Macro Chapter 8
Economic Fluctuations,
Unemployment, and Inflation
5 Learning Goals
1) Characterize fluctuations in economic growth.
2) Relate fluctuations in GDP to employment and
the demand for labor.
3) Classify unemployment into three categories.
4) Distinguish the difference between full
employment and the natural rate of
unemployment and correlate both to potential
GDP.
5) Determine inflation’s effect on the economy.
Overall Goals and Objectives
In Chapters 7 & 8, we are measuring and
monitoring the major economic indicators
of the economy.
Is GDP rising or falling? By how much?
Is employment rising or falling? By how
much?
Are prices rising or falling? By how much?
What are the relationships between GDP,
employment, and prices?
Class Activity: Identify at least two
products that are made in 2014 that you
don’t think will be made in 2024. Briefly
explain why you think they won’t be
produced any longer.
Swings in the Economic
Pendulum
The Business Cycle
See Exhibit 1 on p. 153 and Exhibit 2 on p.
154
Instability in the
Growth of Real GDP: 1960-2013
Annual Rate of Growth
in Real GDP
(long-run growth rate approximately 3%)
•Although real GDP in the
United States has grown at an
average rate of approximately
3%, the growth has been
characterized by economic
ups-and-downs.
Note: periods of recession are
indicated with shading.
8%
6%
4%
2%
0%
-2%
-4%
1960
1965
1970
1975
1980
1985
1990
Source: Economic Report of the President, various issues.
1995
2000
2005
2013
The Hypothetical Business Cycle
Real GDP
Business
Trend line
peak
Business
peak
Recessionary
trough
Recessionary
trough
Time
The four phases of the business cycle are expansion,
peak, contraction, and recessionary trough.
Key Points:
1) The business cycle varies and is
unpredictable
2) The average annual growth rate is 3%
Economic Fluctuations
and the Labor Market
Transmitter Question next
Q8.1 A person not working is considered
unemployed.
1. True
2. False
50%
1.
50%
2.
30
This section describes the
categories of people
Total population divided into two categories:
– (1) Under age 16 & institutionalized people
– (2) Over age 16
Over age 16 divided into two categories:
– (1) Not in labor force – students, retirees, disabled
– (2) In labor force
In labor force divided into two categories:
– (1) Employed
– (2) Unemployed, but want to be employed
Definition of unemployed:
A person not currently employed but (1)
actively seeking a job, or (2) waiting to
begin or return to a job
See BLS FAQs
U.S. Population, Employment,
and Unemployment
Civilian population
16 and over
Not in the
labor force
• Household workers
• Students
• Retirees
• Disabled
Civilian labor force
Labor Force
Participation Rate
= Civilian population (16+)
Employment /
Population Ratio
Number employed
Civilian population (16+)
=
Number unemployed
Rate of
Unemployment = Civilian labor force
Civilian
labor force
Employed
• Employees
• Self-employed
workers
Unemployed
• New entrants
• Reentrants
• Lost last job
• Quit last job
• Laid off
See Current Population Survey
Class Activity: Recall the two products
you predicted wouldn’t be produced in
2024. Is it “good” or “bad” that those
products won’t be made any longer?
Why?
Transmitter question next
Q8.2 Mary is a homemaker. Last week, she was
busy with her normal household activities. She is
1.
2.
3.
4.
a member of the civilian labor force who is employed.
a member of the civilian labor force who is unemployed.
a member of the civilian labor force who is underemployed.
a discouraged worker who is not a member of the labor
force.
5. not a member of the labor force.
0%
1)
0%
2)
0%
3)
0%
4)
0%
5)
60
Three calculations to know
1) Labor force participation rate = (employed
+ unemployed) / civilian pop. over age 16
2) Unemployment rate = unemployed /
(employed + unemployed) OR
unemployed / labor force
3) Employment / population ratio =
employed / civilian pop. over age 16
Transmitter Question Next
Q8.3 Which of the following would be officially
classified as unemployed?
