Transcript
Business Cycles and Fluctuations. Chapter 14.
Phases of the Business Cycle.
• Trough.• Expansion.• Peak.• Contraction.• Recession: Two back to back quarters
declining G.D.P• Depression: Three consecutive
declining quarters in a row.
Sources of Unemployment
FrictionalSeasonalStructuralCyclical
Frictional Unemployment
Caused by time required to bring together labor suppliers and labor demandersEmployers need time to learn about the talent
availableJob seekers need time to learn about employment
opportunities
Generally short-term and voluntary
Seasonal Unemployment
Caused by seasonal changes in labor demand during the year
To eliminate the impact of such changes, monthly unemployment statistics are seasonally adjusted, which smoothes out these factors
Structural Unemployment
Exists because unemployed workers oftenDo not have the skills demanded by employers, orDo not live where their skills are in demand
Occurs because changes in tastes, technology, taxes, or competition reduce the demand for certain skills and increase the demand for other skills
Cyclical Unemployment
Fluctuates with the business cycle, increasing during contractions and decreasing during expansions
Government policies to stimulate aggregate demand recessions is aimed at reducing this type of unemployment
Unemployment and the Business Cycle.
THE BUSINESS CYCLEPhases of the Business CyclePEAK
Le
vel o
f b
usi
ne
ss a
cti
vit
y
Time
RECESSIONTROUGH RECOVERY
GROWTH
TREND
Great Depression. 1929-1941.
• 50 percent decline in G.D.P.
• 800 percent rise in unemployment.
• Average manufacturing wages went from 55 cents an hour to five cents!
• Many bank failed.
• 25 percent unemployment.
Causes of the Great Depression.
• Disparity between rich and poor.
• Too easy credit.
• Withdrawal of U.S. foreign loans.
• Higher American tariffs.
• Bad banks loans to investors, buying on margin, and foreign countries.
Banks Still Fail Today.
UNEMPLOYMENTUnequal Burdens of Unemployment
• Occupation• Age• Race and Ethnicity• Gender• Education
Unemployment Rates for Various Groups
Full Employment
Occurs only if there is no cyclical unemployment Occurs when the only unemployment is
frictional, structural, or seasonalDoes not mean zero unemploymentFrictional, seasonal, and structural
unemployment can still occur
Occurs when from 4% to 6% of the labor force is unemployed
UNEMPLOYMENTMeasurement of Unemployment, 2002
Employed
Not inlaborforce
Under 16and/or
institutionalized
TotalPopulation288,600,000
Laborforce
142,500,000
74,700,000
71,400,000
Unemployed 8,300,000
134,200,000
The U.S. Unemployment Rate Since 1900
INFLATIONDefined and Measurement
• A rising general level of prices• Rate of inflation calculated
using index numbers
Consumer Price Index
= Price of the same marketbasket in 1982-1984
x 100CPIPrice of most recent market
basket in the particular year
Inflation.
Creeping or normal inflation. 1-3 percent a year.
Why must we have some inflation for a healthy economy?
Galloping inflation. 100-300 percent per year.
Hyperinflation or 500 percent a year.
Consumer Price Index Since 1913
CPI Since 1913 – Annual Percentage Change
Inflation Across Countries Inflation Rates in Major Economies Have Trended
Lower Over the Past Two Decades
Is it Good or Bad?
• Inflation is not bad if it occurs at a low predictable rate; acceptable is 2-3%
• If wages increase at a rate that maintains PPP, then it is also not bad.
• Older people are more sensitive to inflation.
• Hyperinflation is bad.• Deflation can also be either.
Inflation
Inflation: a sustained increase in the average price level
Hyperinflation: extremely high inflation Deflation: a sustained decline in the
average price levelDisinflation: a reduction in the rate of
inflation
REDISTRIBUTIVE EFFECTSOF INFLATION
Who is Hurt by Inflation?• Fixed-Income Receivers
•Savers
•Creditors
•Want to be home
owners.
Who is less hurt or helped by Inflation?
• Flexible-Income earners.• Cost of Living Adjustments (COLAs)
•Debtors•Tangible asset holders.
Causes of Inflation?“TOO much money chasing TOO
few goods and services.”
Inflation Causes Continued….
Cost-Push inflation.
Demand-Pull Inflation.
Causes of Inflation
• Labor costs rising faster than productivity• Rising raw-material costs• Depreciation of the dollar• Increased money supply• Low interest rates.• Increased consumer spending.• Increased gov’t spending.
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