Lectures in Macroeconomics- Charles W. Upton
Unemployment and Business Cycles
SSRSLR
D
H’ H*
w*
w’
Here, U = Un
Unemployment and Business Cycles
Counter-Cyclical andPro-Cyclical Indicators
Business Failures Counter-Cyclical New Business Starts Pro-Cyclical Unemployment Counter-Cyclical Average Work Week Pro-Cyclical Average Wage Rate Pro-Cyclical Capital Utilization Pro Cyclical GDP Pro-Cyclical
Unemployment and Business Cycles
Counter-Cyclical andPro-Cyclical Indicators
Business Failures Counter-Cyclical New Business Starts Pro-Cyclical Unemployment Counter-Cyclical Average Work Week Pro-Cyclical Average Wage Rate Pro-Cyclical Capital Utilization Pro Cyclical GDP Pro-Cyclical
Unemployment and Business Cycles
A Change in Demand
SSRSLR
D
H’ H*
w*
w’
Here, U = Un
Unemployment and Business Cycles
A Change in Demand
D’
SSRSLR
D
H’ H*
w*
w’
Unemployment and Business Cycles
A Change in Demand
D’
SSRSLR
D
H’ H*
w*
w’We know a temporary demand reduction causes a
business cycle
Unemployment and Business Cycles
A Change in Demand
D’
SSRSLR
D
H’ H*
w*
w’We know a temporary demand reduction causes a
business cycle
So what does it do to
unemployment?
Unemployment and Business Cycles
A Modest Proposal
D’
SSRSLR
D
H’ H*
w*
w’We know a temporary demand reduction causes a
business cycle
So what does it do to
unemployment?
*
*
H
HHUU n
Unemployment and Business Cycles
A Modest Proposal
D’
SSRSLR
D
H’ H*
w*
w’We know a temporary demand reduction causes a
business cycle
So what does it do to
unemployment?
*
*
H
HHUU n
Ergo, U is counter cyclical
Unemployment and Business Cycles
The Formal Relation
• GDP– Actual GDP = what you think it is
– Potential GDP = GDP when U = Un
Unemployment and Business Cycles
The Formal Relation
• GDP– Actual GDP = what you think it is
– Potential GDP = GDP when U = Un
• Employment– Actual Employment = CLF(1-U)
– Potential Employment = CLF(1-Un)
Unemployment and Business Cycles
GDP and Unemployment
3
2
3
1
)]1([ tttActual UCLFKAGDP
Unemployment and Business Cycles
Potential GDP & the Natural Rate
3
2
3
1
)]1([ tnttPotential UCLFKAGDP
Unemployment and Business Cycles
GDP and Unemployment
3
2
3
1
3
2
3
1
)]1([
)]1([
tttActual
tnttPotential
UCLFKAGDP
UCLFKAGDP
Unemployment and Business Cycles
The Relation
)(3
2n
Actual
ActualPotential UUGDP
GDPGDP
Unemployment and Business Cycles
Unemployment and GDP
Actual
ActualPotentialn GDP
GDPGDPUU
5.1
Unemployment and Business Cycles
An Illustration
)(3
2n
Actual
ActualPotential UUGDP
GDPGDP
GDP is $10 trillion; Un = 4%;U = 7%
Unemployment and Business Cycles
An Illustration
Trillion $10.2GDP
)47(3
2
10$
10$
Potential
PotentialGDP
GDP is $10 trillion; Un = 4%;U = 7%
Unemployment and Business Cycles
A Second Illustration
)(3
2n
Actual
ActualPotential UUGDP
GDPGDP
GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?
Unemployment and Business Cycles
A Second Illustration
UGDP
GDP
GDP
GDP
Actual
Actual
Potential
Potential
3
2
GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?
Unemployment and Business Cycles
A Second Illustration
UGDP
GDP
GDP
GDP
Actual
Actual
Potential
Potential
3
2
GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?
year a %5.3
Potential
Potential
GDP
GDP
Unemployment and Business Cycles
A Second Illustration
%5.1
3
2%5.4%5.3
U
U
GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?
Unemployment and Business Cycles
Okun’s Law
)(3
2n
Actual
ActualPotential UUGDP
GDPGDP
Unemployment and Business Cycles
Okun’s Law
)(2
1n
Actual
ActualPotential UUGDP
GDPGDP
Unemployment and Business Cycles
The Facts
Change in GDP vs Change in U
-1.5000-1.0000-0.50000.00000.50001.00001.50002.0000
-20.0000 -10.0000 0.0000 10.0000 20.0000
Change in GDP
Ch
an
ge
in U
Unemployment and Business Cycles
The Facts
Change in GDP vs Change in U
-1.5000-1.0000-0.50000.00000.50001.00001.50002.0000
-20.0000 -10.0000 0.0000 10.0000 20.0000
Change in GDP
Ch
an
ge
in U
Unemployment and Business Cycles
End
©2004 Charles W. Upton. All rights reserved
Unemployment data from BLS, GDP data from Dept of
Commerce