1. a school administrator who has been working as a
substitute teacher one day per week while looking for a
full-time job in administration
2. a mathematician who returned to graduate school after
failing to find a job the last four months
3. a 60-year-old former steel worker who would like to work
but has given up actively seeking employment
4. a laid-off construction worker waiting to return to a
previous job
0%
1
0%
2
0%
3
0%
4
60
Historical employment/population ratio:
Historical labor force participation rate:
Historical unemployment rate:
Why are you at FSU?
Here’s one reason:
Please see article “15 Statistics about the
jobs market.pdf” on Blackboard
In 2009, the unemployment rate peaked at
10.0% in October. It was so bad, events
like this started to happen.
The unemployment rate climbed to 8.3% in
February, 2009. It stayed over 8% until
September, 2012 (that’s 43 months).
The previous longest streak above 8% was 27
months, from 1981 to 1984.
The unemployment rate climbed to 9.0% in
April, 2009. It stayed over 9% until September,
2011 (except for March, 2011 at 8.9%). That’s
29 out of 30 months.
The previous longest streak above 9% was 19
months, from 1982 to 1983.
Mathemagics!
A declining unemployment rate suggests
the labor market and the economy are
improving.
How can the unemployment rate decline
while the employment conditions are
actually getting worse?
Mathemagics!
Some simple math:
Suppose in August, 8 people are
unemployed and 92 are employed (labor
force = 100)
Unemployment rate = 8 / 100 = 8.0%
Suppose in September, 7 people are
unemployed and 87 are employed (6
people left the labor force; labor force =
94)
Unemployment rate = 7 / 94 = 7.4%
Mathemagics, but…
What happens to the country’s PPC?
What happens to the country’s economic
growth potential?
What happens to the country’s income
growth potential?
Three Types of
Unemployment
3 general reasons why people are
unemployed:
(1) Frictional – imperfect information
(2) Structural – workers don’t possess
desired skills
3 general reasons why people are
unemployed:
(1) Frictional – imperfect information
(2) Structural – workers don’t possess
desired skills
(3) Cyclical – result of business cycle
Video:
Transmitter Questions Next
Q8.4 How would you classify Stewie?
1.
2.
3.
4.
5.
Structurally unemployed
Frictionally unemployed
Cyclically unemployed
Seasonally unemployed
Not in labor force
20%
1.
20%
2.
20%
3.
20%
4.
20%
5.
30
Q8.5 How would you classify Spicoli?
1.
2.
3.
4.
5.
Structurally unemployed
Frictionally unemployed
Cyclically unemployed
Seasonally unemployed
Not in labor force
0%
1)
0%
2)
0%
3)
0%
4)
0%
5)
30
Q8.6 How would you classify Harry and Lloyd?
1.
2.
3.
4.
5.
Structurally unemployed
Frictionally unemployed
Cyclically unemployed
Seasonally unemployed
Not in labor force
0%
1)
0%
2)
0%
3)
0%
4)
0%
5)
30
Employment
Fluctuations- The
Historical Record
Proposal to reduce unemployment:
Recall those two goods you predicted
wouldn’t be produced in 2024. I propose
we make it illegal to lay off those workers.
Keep them employed making those goods.
Class Activity: What do you think will
happen to the people who used to make
the two products you predicted wouldn’t be
produced in 2024? Will they ever work
again?
Transmitter Question Next
Q8.7 Which of the following is a positive effect of
job search and the unemployment that often
accompanies it?
1. It keeps wages and income levels low.
2. It permits individuals to better match their skills and
preferences with the requirements of a job.
3. It reduces the wage gap between high skill workers and
those with few skills.
4. It creates political pressure for an increase in the
minimum wage, which will reduce the rate of
unemployment in the long run.
0%
1
0%
2
0%
3
0%
4
60
Some unemployment is unavoidable and
arguably desirable
Natural rate of unemployment: “normal”
frictional and structural unemployment
The natural rate occurs when the economy
is operating at a sustainable rate
Full employment is when the natural rate
of unemployment exists
Natural rate equals about 5%
Transmitter question next
Q8.8 Full employment is the situation in which the
economy operates at an unemployment rate equal
to the sum of
1. structural and frictional unemployment.
2. cyclical and frictional unemployment.
3. structural and cyclical unemployment.
4. structural, frictional, and cyclical
unemployment.
