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Chapter 12 Business Cycles

and Unemployment• Key Concepts• Summary• Practice Quiz

©2004 Thomson/South-Western

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What is abusiness cycle?

Alternating periods of economic growth and contraction, which can be measured by changes in real GDP

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What are the four phases of a

business cycle?• Peak• Recession• Trough• Recovery

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What is a peak?The phase of the business cycle during which real GDP reaches its maximum after rising during a recovery

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What is a recession?A downturn in the business cycle during which real GDP declines

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What is a trough?The phase of the business cycle in which real GDP reaches its minimum after falling during a recession

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What is a recovery?An upturn in the business cycle during which real GDP rises

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Hypothetical Business Cycle

Peak

Peak

Trough

Recession Recovery

Real GDPper year

Growth trend lin

e

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How long before a downturn is a

recession?The Department of Commerce considers a recession to be at least two consecutive quarters in which GDP declines

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When is a downturn considered a depression?

The term depression is primarily an historical reference to the extreme deep and long recession of the early 1930’s

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What iseconomic growth?

An expansion in national output measured by the annual percentage increase in a nation’s real GDP

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Why is economic growth one of our nation’s economic goals?

It increases our standard of living - it creates a bigger “economic pie”

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What are the three types of economic

indicators?• Leading• Coincident• Lagging

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What is aleading indicator?

Variables that change before real GDP changes

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Leading Indicators

•Average workweek •Unemployment claims•New consumer goods orders•Delayed deliveries•New orders for plant and equipment•New building permits•Stock prices•Money supply•Interest rates•Consumer Expectations

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What is acoincident indicator?

Variables that change at the same time that real GDP changes

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Coincident Indicators

•Nonagricultural payrolls

•Personal income minus transfer payments

•Industrial Production

•Manufacturing and trade sales

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What is alagging indicator?

Variables that change after real GDP changes

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Lagging Indicators

•Unemployment rate

•Duration of unemployment

•Labor cost per unit of output

•Consumer price index for services

•Commercial and industrial loans

•Commercial-credit-to-personal income ratio

Prime rate

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What causes unemployment?

When total spending falls, businesses will find it profitable to produce a lower volume of goods and avoid unsold inventory

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Who is considered unemployed?

Anyone who is 16 years of age and above who is actively seeking employment

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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

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What is the unemployment rate?The percentage of people in the labor force who are without jobs and are actively seeking jobs

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Unemployment rate

unemployedcivilian labor

force

X 100=

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How is the unemployment rate

calculated?About 60,000 households are surveyed each month

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What is thecivilian labor force?

People 16 years or older who are either employed or unemployed, excluding members of the armed forces and people in institutions

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Total Population age 16 and over

Not in Labor ForceNot in Labor ForceArmed forces

Household workersStudentsRetirees

Disabled personsInstitutionalized

Discourage workers

Civilian labor forceCivilian labor forceEmployedEmployees

Self-employedUnemployedNew entrantsRe-entrantsLost last jobQuit last job

Laid off

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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

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What is underemployment?

People working at jobs below their level of skills

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What are criticisms of the unemployment rate?• Does not include discouraged workers

• Includes part-time workers• Does not measure underemployment

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20

15

10

5

1930 40 50 60

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70 80 90 01

The U.S. Unemployment Rate

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What are the types of unemployment?

• Seasonal• Frictional• Structural• Cyclical

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What is seasonal unemployment?

Unemployment caused by recurring changes in hiring due to changes in weather conditions

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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

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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

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What is cyclical unemployment?

Unemployment caused by the lack of jobs during a recession

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What isfull employment?

The situation in which an economy operates at an unemployment rate equal to the sum of the seasonal, frictional, and structural unemployment rates

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What percent unemployment is

considered full employment?

The natural rate of unemployment changes over time, but today it is considered to be about 5%

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What is the GDP gap?The GDP gap is the difference between full-employment real GDP and actual real GDP

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What is the cost of unemployment?

The GDP gap

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Key Concepts

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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?

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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 full employment?• What is the cost of unemployment?

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Summary

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Business cycles are recurrent rises and falls in real GDP over a period of years. Business cycles vary greatly in duration and intensity. A cycle consists of four phases: peak, recession, trough and recovery.

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The generally accepted theory today is that changes in the forces of demand and supply cause business cycles.

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A recession is officially defined as at least two consecutive quarters of real GDP decline. A trough is the turning point in national output between recession and recovery. During a recovery, there is an upturn in the business cycle during which real GDP rises.

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Hypothetical Business Cycle

Peak

Peak

Trough

Recession Recovery

Growth trend lin

eReal GDPper year

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Economic growth is measured by the annual percentage change I real GDP in a nation. The long-term annual average growth rate in the United States is 3 percent.

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Leading, coincident, and lagging indicators are economic variables that change before, at the same time as, and after changes in real GDP, respectively.

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The unemployment rate is the ratio of the number of unemployed to the number in the labor force multiplied by 100. The nation’s labor force consists of people who are employed plus those who are out of work, but seeking employment.

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Discouraged workers are persons who want to work , but who have given up looking for work.

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Seasonal unemployment is unemployment due to seasonal changes.

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Frictional unemployment results when workers are seeking new jobs that exist.

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Structural unemployment is unemployment caused by factors in the economy, including lack of skills, changes in product demand, and technological change.

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Cyclical unemployment is unemployment resulting from insufficient aggregate demand.

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Full employment occurs when the unemployment rate is equal to the total of the seasonal, frictional, and structural unemployment rates.

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The GDP gap is the difference between full employment, or potential real GDP, and actual real GDP. Therefore, the GDP gap measures the loss of output due to cyclical unemployment.

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END