consequences of business fluctuations chapter 14

Consequences of Business Fluctuations

Chapter 14

Discussion Topics

Fluctuations in business activityConsequences of business fluctuationsMacroeconomic policy options

Nature of Business Fluctuations

Expansionary phasePeak of business cycleRecessionary phaseTrough of business cycle

38

Four Phases of a Business CycleFour Phases of a Business Cycle

Length of cycles variesover time…

Length of cycles variesover time…

Indicators of Economic Activity

Coincident indicators: current production, current disposable income, current sales

Lagging indicators: business inventories, duration of employment, average interest rate

Leading indicators: new orders for goods, new building permits, new investment in plant and equipment, changes in the money supply

Forecasting models: mathematical methods of forecasting future trends in the economy

Pages 339-340

Indicatorindex

Indicatorindex

Actual activityseveral monthslater…

Actual activityseveral monthslater…

A classical example of a leading indicator

A classical example of a leading indicator

Two Consequences of Business Fluctuations

Fluctuations in the civilian unemployment rate and implications for policy

Fluctuations in the rate of inflation and implications for policy

Pages 354-364

Unemployment Rate

Calculation of Civilian Unemployment Rate

Calculation of Civilian Unemployment Rate

Annual rate

Number of civilians unemployedSize of total civilian labor force

=

where the size of the total civilian labor force is determined by subtracting those not seeking jobs(homemakers, students, etc.) from the total non-institutional population (those not in prison) over 16 years of age as well as those who are in militaryservice.

Pages 341

An ExampleAssume the following values:Total labor force1 143.8 millionMembers of armed services 1.7 millionEmployed persons 136.2 million

Annual rate

143.8 – 1.7 – 136.2 143.8 – 1.7

=

= .0415 or 4.15 percent

1 The total labor force equals total population minus those notseeking employment over age 16 and those in institutions.

Pages 341

Forms of Unemployment

Frictional: changing jobs and currently unemployed

Cyclical: associated with business cyclesSeasonal: associated with seasonal

business activityStructural: associated with technological

change

Pages 341

Full employmentbarometer?

Full employmentbarometer?

Unemployment rateduring the great depression was 25%

Unemployment rateduring the great depression was 25%

Inflation Rate

What is Inflation?

Sustained rise in the general price level

Not a change in the price of a single commodity

Core rate of inflation excludes fuel and food price increases

Deflation (prices falling) vs. disinflation (prices increasing at a slower rate)

Pages 342 – 343

Measuring the CPIThe consumer price index is a weighted average ofthe prices consumers pay for goods and services.It is measured by:

CPI =

Or:

CPI = WFB(PFB) + WH(PH) + … + WOTHER(POTHER)

= 16.302(PFB) + 39.636(PH) + … + 10.203(POTHER)

Cost of market basket in current yearCost of market basket in base year

× 100

See Table 14.3 on page 344See Table 14.3 on page 344

Page 342

Rate of Inflation

The rate of inflation can be measured by the percentchange in the CPI, or:

Inflation rate = current CPI – previous CPIprevious CPI

If the CPI was 166.6 in 1999 and 172.3 in 2000, theannual rate of inflation in 2000 would be:

Inflation rate = (172.3 – 166.6) ÷ 166.6 = .0342 or 3.42%

Pages 344

Inflation thought to be“under control” in thisrange

Inflation thought to be“under control” in thisrange

Brought about a majormonetary policy actiondescribed in Chapter 13

Brought about a majormonetary policy actiondescribed in Chapter 13

Page 345

When describing growth in the economy onthe nightly newscast, the newscaster willrefer to the growth in real GDP after adjustmentsfor inflation. In the above example, real GDPgrew over the 1992-1999 period, but not at therate implied by comparisons in nominal terms.

When describing growth in the economy onthe nightly newscast, the newscaster willrefer to the growth in real GDP after adjustmentsfor inflation. In the above example, real GDPgrew over the 1992-1999 period, but not at therate implied by comparisons in nominal terms.

Some examples of annual rates ofinflation around the world vs. U.S.

Some examples of annual rates ofinflation around the world vs. U.S.

Trade off between Inflation and

Unemployment

Phillips curve named afterBritish economist A. W.Phillips…

Phillips curve named afterBritish economist A. W.Phillips…

Policies that reduceunemployment mayincrease inflation inthe short run, andvice versa…

Policies that reduceunemployment mayincrease inflation inthe short run, andvice versa…

Demand oriented policiesthat shift the aggregatedemand curve from AD2

to AD3 “pull up” thegeneral price level from P0

to P1.

This small increase in inflation may make sensesince output increasedfrom Y2 to Y3, which wouldlower unemployment.

Demand oriented policiesthat shift the aggregatedemand curve from AD2

to AD3 “pull up” thegeneral price level from P0

to P1.

This small increase in inflation may make sensesince output increasedfrom Y2 to Y3, which wouldlower unemployment.

Demand oriented policiesto maximize output at theeconomy’s potential orYPOT may bring about asubstantial increase in the general price level (and hence rate of inflation) fora relatively small gain in output and employment.

Demand oriented policiesto maximize output at theeconomy’s potential orYPOT may bring about asubstantial increase in the general price level (and hence rate of inflation) fora relatively small gain in output and employment.

Both demand and supplyoriented policies stimulate aggregate output.

Both demand and supplyoriented policies stimulate aggregate output.

But demand expansion policy“pulls up” the general price level….

But demand expansion policy“pulls up” the general price level….

…while supply oriented policiesthat enhance productivity reduce the general price level.

…while supply oriented policiesthat enhance productivity reduce the general price level.

In reality, both forms of policy are typically carried out at the same time.

In reality, both forms of policy are typically carried out at the same time.

SummaryA business cycle has four phases: peak,

recession, trough and expansion The two major consequences of

business fluctuations are unemploy-ment and inflation

Know how to calculate the civilian unemployment rate and the rate of inflation facing consumers

Understand the nature of the index of leading economic indicators

Understand the concept graphing of demand pull inflation

Understand the Phillips curve and demand and supply policy impacts

Chapter 15 focuses on how macroeconomic policy affects agriculture….

consequences of business fluctuations chapter 14

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