0%
1
0%
2
0%
3
0%
4
60
Other proposals to reduce
unemployment:
These would create jobs, but would they
create value to an economy?
Actual and Potential GDP
Potential output is the economy’s
maximum sustainable output; occurs when
the natural rate of unemployment exists;
occurs when full employment exists
Potential output is perhaps best thought of
as the 3% growth rate discussed earlier
Actual output can be greater than or less
than potential; again, think about the
actual growth rate
Real GDP
Business
peak
Trend line
Business
peak
Recessionary
trough
Recessionary
trough
Trend line = maximum sustainable rate
Business Cycle = actual output
Time
Actual and Potential GDP, 1960-2013
Real GDP
(billions of 2005 $)
16,000
14,000
•Here we illustrate both
actual GDP & potential GDP.
•Note the gap between actual
and potential GDP during
periods of recession.
Actual
GDP
12,000
1990-91
recession
10,000
8,000
6,000
1970
recession
1960
recession
2008-10
recession
1982
recession
4,000
1974-75
recession
2,000
1960
2001
recession
Potential
GDP
1965
1970
Source: http://www.bls.gov
1975
1980
1980
recession
1985 1990
1995
2000 2005
2013
Another way to think about these:
When you read the BEA report about
quarterly GDP, if the reported (actual)
growth rate is near 3%, then the economy
is at it’s potential output.
At 3% actual growth, the unemployment
rate will likely be around 5% (i.e. full
employment is 95%)
The economy can never eliminate
frictional and structural unemployment for
an extended period.
Transmitter Question Next
Q8.9 Actual GDP will be below potential
GDP
1.
2.
3.
4.
when the economy is at full employment.
during an economic boom.
when resources are fully utilized.
during a recession.
0%
1
0%
2
0%
3
0%
4
60
The Effects of Inflation
The Inflation Rate, 1956-2013
•Between 1956 and 1965, the
general price level increased
at an average annual rate of
only 1.6%.
•In contrast, the inflation rate
averaged 9.2% from 1973 to
1981, reaching double-digits
during several years.
•Since 1982, the average rate
of inflation has been lower
(2.9% from 1983-2013) and
more stable.
1956-1965 average
inflation rate = 1.6 %
15%
10%
1973-1981 average
inflation rate = 9.2 %
1983-2013 average
inflation rate = 2.9 %
5%
0%
-5%
1956 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
2013
See BLS CPI release
Transmitter question next
Q8.10 Suppose you received a 3 percent increase in
your nominal wage. Over the year, inflation ran about
6 percent. Which of the following is true?
1. Your real wage fell.
2. Your nominal wage fell.
3. Both your nominal and real wages decreased.
4. Although your nominal wage fell, your real wage
increased.
5. Both nominal and real wages increased.
0%
1
0%
2
0%
3
0%
4
0%
5
60
Inflation is a persistent increase in the
general level of prices
Case Study: Zimbabwe
In February, 2008 a loaf of bread was
200,000 Zimbabwe dollars
In August, 2008, that same loaf of bread
was 1.6 trillion dollars
That’s 11.2 million percent!
Video:
Why is inflation “bad”?
1) It reduces investment: long-term projects are
more risky
2) It distorts information delivered by prices:
relative prices are skewed because some
prices adjust more quickly than others
3) It results in less productive use of resources:
people will spend more time trying to combat
the effects of inflation rather than engaging in
productive activity
Key Points:
The business cycle varies and is unpredictable
Potential GDP = average annual growth rate = 3%
Natural rate of unemployment = 5% (varies in reality,
constant for our purposes)
Natural rate of unemployment means cyclical
unemployment = 0; frictional and structural
unemployment remain
When actual GDP > potential GDP, unemployment falls,
upward pressure on prices
When actual GDP < potential GDP, unemployment rises,
downward pressure on prices
Jobs are important, but the production from those jobs is
more important (remember: more production first, higher
incomes result)
5 Learning Goals
1) Characterize fluctuations in economic growth.
2) Relate fluctuations in GDP to employment and
the demand for labor.
3) Classify unemployment into three categories.
4) Distinguish the difference between full
employment and the natural rate of
unemployment and correlate both to potential
GDP.
5) Determine inflation’s effect on the economy.