Recession: Two back to back quarters declining G.D.P
Depression: Three consecutive declining quarters in a row.
Sources of Unemployment
Caused by time required to bring together labor suppliers and labor demanders
Employers need time to learn about the talent available
Job seekers need time to learn about employment opportunities
Generally short-term and voluntary
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
Exists because unemployed workers often
Do not have the skills demanded by employers, or
Do 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
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 CYCLE Phases of the Business Cycle PEAK Level of business activity Time RECESSION TROUGH 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.
UNEMPLOYMENT Unequal Burdens of Unemployment
Race and Ethnicity
Unemployment Rates for Various Groups
Occurs only if there is no cyclical unemployment
Occurs when the only unemployment is frictional, structural, or seasonal
Does not mean zero unemployment
Frictional, seasonal, and structural unemployment can still occur
Occurs when from 4% to 6% of the labor force is unemployed
UNEMPLOYMENT Measurement of Unemployment, 2002 Total Population 288,600,000 Labor force 142,500,000 74,700,000 71,400,000 8,300,000 134,200,000 Employed Not in labor force Under 16 and/or institutionalized Unemployed
The U.S. Unemployment Rate Since 1900
INFLATION Defined and Measurement
A rising general level of prices
Rate of inflation calculated using index numbers
Consumer Price Index = Price of the same market basket in 1982-1984 x 100 CPI Price 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 : a sustained increase in the average price level
Hyperinflation : extremely high inflation
Deflation : a sustained decline in the average price level
Disinflation : a reduction in the rate of inflation
REDISTRIBUTIVE EFFECTS OF INFLATION
Who is Hurt by Inflation?
Want to be home owners.
Who is less hurt or helped by Inflation?
Cost of Living Adjustments (COLAs)
Tangible asset holders.
Causes of Inflation? “TOO much money chasing TOO few goods and services.”