business cycles, unemployment, and inflation chapter 26 mcgraw-hill/irwin copyright © 2009 by the...
TRANSCRIPT
Business Cycles, Unemployment, and Inflation
Chapter 26
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
26-2
Chapter Objectives
• The business cycle and its phases
• Measuring unemployment and inflation
• The types and impacts of unemployment and inflation
26-3
The Business Cycle
Lev
el o
f R
eal O
utp
ut
Time
Peak
Peak
Peak
Recession
Recession
Expa
nsio
n Exp
ansi
on
Trough
Trough
Growth
Trend
Durable and nondurable industries affected differently
26-4
Causes 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
26-5
Unemployment
• 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 workers
Unemployment RateUnemployed
Labor Force= x 100
26-6
Unemployment
Under 16And/or
Institutionalized(71.8 Million)
2007 data
TotalPopulation
(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
26-7
Unemployment
• Types of unemployment–Frictional –Structural –Cyclical
• Full employment defined–No cyclical unemployment
• Natural rate of unemployment• Full employment rate
26-8
Unemployment
• Natural rate of unemployment–1980’s 6%–Today 4-5%
• Aging labor force• Temp agencies and the internet• New welfare laws and work
requirements• Prison population has doubled
26-9
Cost of Unemployment
• Foregone output• Potential output• GDP gap
–(Actual output – potential output)
• Okun’s Law–Each 1% above NRU creates
negative 2% output gap
26-10
Unemployment
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
The GDP Gap12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000GD
P (
bil
lio
ns
of
1996
do
lla
rs)
0
2
4
6
8
10
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
The Unemployment Rate10
8
6
4
2
0
Un
emp
loy
men
t(p
erce
nt
of
civi
lian
Lab
or
forc
e)
Source: Congressional Budget Office & Bureau of Economic Analysis
GDP gap(positive)
GDP gap(negative)
Potential GDP
Actual GDP
26-11
Unemployment
• Unequal burdens–Occupation–Age–Race and ethnicity–Gender–Education–Duration
• Noneconomic costs
26-12
Unemployment
Source: Bureau of Labor Statistics
Unemployment Rates in Five Industrial Nations,1995-2005
26-13
Inflation
• Rise in general level of prices• Consumer price index (CPI)
–Market basket –300 goods and services–Typical urban consumer–2 year updates
CPIPrice of the Most Recent Market
Basket in the Particular Year
Price estimate of the MarketBasket in 1982-1984
= x 100
26-14
Inflation
Annual Inflation Rates in the United States,1960-2007
0
5
10
15
1960 1970 1980 1990 2000
Infla
tion
Rat
e (p
erce
nt)
Source: Bureau of Labor Statistics
26-15
Inflation
Source: Bureau of Labor Statistics
Inflation Rates in Five Industrial Nations,1995-2005
26-16
Inflation
• Types of Inflation–Demand pull –Cost-push
• Redistributive Effects–Nominal and real income–Growth in nominal income vs.
inflation rate–Anticipated vs. unanticipated
inflation
26-17
Inflation
• Who is hurt by inflation?–Fixed-income receivers–Savers–Creditors
• Who is unaffected or not hurt by inflation?–Flexible-income receivers
• Cost-of-living adjustments (COLAs)–Debtors
26-18
Anticipated Inflation
–Nominal Interest Rate –Real Interest Rate–Inflation Premium
NominalInterest
Rate
RealInterest
Rate
InflationPremium
11%
5%
6%
= +
26-19
Other Inflation Issues
• Deflation• Mixed effects• Arbitrariness• Cost-push inflation and real
output• Demand-pull inflation and real
output• Hyperinflation
26-20
The 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 an
impact• Index of Leading Indicators
26-21
Key Terms
• business cycle• peak• recession• trough• expansion• labor force• unemployment rate• discouraged workers• frictional unemployment• structural unemployment• cyclical unemployment• full-employment rate of
unemployment• 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
26-22
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BasicMacroeconomicRelationships