02 business cycles and unemployment

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  • 1. Chapter 16 Business Cyclesand Unemployment • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing 1
  • 2. In this chapter, you will learn to solve these economic puzzles:IsWhat isan who has given a worker economy Can the difference produce more output between a recession up searching for work counted its unemployed? and a as potential? than depression? 2
  • 3. What is a Business Cycle?Alternating periods of economic growth and contraction, which can be measured by changes in real GDP 3
  • 4. What are the four phases of a Business Cycle? • Peak • Recession • Trough • Recovery 4
  • 5. What is a Peak?The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery 5
  • 6. What is a Recession?A downturn in the business cycle during which real GDP declines 6
  • 7. What is a Trough?The phase of the business cycle in which real GDP reaches its minimum after falling during a recession 7
  • 8. What is a Recovery?An upturn in the business cycle during which real GDP rises 8
  • 9. Hypothetical Business Cycle Peak Real GDP per year th o w lin e Gr d Peak tr en Trough Recession Recovery 9
  • 10. How long before adownturn is a Recession?The Department of Commerce usually considers a recession to be at least two consecutive quarters in which there is a decline in GDP 10
  • 11. When is a downturnconsidered a Depression? The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s 11
  • 12. What is Economic Growth?An expansion in national output measured by the annual percentage increase in a nation’s real GDP 12
  • 13. Why is Economic Growth one of our nation’s economic goals?It increases our standard of living - it creates a bigger “economic pie” 13
  • 14. What are the three typesof Economic Indicators? • Leading • Coincident • Lagging 14
  • 15. What is a Leading Indicator?Variables that change before real GDP changes 15
  • 16. Leading Indicators•Changes in business and consumer credit•New orders for plant and equipment•New consumer goods orders•Unemployment claims•Delayed deliveries •Material prices•New business formed •Stock prices•Average workweek •Money supply•New building permits•Changes in inventories 16
  • 17. What is aCoincident Indicator? Variables that change at the same time that real GDP changes 17
  • 18. Coincident Indicators•Nonagricultural payrolls•Personal income•Industrial Production•Manufacturing and trade sales 18
  • 19. What is aLagging Indicator?Variables that change after real GDP changes 19
  • 20. Lagging Indicators•Unemployment rate•Duration of unemployment rate•Labor cost per unit of output•Inventories to sales ratio•Outstanding commercial loans•Commercial credit to personal income ratio•Prime interest rate 20
  • 21. What causes Unemployment?When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory 21
  • 22. Who is considered Unemployed?Anyone who is 16 years of age and above who is actively seeking employment 22
  • 23. Who is considered Employed?Anyone who works at least one hour a week for pay or at least 15 hours per week as an unpaid worker in a family business 23
  • 24. What is the Unemployment Rate?The percentage of people in the labor force who are without jobs and are actively seeking jobs 24
  • 25. Unemployment unemployed rate = X 100 civilian labor force 25
  • 26. How is the Unemployment Rate calculated? 56,000 households are surveyed each month 26
  • 27. What is the Civilian Labor Force?People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions 27
  • 28. Total Population age 16 and over Civilian labor force Not in Labor Force Employed Armed forces Employees Household workers Self-employed Students Retirees UnemployedPersons with disabilities New entrants Institutionalized Re-entrants Discourage workers Lost last job Quit last job Laid off 28
  • 29. Who is aDiscouraged Worker?A person who wants to work, but who has given up searching for work. He or she believes there will be no job offers 29
  • 30. What is Underemployment?People working at jobs below their level of skills 30
  • 31. What are criticisms of the Unemployment Rate? • Does not include discouraged workers • Includes part-time workers • Does not measure underemployment 31
  • 32. The U.S. Unemployment Rate252015105 1930 40 50 60 70 80 90 00 32
  • 33. 12.4% 11.7% 8.3% 6.3% 6.3% 4.5%4.3%Japan U.S. Germany U.K. Canada France Italy 33
  • 34. What are the types of Unemployment? • Seasonal • Frictional • Structural • Cyclical 34
  • 35. What is Seasonal Unemployment?Unemployment caused by recurring changes in hiring due to changes in weather conditions 35
  • 36. What is Frictional Unemployment?Unemployment caused by the normal search time required by workers with marketable skills who are changing jobs, entering, or re-entering the labor force 36
