1. Economic Fluctuations, Unemployment, and Inflation Chapter 8

2. 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.

4. 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

5. Source: Economic Report of the President, various issues. Instability in the Growth of Real GDP Annual growth rate of real GDP 6 8 4 2 0 - 2 19601965197019751980198519901995 20002004 Long-run growth rate (approx. 3%)

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

7. Potential GDP Source: U.S. Department of Commerce, Bureau of Economic Analysis. Actual & Potential GDP, 1960-2003 Real GDP (billions of 2000 $) 8,000 6,000 4,000 2,000 196019651970197519801985199019952000 2003 10,000 1970 recession 1974-75 recession 1980 recession 1982 recession 1990-91 recession 2001 recession Actual GDP 1960 recession

10. The Unemployment Rate Measuring Unemployment Labor force = employed + unemployed

12. Labor Force Participation Rate of Men and Women Source: www.bls.gov. 2003197519481960 87 % 83% 74 % 33 % 38 % 46 % 58 % ––––––– Men ––––––– Labor Force Participation Rate of Men and Women: 1948-2003 –––––– Women –––––– 19902003197519481960 1990 78 % 76 % 60 %

13. 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% 147.4 million 139.3 million 76.0 million 223.4 million 8.1 million 147.4 223.4 = 139.3 223.4 = 8.1 147.4 =

14. Unemployment Rate, 2003 Source: www.bls.gov. All workers 19.3 % 10.6 % 6.0 % 5.7 % 15.6 % 9.3 % 25+16-1920-24 –– Men aged –– The Unemployment Rate By Age and Gender: 2003 All men All women –– Women aged –– 25+16-19 20-24 5.0 % 6.3 % 4.6 %

15. 5.1 % 8.6 % 10.6 % 4.2 % 6.5 % 10.5 % 14.6 % Spain Italy Germany Japan Average Unemployment Rate (1994-2003) France U.K. U.S. Source: Economic Outlook, OECD (June 2004).

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

17. 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.

18. 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.

20. Inflation Since 1900 McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 30201019004050607080902000 –10 –5 0 5 10 15 20 25

21. Sources: Derived from computerized data supplied by FAME ECONOMICS. Also see Economic Report of the President (annual). The Inflation Rate, 1953-2003 Inflation rate 1955196019651970197519801985199020001995 10 5 0 15 2003 1953-1965 average inflation rate = 1.3 % 1973-1981 average inflation rate = 9.2 % 1983-2003 average inflation rate = 3.1 %