1. Unemployment & Business Cycles Chapter 8

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

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

4. 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.

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

6. 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.

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

11. 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 %

12. 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%)

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

14. 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 =

15. 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 %

16. 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).

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

18. Source: www.bls.gov. Composition of the Unemployed by Reason There are various reasons why persons were unemployed in 2003. 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%

19. 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.

20. 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.

22. 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

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

26. 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 %

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

28. 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?