  • 37. What is Structural Unemployment?Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities 37
  • 38. What is Cyclical Unemployment?Unemployment caused by the lack of jobs during a recession 38
  • 39. What is Full Employment?The situation in which an economy operates at an unemployment rate equal to the sum of the seasonal, frictional, and structural unemployment rates 39
  • 40. What percentunemployment is considered Full Employment? The natural rate of unemployment changes over time, but today it is considered to be about 5% 40
  • 41. What is the GDP Gap?The GDP gap is the difference between full- employment real GDP and actual real GDP 41
  • 42. What is the Cost of Unemployment? The GDP gap 42
  • 43. Civilian Unemployment Rates 1998 Demographic Groups Overall 4.5% Male 4.4% Female 4.6% White 3.9% Black 8.9% Teenagers (16 - 19 years) 14.6% White males 14.1% Black males 30.1% White females 10.9% Black females 25.3% Less than high school 7.1% High school graduates 4.0% College graduates 1.8% 43
  • 44. Key Concepts 44
  • 45. Key Concepts• What is a Business Cycle?• What are the phases of a Business Cycle?• How long before a downturn is a Recession?• What are the types of Economic Indicators?• What causes Unemployment?• Who is considered Unemployed?• Who is considered Employed?• What is the Unemployment Rate? 45
  • 46. Key Concepts cont.• What is the Civilian Labor Force?• Who is a Discouraged Worker?• What is Underemployment?• What are the types of Unemployment?• What is Full Employment?• What percent unemployment is considered Fu• What is the Cost of Unemployment? 46
  • 47. Summary 47
  • 48. Business cycles are recurrentrises and falls in real GDP over aperiod of years. Business cyclesvary greatly in duration andintensity. A cycle consists of fourphases: peak, recession, trough andrecovery. 48
  • 49. The generally accepted theorytoday is that changes in the forces ofdemand and supply cause businesscycles. 49
  • 50. A recession is officially definedas at least two consecutive quartersof real GDP decline. A trough is theturning point in national outputbetween recession and recovery.During a recovery, there is anupturn in the business cycle duringwhich real GDP rises. 50
  • 51. Hypothetical Business Cycle Peak Real GDP per year th o w lin e Gr d Peak tr en Trough Recession Recovery 51
  • 52. Economic growth is measuredby the annual percentage change Ireal GDP in a nation. The long-termannual average growth rate in theUnited States is 3 percent. 52
  • 53. Leading, coincident, andlagging indicators are economicvariables that change before, at thesame time as, and after changes inreal GDP, respectively. 53
  • 54. The unemployment rate is theratio of the number of unemployedto the number in the labor forcemultiplied by 100. The nation’slabor force consists of people whoare employed plus those who are outof work, but seeking employment. 54
  • 55. Discouraged workers are areason critics say the unemploymentrate is understated. Discouragedworkers are persons who want towork , but who have given up.Another criticism of theunemployment rate is that itoverstates unemployment becauserespondents can falsely report theyare seeking a job. 55
  • 56. Seasonal unemployment isunemployment due to seasonalchanges. 56
  • 57. Frictional unemploymentresults when workers are seekingnew jobs that exist. The problem isthat imperfect information preventsmatching the applicants withavailable jobs. 57
  • 58. Structural unemployment isunemployment caused by factors inthe economy, including lack ofskills, changes in product demand,and technological change. 58
  • 59. Cyclical unemployment isunemployment resulting frominsufficient aggregate demand. 59
  • 60. Full employment occurs whenthe unemployment rate is equal tothe total of the seasonal, frictional,and structural unemployment rates.Currently, the full-employment rateof unemployment in the UnitedStates is considered to be close to 5percent. At this rate ofunemployment, the economy isproducing at its maximum potential. 60
  • 61. The GDP gap is the differencebetween full employment, orpotential real GDP, and actual realGDP. Therefore, the GDP gapmeasures the loss of output due tocyclical unemployment. 61
  • 62. Chapter 16 Quiz ©2000 South-Western College Publishing 62
  • 63. 1. The phases of a business cycle are a. upswing and downswing. b. full employment and unemployment. c. peak, recession, trough, and recovery. d. full employment, depression, expansion, and plateau.C. These are the four phases of changes in real GDP which mirrors changes in employment and other key measures of the macro economy. 63
  • 64. 2. The phase of a business cycle during which real GDP reaches its minimum level is the a. recession. b. depression. c. recovery. d. trough.D. Recession is the phase during which real GDP fall and recovery is the phase during which real GDP rises. Depression is an historical reference to the deep and long recession of the early 1930’s. 64
