year

Inflation Inflation: a sustained increase in the average price level Hyperinflation: extremely high inflation Deflation: a sustained decline in the average price level Disinflation: a reduction in the rate of inflation

Causes of Inflation: Demand-pull inflation is inflation initiated by an increase in aggregate demand. Cost-push, or supply-side, inflation is inflation caused by an increase in costs.

Demand pull : Increase in AD can be due to a fiscal or monetary policy, thus increasing prices

Cost push: Upward shift of the AS will be due to increase in costs due to increase in price of inputs.

Combination of both:

Exhibit 6a: Inflation Caused by Shifts of AD and AS Curves Increase in the AD curve pulls up the price level. To generate continuous demand-pull inflation, the AD curve must keep shifting outward along a given AS curve Increase in costs of production push up the price level. To generate continuous cost-push inflation, the AS curve must keep shifting to the left along a given AD curve.

Stagflation: Stagflation occurs when output is falling at the same time that prices are rising. One possible cause of stagflation is an increase in costs.

Countering inflation: Demand -pull Reduce demand by higher taxation, lower govt. expenditure, lower govt borrowing, higher interest rates Cost push Take steps to reduce production costs by deregulating labour markets, encouraging greater productivity, apply control over wages and prices Import factors reduce quantity of imports or their prices via trade policies.

Controlling inflation (cont) Excessive growth on money supply Reduce money supply by cutting down on public sector borrowing Funding Govt borrowing from non bank Reduce bank lending Maintain interest rates Expectations of inflation Pursue policies which indicate Govt’s determination to reduce inflation

Anticipated versus Unanticipated Inflation Unanticipated inflation creates more problems for the economy than does anticipated inflation To the extent that inflation is higher or lower than anticipated, it arbitrarily creates winners and losers If it is higher than expected, the winners are all those who had contracted to pay a price that anticipates lower inflation The losers are all those who agreed to sell at that price If inflation is lower is lower than expected, the situation is reversed

Inflation Across Metropolitan Areas Inflation rates differ across regions mostly because of differences in housing prices, which grow faster in some places than in others Federal government tracks separate CPIs for each of 26 metropolitan areas.

Exhibit 8: Average Annual Inflation from 1994 to 2004 Differed Across U.S. Metropolitan Areas

Inflation and Interest Rates Interest is the dollar amount paid by borrowers to lenders because lenders must be rewarded for forgoing present consumption The interest rate is the interest per year as a percentage of the amount loaned

Why is Inflation Unpopular? Problems with unanticipated inflation Hits those whose incomes are fixed in nominal terms Arbitrarily redistributes income and wealth from one group to another Reduces the ability to make long-term plans Forces buyers and sellers to pay more attention to prices - less time for production - overall productivity of economy falls

CREDICTS Oroville High School on Oct 05, 2009  Kelly Giles, Contract Specialist at Microsoft on Apr 12, 2011  Kinnar Majithia, Management Trainee at Emerson Network Power on Jan 27, 2012 Baterdene Batchuluun, Teacher at I'm working as a teacher on Sep 02, 2013