1. Business Cycle, Unemployment, and Inflation
Chapter 26

2. The Business Cycle
The business cycle shows changes over time in the economy regarding growth and recessions
The black arrow indicates growth over time
Recession

3. Business Cycle
The length on contractions versus expansion differs depending on the circumstances
In other words, this chart will not tell us when a recession/depression will end
It does tell us that it is likely to end
At PEAK the economy is at or near full employment and the economy is producing maximum output
Prices are likely to go up at this point
During a recession the economy’s total output, income and employment shrink
This generally lasts 6+mos. and if it lasts long enough it becomes a depression—at this point prices will begin to fall

4. Business Cycle
During a TROUGH we experience output, employment, etc. at lower(ing) levels
This can be short-lived or long term and we may not know we’ve experienced the trough until we have come out of it
During RECOVERY we begin to increase output (thus employment increases)
Prices may begin to rise again
The Great Depression is one of the most severe fluctuations we have seen
Our most recent economic troubles were insignificant in comparison

5. Business Cycle
Growth can be seen over the course of time as depicted below:

6. Business Cycle What causes the cycle to change?
New technology/better efficiency
Better productivity
SPENDING!!!
Sometimes…War!
If we aren’t spending, the companies aren’t producing; if companies aren’t producing they are laying off; if the companies are laying off, there are fewer people to spend $$
This is a vicious cycle that can be very difficult to correct

7. Business Cycle Consumers stop spending Business stops producing
Business lays off employees
Goods that are durable (washers, cars, etc.) and capital goods (construction, heavy equipment, etc.) are hit first and hardest by this cycle.
People are willing to make due with what they have when the economy starts slipping.

8. Unemployment
When we talk about employment and the labor force, we need to know who counts and who doesn’t
To get the unemployment rate
UR = unemployed/labor force x 100
[8,266,000/142,535,000] x 100 = 5.8%
Counts
Doesn’t Count
People able and willing who are 16 or older
<16 years old
Institutionalized
Eligible but not seeking work
Part time employees (count as full time)
People who have given up because the believe they won’t be able to find work

9. Unemployment There are four types of unemployment
Frictional—people “between jobs”, temporary layoffs, are expecting to be back to work quickly
You still possess a valuable skill set
Structural—when demand for your skill set disappears
Demand for farm labor decreases due to new technology
Cyclical—when demand for goods and services decreases overall, people get laid off due to the business cycle
Seasonal—jobs that can only be done during certain seasons
Santa Claus impersonators are laid off after Christmas

10. Unemployment
Because some unemployment is expected, 100% employment doesn’t happen
Full employment occurs when there is no cyclical unemployment and the number of job seekers equals the number of job vacancies
When this happens we are operating at the Natural rate of unemployment-NRU (NOTE: this rate will change…there is no consistent natural rate)
Sometimes the economy can function below the NRU—people who had not been in the labor force join and skew the numbers
The NRU is currently 4.5-5% (Oct 2017 stats)

11. Unemployment What is the cost of unemployment?
When we have people willing and able to produce who don’t have jobs, we are losing what they could have produced
This is called the GDP gap
Okun’s law states that for every 1% that the actual unemployment exceeds the natural rate, a 2% GDP gap is seen
If you have a positive GDP gap (you are producing more than was thought possible) you will run into the issue of inflation, thus positive GDP cannot be sustained long term

12. Unemployment
Certain groups bear the burden of unemployment more than others
People with lesser skills are prone to longer terms of structural unemployment
Teenagers have higher unemployment than others because of transportation issues, lack of skills, and lack of maturity
Minorities tend to have higher unemployment due to educational attainment and discrimination
Education plays a large role in employed versus unemployed—less education, less likely to keep a job

13. Unemployment Unemployment is a social nightmare
Leads to loss of self-respect, poor morale, family disintegration, and political unrest
Chronically unemployed have higher suicide rates, heart attacks, strokes, mental illness, and homicide
We can compare unemployment to other countries, but we have to bear in mind that other countries may be in a different part of the business cycle

14. Inflation Inflation is a general rise in prices
Gas in 1999 was about $0.99, now it’s about $2.60
( in cent. Fla. peaked at $3.99!)
Inflation reduces your purchasing power
One of the difficult parts of factoring for inflation is that prices rise erratically and illogically
The main measure of inflation is the Consumer Price Index (CPI)
The government uses CPI to determine adjustments in Social Security Benefits and tax brackets
They use a market basket made up of 300 typical consumer goods purchased by an urban family in a month

15. Inflation
When calculating CPI the Bureau of Labor Statistics arbitrarily chooses as their baseline
CPI = Price of the current market basket
Price of same market basket from 82-84
To find inflation
Inflation Rate = current year-base year
base year
X 100
X 100

16. Inflation Inflation from 2014 to 2015 (hypothetical)
Base MBV ( ) = 1.9M
2014 MBV = 2.9M
2015 MBV = 3.0M
CPI for base year always equals 100
2014 CPI = ×100 =153
2015 CPI = ×100 =158
Calculate inflation
158 − ×100= ×100=3.3
The inflation rate from 2014 to 2015 was 3.3%