Introduction to Macroeconomics
The Business Cycle and Measures of
Performance
Macroeconomics
• Focuses on the “ups” and “downs” of the
economy
– The Big Picture
• Economic Aggregates
– Unemployment Rate
– Inflation Rate
– Gross Domestic Product (GDP)
The Business Cycle
The alternation between economic downturns
and upturns in the economy
Peak
Full employment; near capacity output
Recession A decline in output lasting 6 months or
more, usually accompanied by declines in
income and employment
Trough
Bottom of a recession; unemployment
highest
Recovery Expansion back towards full employment
Growth
When output exceeds previous peak
The Business Cycle
Growt
h
(Recession)
Employment
Labor Force = Employed + Unemployed
Employed
Unemployed
• Work for pay OR
• 15 hours of unpaid work in family
business OR
• Temporarily absent from work
• Did no work for pay or profit
• Actively looked for work
• Available for work
Not Counted in Labor Force
• Under 16
• Institutionalized (military; prison)
• People who have stopped
seeking work
Unemployment Rate
UR = 100 x (Unemployed/Labor Force)
Ex: Calculate the Unemployment Rate
Labor Statistic
Number
Military Personnel
1.5 million
Population under 16 working part time
0.3 million
Population over 16 working part time
4 million
Population over 16 working full time
14 million
Those without jobs who are actively seeking jobs
2 million
GDP= Aggregate Output
• The economy’s total production of goods and
services for a given time period, usually a year
• Closely tied to employment
– Near peak, unemployment is very low
– Near trough, unemployment is high
Figure 2.1 The U.S. Unemployment Rate and the Timing of Business Cycles, 1989–2009
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 2.2 Growth, the Long View
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Price Level
• Average of all prices in the economy
– usually measured by an index
• Inflation
– A rise in the overall price level
• Deflation
– A fall in the overall price level