Unemployment & Business Cycles Chapter 8

The Three Faces of GDP == Market value of final goods and services ProductionExpenditureIncomeInvestment Consumption Governmentpurchases Net exports Capital Income Labor Income

Components of GDP C: consumption I : investment in plant & equipment G: government spending X-M: net exports

Limitations as a Measure Not a measurement of well-being, just economic activity. Does not consider the distribution of income. Unreported economic activity is not included.

Problems comparing per capita GDP across countries Bangladesh $270 USA $35,000 Exchange rate method and purchasing power method.

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.

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 %

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

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

Source: Composition of the Unemployed by Reason There are various reasons why persons were unemployed in A little more than two-fifths (42.4%) of the unemployed were dismissed from their previous jobs. 35.5% of the unemployed were either new entrants or reentrants into the labor force. Dismissed from previous jobs 42.4% Job leavers 9.3 % New entrants 7.3% Reentrants 28.2% On layoff 12.8%

How Accurate Is the Official Unemployment Rate? The unemployment rate includes as unemployed, people who say they are looking for a job who are really not. Many are “working off the books, others are vacationing. But does not include discouraged workers who have left the labor force.

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.

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

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 %

The Inflation Problem? If all prices are rising, including wages, why is inflation a problem?

Using a price index to compare dollar values across time. A Manhattan graduate from 1970 was offered a starting salary of $12,000. What is that equivalent to in today’s dollars?