USH Chapter 14.

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.