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

2. © 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.
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9.1
The Business Cycle
Alternating increases and decreases in economic activity over time.
Phases of the business cycle
Peak
Recession
Trough
Expansion
LO1
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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
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5. Depth (decline in real GDP, %)
LO4.1
TABLE 9-1
Canadian Recessions Since 1930
Year
Depth (decline in real GDP, %)
-27.5
1945
-2.4
1946
-2.2
1954
-1.1
1982
-3.2
1991
-1.7
2009
-2.7
Source: Statistics Canada.
LO1
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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
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9.1
The Business Cycle
Causation: A First Glance
Irregular innovation
Productivity changes
Monetary factors
Political events
Financial instability
Recession of
LO1
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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
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9. 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
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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
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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
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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
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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
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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 Accessed June 10, 2015.
LO2
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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
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9.2
Unemployment
Economic Costs of Unemployment
UNEQUAL BURDENS
Occupation
Age
Gender
Education
Duration
LO2
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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
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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
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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
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9.1 GLOBAL PERSPECTIVE
Unemployment Rates in Six Industrial Nations,
LO2
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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
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9.3
Inflation
Measurement of Inflation
Example: the CPI was in 2014, up from in 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
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LO4.1
Annual Inflation Rates in Canada, (December to December changes in the CPI)
FIGURE 9-4
Source: Statistics Canada.
LO3
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9.2 GLOBAL PERSPECTIVE
Inflation Rates in Six Industrial Nations,
LO3
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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
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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
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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
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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
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Redistribution Effects of Inflation
9.4
Who Is Hurt by Inflation?
Assuming Unanticipated Inflation
Those with Fixed Incomes
Savers
Creditors
LO4
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Redistribution Effects of Inflation
9.4
Who Is Unaffected or Helped by Inflation?
Assuming Unanticipated Inflation
Those with Flexible Incomes
Debtors
LO4
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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
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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
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Redistribution Effects of Inflation
9.4
Other Redistribution Issues
Deflation
Mixed Effects
Arbitrariness
LO4
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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
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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
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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
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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