micro economics chapter 09

9 Business Cycles, Unemployment, and Inflation McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved The Business Cycle • Alternating increases and decreases in • • LO1 economic activity (GDP, employment, income) over time Vary in duration and magnitude Phases of the business cycle • Peak • Recession – months or more • Trough • Expansion The Business Cycle Peak Rec ess io n ns io n Trough Time LO1 Re ces sio n ns io h t w o Gr Ex pa Peak n d Tren Ex pa Level of real output Peak Trough The Business Cycle TABLE 26.1 U.S Recessions since 1950 Period Duration, Months Depth (Decline in Real Output) 1953-54 10 -2.6% 1957-58 -3.7 1960-61 10 -1.1 1969-70 11 -0.2 1973-75 16 -3.2 1980 -2.2 1981-82 16 -2.9 1990-91 -1.4 2001 -0.4 2007-09 18 -3.7 Source: National Bureau of Economic Research, www.nber.org, and Minneapolis Federal Reserve Bank, www.minneapolisfed.gov Output data are in 2000 dollars LO1 Cyclical Impact • Durable & capital goods affected • LO1 most during recessions • Postponability Nondurable consumer goods affected less Unemployment Under 16 and/or Institutionalized (69.5 million) Total population (321.4 million) Not in labor force (94.1 million) Employed (149.9 million) Unemployed (7.9 million) LO2 Labor force (157.8 million) Unemployment Unemployed • Unemployment Rate = Labor Force x 100 • Criticisms • Involuntary part-time workers counted as if full-time • Discouraged workers are not counted as unemployed • http://www.youtube.com/watch?v=Ul u3SCAmeBA LO2 Types of Unemployment • Frictional unemployment • Individuals searching/waiting for jobs • Shorter term • Structural unemployment • Occurs due to changes in the structure of the demand for labor • Longer term LO3 Types of Unemployment • Frictional and structural • LO3 unemployment are unavoidable and beneficial Cyclical unemployment • Caused by a recession – decrease in total spending Definition of Full Employment • Natural Rate of Unemployment (NRU) • Full employment level of • LO3 unemployment • Zero cyclical unemployment • Can vary over time • Actual unemployment can be above or fall below the NRU Potential GDP is GDP associated with NRU Economic Cost of Unemployment • Irretrievable loss of goods and services • GDP Gap • Amount of goods and services sacrificed due to cyclical unemployment • GDP gap = actual GDP – potential GDP LO3 Economic Cost of Unemployment • Negative GDP gap occurs because • LO3 there is cyclical unemployment; potential GDP exceeds actual GDP Positive GDP occurs because the actual unemployment rate is less than the NRU; actual GDP is greater than potential GDP Economic Cost of Unemployment • Okun’s Law • Every 1% of cyclical unemployment creates a 2% GDP gap LO3 Economic Cost of Unemployment LO3 Global Perspective LO3 Inflation • General rise in the price level • Consumer Price Index (CPI) is used • Can use the “rule of 70” LO2 Inflation LO2 Inflation LO2 Types of Inflation • Demand-Pull inflation • “Too much spending chasing too few goods” • Central bank issues too much money • More likely to occur the closer the economy is to full-employment LO3 Types of Inflation • Cost-Push inflation • Due to a rise in per-unit input costs • Supply shocks LO3 Inflation • Core inflation • Excludes volatile food and energy goods • Focuses on more stable prices LO3 Redistribution Effects of Inflation • Nominal income • Unadjusted for inflation • Real income • Nominal income adjusted for inflation • Real income can fall if nominal income increases by less than inflation • Income is redistributed LO3 Who is Hurt by Inflation? • Fixed-income receivers • Real incomes fall • Savers • Value of accumulated savings • LO3 deteriorates Creditors • Lenders get paid back in “cheaper dollars” Who is Unaffected by Inflation? • Flexible-income receivers • COLAs • Social Security recipients • Union members • Debtors • Pay back the loan with “cheaper dollars” LO3 ... 1960-61 10 -1.1 1969-70 11 -0.2 1973-75 16 -3.2 1980 -2.2 1981-82 16 -2.9 1990-91 -1.4 2001 -0.4 2007 -09 18 -3.7 Source: National Bureau of Economic Research, www.nber.org, and Minneapolis Federal Reserve