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After studying this chapter you will be able to understand: Describe the business cycle and its primary phases, illustrate how unemployment and inflation are measured, explain the types of unemployment and inflation and their various economic impacts.
26 BusinessCycles,Unemployment,and Inflation McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved TheBusinessCycle Alternating increases and decreases • LO1 in economic activity over time Phases of the business cycle • Peak • Recession • Trough • Expansion 26-2 The Business Cycle Peak Rec ess io an si on h t w o Gr n Re ces sio n Ex pa Peak ns i on d Tren Trough Ex p Level of real output Peak Trough Time LO1 26-3 Causation: A First Glance • Business cycle fluctuations • Economic shocks • Prices are “sticky” downwards • Economic response entails decreases in output and employment LO1 26-4 Unemployment Unemployment rate = Under 16 and/or Institutionalized (71.4 million) Total population (307.3 million) # of unemployed labor force Not in labor force (81.7 million) Employed (139.9 million) X 100 Unemployment rate = Labor force (154.2 million) 14,265,000 154,142,000 X 100 = 9.3% Unemployed (14.3 million) LO2 26-5 Unemployment • Criticisms of unemployment • Involuntary part-time workers counted as if full-time • Discouraged workers are not counted as unemployed LO2 26-6 Types of Unemployment • Frictional unemployment • Individuals searching for jobs or • • LO3 waiting to take jobs soon Structural unemployment • Occurs due to changes in the structure of the demand for labor Cyclical unemployment • Caused by the recession phase of the business cycle 26-7 Definition of Full Employment • Natural Rate of Unemployment (NRU) • Full employment level of unemployment • Can vary over time • Demographic changes • Changing job search methods • Public policy changes • Actual unemployment can be above or fall below the NRU LO3 26-8 Economic Cost of Unemployment • GDP Gap • GDP gap = actual GDP – potential • LO3 GDP • Can be negative or positive Okun’s Law • Every 1% of cyclical unemployment creates a 2% GDP gap 26-9 Economic Cost of Unemployment Economic Cost of Unemployment LO3 26-10 Unequal Burdens • Occupation • Age • Race and ethnicity • Gender • Education • Duration LO3 26-11 Noneconomic Costs • Loss of skills and loss of self-respect • Plummeting morale • Family disintegration • Poverty and reduced hope • Heightened racial and ethnic tensions • Suicide, homicide, fatal heart attacks, • LO3 mental illness Can lead to violent social and political change 26-12 Global Perspective LO3 26-13 Inflation • General rise in the price level • Inflation reduces the “purchasing • power” of money Consumer Price Index (CPI) CPI = CPI = LO3 Price of the Most Recent Market Basket in the Particular Year Price estimate of the Market Basket in 1982-1984 207.3 - 201.6 201.6 x x 100 100 = 2.8% 26-14 Types of Inflation • Demand-Pull inflation • Excess spending relative to output • Central bank issues too much • LO3 money Cost-Push inflation • Due to a rise in per-unit input costs • Supply shocks 26-15 Redistribution Effects of Inflation • Nominal income • Unadjusted for inflation • Real income • Nominal income adjusted for • inflation Anticipated vs unanticipated income Percentage change in real income LO3 = Percentage change in nominal income Percentage change in price level 26-16 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” 26-17 Who is Unaffected by Inflation? • Flexible-income receivers • COLAs • Social Security recipients • Union members • Debtors • Pay back the loan with “cheaper dollars” LO3 26-18 Does Inflation Affect Output? • Cost-push inflation • Reduces real output • Redistributes a decreased level of • LO3 real income Demand-pull inflation • One view is that zero inflation is best • Another view is that mild inflation is best 26-19 ... 198 2-1 984 207.3 - 201.6 201.6 x x 100 100 = 2.8% 2 6-1 4 Types of Inflation • Demand-Pull inflation • Excess spending relative to output • Central bank issues too much • LO3 money Cost-Push inflation. .. Cost-push inflation • Reduces real output • Redistributes a decreased level of • LO3 real income Demand-pull inflation • One view is that zero inflation is best • Another view is that mild inflation. ..The Business Cycle • Alternating increases and decreases • LO1 in economic activity over time Phases of the business cycle • Peak • Recession • Trough • Expansion 2 6-2 The Business Cycle