Gdp, inflation, and business cycles


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Gdp, inflation, and business cycles

  1. 1. BusinessCycles,Unemployment,and InflationChapter 26McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
  2. 2. 26-2Chapter Objectives• The business cycle and itsphases• Measuring unemployment andinflation• The types and impacts ofunemployment and inflation
  3. 3. 26-3The Business CycleLevelofRealOutputTimePeakPeakPeakRecessionRecessionExpansionExpansionTroughTroughGrowthTrendDurable and nondurable industriesaffected differently
  4. 4. 26-4Causes of Business Cycles• Shocks and price stickiness• Supply and productivity shocks• Monetary shocks• Financial bursts and bubbles• Unexpected political events• Common link–Unexpected changes in spending
  5. 5. 26-5Unemployment• Twin problems of the business cycle–Unemployment–Inflation• Measurement of unemployment–Who’s in the labor force• Problems with the unemployment rate–Part-time employment–Discouraged workersUnemployment RateUnemployedLabor Force= x 100
  6. 6. 26-6UnemploymentUnder 16And/orInstitutionalized(71.8 Million)2007 dataTotalPopulation(303.6 Million)Not inLabor Force(78.7 Million)Employed(146.0 Million)LaborForce(153.1 Million)Unemployed(7.1 Million) Source: Bureau of Labor Statistics
  7. 7. 26-7Unemployment• Types of unemployment–Frictional–Structural–Cyclical• Full employment defined–No cyclical unemployment• Natural rate of unemployment• Full employment rate
  8. 8. 26-8Unemployment• Natural rate of unemployment–1980’s 6%–Today 4-5%• Aging labor force• Temp agencies and the internet• New welfare laws and workrequirements• Prison population has doubled
  9. 9. 26-9Cost of Unemployment• Foregone output• Potential output• GDP gap–(Actual output – potential output)• Okun’s Law–Each 1% above NRU createsnegative 2% output gap
  10. 10. 26-10Unemployment5,0006,0007,0008,0009,00010,00011,00012,0001985 1987 1989 1991 1993 1995 1997 1999 2001 2003 20051985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005The GDP Gap12,00011,00010,0009,0008,0007,0006,0005,000GDP(billionsof1996dollars)02468101985 1987 1989 1991 1993 1995 1997 1999 2001 2003 20051985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005The Unemployment Rate1086420Unemployment(percentofcivilianLaborforce)Source: Congressional Budget Office & Bureau of Economic AnalysisGDP gap(positive)GDP gap(negative)Potential GDPActual GDP
  11. 11. 26-11Unemployment• Unequal burdens–Occupation–Age–Race and ethnicity–Gender–Education–Duration• Noneconomic costs
  12. 12. 26-12UnemploymentSource: Bureau of Labor StatisticsUnemployment Rates in Five IndustrialNations,1995-2005
  13. 13. 26-13Inflation• Rise in general level of prices• Consumer price index (CPI)–Market basket–300 goods and services–Typical urban consumer–2 year updatesCPIPrice of the Most Recent MarketBasket in the Particular YearPrice estimate of the MarketBasket in 1982-1984= x 100
  14. 14. 26-14InflationAnnual Inflation Rates in the United States,1960-20070510151960 1970 1980 1990 2000InflationRate(percent)Source: Bureau of Labor Statistics
  15. 15. 26-15InflationSource: Bureau of Labor StatisticsInflation Rates in Five Industrial Nations,1995-2005
  16. 16. 26-16Inflation• Types of Inflation–Demand pull–Cost-push• Redistributive Effects–Nominal and real income–Growth in nominal income vs.inflation rate–Anticipated vs. unanticipatedinflation
  17. 17. 26-17Inflation• Who is hurt by inflation?–Fixed-income receivers–Savers–Creditors• Who is unaffected or not hurt byinflation?–Flexible-income receivers• Cost-of-living adjustments (COLAs)–Debtors
  18. 18. 26-18Anticipated Inflation–Nominal Interest Rate–Real Interest Rate–Inflation PremiumNominalInterestRateRealInterestRateInflationPremium11%5%6%= +
  19. 19. 26-19Other Inflation Issues• Deflation• Mixed effects• Arbitrariness• Cost-push inflation and realoutput• Demand-pull inflation and realoutput• Hyperinflation
  20. 20. 26-20The Stock Market• Stock prices and macro instability• The market for stocks• Volatile stock prices• Wealth effect• Investment effect• Little impact on macroeconomy• Stock market bubbles do have animpact• Index of Leading Indicators
  21. 21. 26-21Key Terms• business cycle• peak• recession• trough• expansion• labor force• unemployment rate• discouraged workers• frictional unemployment• structural unemployment• cyclical unemployment• full-employment rate ofunemployment• natural rate of unemployment(NRU)• potential output• GDP gap• Okun’s law• inflation• Consumer Price Index (CPI)• demand-pull inflation• cost-push inflation• per-unit production costs• nominal income• real income• anticipated inflation• unanticipated inflation• cost-of-living adjustments(COLAs)• real interest rate• nominal interest rate• deflation• hyperinflation
  22. 22. 26-22Next Chapter Preview…BasicMacroeconomicRelationships