Economic Fluctuations, Unemployment, and Inflation Chapter 8

Which of the following are included in GDP? a)Your mother-in-law buys a new car from a U.S. producer. b)Your mother-in-law buys a new car imported from Sweden. c)Your mother-in-law’s car rental business buys a new car from a U.S. producer. d)Your mother-in-law’s car rental business buys a new car imported from Sweden. e)The U.S. government buys a new domestically produced car for the use by your mother-in-law, who has been appointed the ambassador to Sweden.

U. S. Business Cycles McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Civil War Recovery of 1895 World War I Panic of 1893 Panic of 1907 Great Depression Korean War Vietnam War World War II

Source: Economic Report of the President, various issues. Instability in the Growth of Real GDP Annual growth rate of real GDP Long-run growth rate (approx. 3%)

Time Real GDP Business peak Recessionary trough Contraction Expansion The Hypothetical Business Cycle Business peak Recessionary trough Trend line

Potential GDP Source: U.S. Department of Commerce, Bureau of Economic Analysis. Actual & Potential GDP, Real GDP (billions of 2000 $) 8,000 6,000 4,000 2, , recession recession 1980 recession 1982 recession recession 2001 recession Actual GDP 1960 recession

The Unemployment Rate Measuring Unemployment Labor force = employed + unemployed

Labor Force Participation Rate of Men and Women Source: % 83% 74 % 33 % 38 % 46 % 58 % ––––––– Men ––––––– Labor Force Participation Rate of Men and Women: –––––– Women –––––– % 76 % 60 %

U.S. Population, Employment, and Unemployment: 2004 Civilian population 16 and over Civilian labor force Employed Employees Self-employed workers Unemployed New entrants Reentrants Lost last job Quit last job Laid off Not in the labor force Household workers Students Retirees Disabled Labor Force Participation Rate = Civilian labor force Civilian population (16+) = 66.0% Employment / Population Ratio = Number employed Civilian population (16+) = 62.3% Rate of Unemployment = Number unemployed Civilian labor force = 5.5% million million 76.0 million million 8.1 million = = =

Unemployment Rate, 2003 Source: All workers 19.3 % 10.6 % 6.0 % 5.7 % 15.6 % 9.3 % –– Men aged –– The Unemployment Rate By Age and Gender: 2003 All men All women –– Women aged –– % 6.3 % 4.6 %

5.1 % 8.6 % 10.6 % 4.2 % 6.5 % 10.5 % 14.6 % Spain Italy Germany Japan Average Unemployment Rate ( ) France U.K. U.S. Source: Economic Outlook, OECD (June 2004).

Types of Unemployment Frictional: worker “between jobs” Cyclical: caused by bad economic conditions Structural: worker’s skill set is no longer in demand

Natural Rate of Unemployment Structural + Frictional Average rate of unemployment over the business cycle. Non-inflationary rate of unemployment. Full-employment. Associated with potential output.

Labor Force, unemployment rate & Participation Rate 65 people 10 <16 years of age 10 retired 25 full-time jobs 5 part-time jobs 5 full-time homemakers 5 full-time students over 16 2 disabled and cannot work Rest did not have jobs but wanted one but one has not searched in 3 months.

Inflation Since 1900 McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved –10 –

Sources: Derived from computerized data supplied by FAME ECONOMICS. Also see Economic Report of the President (annual). The Inflation Rate, Inflation rate average inflation rate = 1.3 % average inflation rate = 9.2 % average inflation rate = 3.1 %