  • 65. 3. Which of the following is not a variable in the index of leading indicators? a. New consumer goods orders. b. Delayed deliveries. c. New businesses formed. d. Prime rate.D. The prime rate is a lagging indicator. 65
  • 66. 4. Which of the following is a coincident indicator? a. Personal income. b. Industrial production. c. Manufacturing and trade sales. d. All of the above.D. All of these will change at the same time that real GDP changes. 66
  • 67. 5. The labor force consists of all persons a. 21 years of age and older. b. 21 years of age and older who are working. c. 16 years of age and older. d. 16 years of age and older who are working or actively seeking work. D. The labor force also includes the armed forces, but excludes the category called “persons not in labor force.” 67
  • 68. 6. People who are not working will be counted as employed if they are a. on vacation. b. absent from their job because of bad weather. c. absent from their job because of a labor dispute. d. all of the above. D. A person who works at least 1 hour per week for pay or at least 15 hours per week as an unpaid worker in a family business is counted as employed regardless of the special situations listed in a, b, and c. 68
  • 69. 7. The number of people officially unemployed is not the same as the number of people who can’t find a job because a. people who have jobs continue to look for better ones. b. the armed forces are included. c. discouraged workers are not counted. d. of all of the above. C. A person can quit looking for a job because he is discouraged after trying to find one, but wants to work if he could find a job, yet this person is not considered unemployed because he is not actively seeking employment. 69
  • 70. 8. Frictional unemployment applies to a. workers with skills not required for existing jobs. b. short periods of unemployment needed to match jobs and job seekers. c. people who spend long periods of time out of work. d. unemployment related to the ups and downs of the business cycle. B. Frictional unemployment includes people changing jobs, initially entering the labor force, or re-entering the labor force. 70
  • 71. 9. Structural unemployment is caused by a. shifts in the economy that make certain job skills obsolete. b. temporary layoffs in industries such as construction. c. the impact of the business cycle on job opportunities. d. short-term changes in the economy. A. Structural unemployment is long-term unemployment because the skills of unemployed workers do not match the skills required for existing jobs. 71
  • 72. 10. Unemployment that is due to a recession is a. involuntary unemployment. b. frictional unemployment. c. structural unemployment. d. cyclical unemployment.D. Only cyclical unemployment is attributable directly to the business cycle. 72
  • 73. 11. Seasonal, frictional and structural unemployment is equal to a. frictional unemployment. b. structural unemployment. c. cyclical unemployment. d. full employment. D. Full employment does not mean zero unemployment. Even in the best times, there is always seasonal, frictional, and structural unemployment. 73
  • 74. 12. Which of the following statements is true? a. The four phases of the business cycle, in order, are peak, recovery, trough, and recession. b. When unemployment is rising, then real GDP is rising. c. The economic problem typically associated with a recovery is rising unemployment. d. Full employment exists in an economy when the unemployment rate equals the sum of seasonal, frictional, and structural unemployment rates. D. There will always be some people looking for work. 74
  • 75. 13. Which of the following groups typically has the highest unemployment rate? a. White men and women. b. African-American men and women as a group. c. Teenagers. d. Persons who completed high school.B. In 1998 the unemployment rate of black males was 30.1% and black males was 25.3%. 75
  • 76. Civilian Unemployment Rates 1998 Demographic Groups Overall 4.5% Male 4.4% Female 4.6% White 3.9% Black 8.9% Teenagers (16 - 19 years) 14.6% White males 14.1% Black males 30.1% White females 10.9% Black females 25.3% Less than high school 7.1% High school graduates 4.0% College graduates 1.8% 76
  • 77. 14. Which of the following is true? a. The GDP gap is the difference between full employment real GDP and actual real GDP. b. We desire economic growth because it increases the nation’s real GDP. c. Economic growth is measured by the annual percentage increase in a nation’s real GDP. d. Discouraged workers are a reason critics say the unemployment rate is understated. e. All of the above are true. E. All of the above are true. 77
  • 78. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 78
  • 79. END 79