1. Chapter 12 Business Cycles and Unemployment
Lecture Slides
Survey of Economics Irvin B. Tucker 1
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2. This chapter will answer these questions:
How are cycles measured?
What causes business cycles?
What is unemployment?
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3. What is a business cycle?
Alternating periods of economic growth and contraction, which can be measured by changes in real GDP
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4. What are the four phases of a business cycle?
Peak
Recession
Trough
Expansion
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5. © 2016 south-Western, a part of Cengage Learning
What is a peak?
The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery
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6. © 2016 south-Western, a part of Cengage Learning
What is a recession?
A downturn in the business cycle during which real GDP declines, and the unemployment rate rises. Also called a contraction.
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7. How long before a downturn is a recession?
As a general rule, at least two consecutive quarters in which real GDP declines
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8. When is a downturn considered a depression?
The term depression is primarily an historical reference to the extremely deep and long recession of the early 1930’s
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9. © 2016 south-Western, a part of Cengage Learning
What is a trough?
The phase of the business cycle in which real GDP reaches its minimum after falling during a recession
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10. © 2016 south-Western, a part of Cengage Learning
What is a recovery?
An upturn in the business cycle during which real GDP rises. Also called an expansion.
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11. Exhibit 12-1(a) Hypothetical Business Cycle
Peak
Growth trend line
Real GDP per year
Peak
Trough
Recession
Expansion
One business cycle
Year 11 11
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12. © 2016 south-Western, a part of Cengage Learning
Exhibit 12.1(b) Actual Business Cycle
13.5
Peak
13.0
12.5
Trillions of 2005 dollars
12.0
Peak
11.5
11.0
Trough
10.5
Expansion
Recession
10.0
One Business Cycle
Year
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13. Exhibit 12-2 Severity of Post-World War II Recessions
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14. What is economic growth?
An expansion in national output measured by the annual percentage increase in a nation’s real GDP
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15. Why is growth an economic goal?
It increases our standard of living - it creates a bigger “economic pie”
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16. Annual Real GDP Growth Rate
Exhibit A Historical Record of Business Cycles in the United States, 20
Annual real GDP growth 15
Long-term average growth 10
Annual Real GDP Growth Rate 5
3.5
Zero growth -5
-10
-15
`29 `30 `35 `40 `45 `50 `55 `60 `65 `70 `75 `80 `85 `90 `95 `00 `05 `10 `15
Year 16
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17. Exhibit 12-4 An International Comparison of GDP Growth Rates, 2013
7.6%
4.4%
Real GDP growth rates (percent)
1.9%
1.8%
1.5%
1.3%
1.1%
0.5%
0.3%
China
India
United States
United Kingdom
Japan
Russia
Mexico
Germany
France
Country
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18. What are the three types of economic indicators?
Leading
Coincident
Lagging
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19. What is a leading indicator?
Variables that change before real GDP changes
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20. Exhibit 12-5 Leading Indicators
Average workweek
Unemployment claims
New consumer goods orders
Delayed deliveries
New orders for plant and equipment
New building permits
Stock prices
Money supply
Interest rates
Consumer expectations
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21. What is a coincident indicator?
Variables that change at the same time that real GDP changes
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22. Exhibit 12-5 Coincident Indicators
Nonagricultural payrolls
Personal income minus transfer payments
Industrial production
Manufacturing and trade sales
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23. What is a lagging indicator?
Variables that change after real GDP changes
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24. Exhibit 12-5 Lagging Indicators
Unemployment rate
Duration of unemployment
Labor cost per unit of output
Consumer price index for services
Commercial and industrial loans
Commercial credit to personal income ratio
Prime interest rate
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25. Changes in total spending cause the business cycle25
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26. What is the unemployment rate?
The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs
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27. How is the unemployment rate calculated?
Each month, the Bureau of Labor Statistics (BLS) surveys 60,000 households at random
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28. What is the civilian labor force?
People 16 years or older who are either employed or actively seeking a job, excluding members of the armed forces, homemakers, and people in institutions
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29. 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
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30. Who is considered unemployed?
Anyone who is 16 years of age and above who is actively seeking employment
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31. Who is a discouraged worker?
A person who wants to work, but who has given up searching for work
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32. Total Population age 16 and over Employed Employees Self-employed
Exhibit 12-6
Civilian labor force
Not in Labor Force Armed forces Household workers Students Retirees Persons with disabilities Institutionalized persons Discouraged workers
Employed Employees Self-employed
Unemployed New entrants Re-entrants Lost last job Quit last job Laid off
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33. © 2016 south-Western, a part of Cengage Learning
unemployed
civilian labor force
Unemployment rate =
X 100
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34. Number of Persons (millions)
Exhibit 12-6 Population, Employment, and Unemployment, 2013
Number of Persons (millions)
Total civilian population age
16 and over
Not in labor force
Civilian force
Employed
Unemployed
Civilian unemployment rate % 33
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35. U.S. Unemployment Rate (percent)
Exhibit 12-7 The U.S. Unemployment Rate, 25 20
U.S. Unemployment Rate (percent) 15 10 5
Year 35
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36. Exhibit 12-8 Unemployment Rates for Selected Nations, 2013
27.3%
24.7%
Unemploy-ment rate (percent)
7.6%
7.4%
7.1%
5.3%
4.9%
4.1%
4.0%
Greece
South Africa
United Kingdom
United States
Canada
Germany
Mexico
China
Japan
Country
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37. What are criticisms of the unemployment rate?
Does not include discouraged workers
Includes part-time workers
Not measure underemployment
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38. What is underemployment?
People working at jobs below their level of skills
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39. What are the types of unemployment?
Frictional
Structural
Cyclical
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40. What is frictional unemployment?
Normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force, or seasonally unemployed
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41. What is structural unemployment?
A mismatch of the skills of workers out of work and the skills required for existing job opportunities
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42. What is the difference between outsourcing and offshoring?
Outsourcing is the practice of a company having its work done by another company in another country.
Offshoring occurs when a U.S. company hires employees from another country to perform jobs once done by the company’s American employees.
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43. What is cyclical unemployment?
Unemployment caused by the lack of jobs during a recession
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44. What is full employment?
When an economy operates at an unemployment rate equal to the sum of frictional and structural unemployment rates. Also called the natural rate of unemployment.
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45. What rate is considered full employment?
The natural rate of unemployment changes over time, but today it is considered to be about 5 percent
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46. © 2016 south-Western, a part of Cengage Learning
What is the GDP gap?
The difference between actual real and full-employment real GDP
GDP = actual real GDP – potential real GDP
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47. What is the cost of cyclical unemployment?
The GDP gap
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48. Exhibit 12-9 Actual and Potential GDP, 1998-2013
16.5
16.0
15.5
15.0
Potential real GDP
14.5
14.0
GDP GAP (negative)
Trillions of 2009 dollars
13.5
13.0
12.5
Actual real GDP
12.0
11.5
GDP GAP (positive)
11.0
`98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10 `11 `12 `13
Year 48
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49. © 2016 south-Western, a part of Cengage Learning
Conclusion?
The gap between actual and potential real GDP measures the monetary losses of real goods and services when at less than full employment
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50. Unemployment Rate (percent)
Exhibit Civilian Unemployment Rates by Selected Demographic Groups, 2013
Unemployment Rate (percent)
Demographic Group
Overall %
Sex
Male
Female
Race
White
Hispanics
African American
Teenagers (16-19 years old)
All
White
Hispanics
African American
Education
Less than high school diploma 11.0
High school graduates
Bachelor’s degree or higher 48
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