[ppt]chapter 7 - seneca valley school district / overvie · web view* 26-* chapter objectives the...
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Business Cycles, Unemployment, and Inflation
Chapter 26
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter Objectives
• The business cycle and its phases
• Measuring unemployment and inflation
• The types and impacts of unemployment and inflation
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The Business Cycle
Leve
l of R
eal O
utpu
t
Time
Peak
Peak
Peak
Recession
Recession
Expa
nsio
n Expa
nsio
n
Trough
Trough
GrowthTrend
Durable and nondurable industries affected differently
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Causes of Business Cycles
• Shocks and price stickiness– Change in output instead of price
• Supply and productivity shocks– innovation
• Monetary shocks• Financial bursts and bubbles• Unexpected political events• Common link
– Unexpected changes in spending
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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 RateUnemployedLabor Force= x 100
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UnemploymentUnder 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
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Unemployment
• Types of unemployment–Frictional (search and wait)–Structural (occupational and
geographical)–Cyclical
• Full employment redefined–No cyclical unemployment
• Natural rate of unemployment • Full employment rate
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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
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Cost of Unemployment
• Foregone output• Potential output• GDP gap
–(Actual output – potential output)–Negative or positive
• Okun’s Law–Each 1% above NRU creates negative
2% output gap
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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 (b
illio
ns o
f 199
6 do
llars
)
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
Une
mpl
oym
ent
(per
cent
of c
ivili
anLa
bor f
orce
)
Source: Congressional Budget Office & Bureau of Economic Analysis
GDP gap(positive)
GDP gap(negative)
Potential GDP
Actual GDP
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Unemployment
• Unequal burdens–Occupation–Age–Race and ethnicity–Gender–Education–Duration
• Noneconomic costs–Psychological, social, political
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Unemployment
Source: Bureau of Labor Statistics
Unemployment Rates in Five Industrial Nations,1995-2005
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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
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Rate of Inflation
• Rate of inflation
This year index – last year index
last year index
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InflationAnnual 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
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Inflation
Source: Bureau of Labor Statistics
Inflation Rates in Five Industrial Nations,1995-2005
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Inflation
• Types of Inflation– Demand pull: resources fully employed, cant
meet demand, higher prices– Cost-push: rise in ATC, lower output, higher
prices – often due to supply shocks– Complex dynamic, often hard to diagnose
• Redistributive Effects– Nominal (just dollars) and real
(nominal/price index) income– Growth in nominal income vs. inflation rate– Anticipated vs. unanticipated inflation
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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)• Demand-pull beneficiaries
–Debtors
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Anticipated Inflation
–Nominal Interest Rate –Real Interest Rate–Inflation Premium
NominalInterest
Rate
RealInterest
Rate
InflationPremium
11%
5%
6%= +
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Other Inflation Issues• Deflation• Mixed effects - diversified• Arbitrariness – whammy…• Cost-push inflation and real output
– “Stagflation”• Demand-pull inflation and real output
– Efficiency loss?– A little inflation as a trade-off for more
productivity?• Hyperinflation
– No stability - chaos
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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
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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
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BasicMacroeconomicRelationships