Economic Fluctuations, Unemployment, and Inflation

Chapter 8

Which of the following are included in GDP?

a) Your mother-in-law buys a new car from a U.S. producer.

b) Your mother-in-law buys a new car imported from Sweden.

c) Your mother-in-law’s car rental business buys a new car from a U.S. producer.

d) Your mother-in-law’s car rental business buys a new car imported from Sweden.

e) The U.S. government buys a new domestically produced car for the use by your mother-in-law, who has been appointed the ambassador to Sweden.

U. S. Business Cycles

20

10

0

–10

–20

‘90‘801860 ‘70 1900 ‘10 ‘20 ‘30 ‘40 ‘50 ‘60 ‘70 ‘80 ‘90 ‘102000

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Civil War

Recoveryof 1895

World War I

Panicof 1893 Panic

of 1907Great

Depression

Korean War Vietnam War

World War II

Source: Economic Report of the President, various issues.

Instability in the Growth of Real GDP

Annual growth rate of real GDP

6

8

4

2

0

- 2

1960 1965 1970 1975 1980 1985 1990 1995 2000 2004

Long-run growth rate(approx. 3%)

Time

Real GDP

Business peak

Recessionary trough

Contraction Exp

ansi

on

The Hypothetical Business Cycle

Business peak

Recessionary trough

Trend line

PotentialGDP

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Actual & Potential GDP, 1960-2003Real GDP(billions of 2000 $)

8,000

6,000

4,000

2,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2003

10,000

1970recession

1974-75recession

1980recession

1982recession

1990-91recession

2001recession

ActualGDP

1960recession

The Unemployment Rate

• Measuring UnemploymentLabor force = employed + unemployed

force labor

unemployed rate ntUnemployme

over and 16 population

force labor rate ionParticipat

Labor Force Participation Rate of Men and Women

Source: www.bls.gov.

200319751948 1960

87 % 83%74 %

33 % 38 %

46 %

58 %

––––––– Men –––––––

Labor Force Participation Rateof Men and Women: 1948-2003

–––––– Women ––––––1990 200319751948 1960 1990

78 % 76 %

60 %

U.S. Population, Employment,and Unemployment: 2004

Civilian population 16 and over

Civilian labor force

Employed• Employees • Self-employed

workers

Unemployed

• New entrants • Reentrants • Lost last job • Quit last job • Laid off

Not in the labor force

• Household workers • Students • Retirees • Disabled

Labor Force Participation Rate =

Civilian labor forceCivilian population (16+) = 66.0%

Employment / Population Ratio =

Number employedCivilian population (16+) = 62.3%

Rate ofUnemployment =

Number unemployedCivilian labor force = 5.5%

147.4 million

139.3 million

76.0 million

223.4 million

8.1 million

147.4223.4 =

139.3223.4 =

8.1147.4 =

Unemployment Rate, 2003

Source: www.bls.gov.

Allworkers

19.3 %

10.6 %

6.0 % 5.7 %

15.6 %

9.3 %

25+16-19 20-24–– Men aged ––

The Unemployment RateBy Age and Gender: 2003

Allmen

Allwomen –– Women aged ––

25+16-19 20-24

5.0 %6.3 %

4.6 %

5.1 %

8.6 %

10.6 %

4.2 %

6.5 %

10.5 %

14.6 %Spain

Italy

Germany

Japan

Average Unemployment Rate(1994-2003)

France

U.K.

U.S.

Source: Economic Outlook, OECD (June 2004).

Types of Unemployment

Frictional: worker “between jobs”

Cyclical: caused by bad economic conditions

Structural: worker’s skill set is no longer in demand

Natural Rate of Unemployment

Structural + Frictional

• Average rate of unemployment over the business cycle.

• Non-inflationary rate of unemployment.• Full-employment.• Associated with potential output.

Labor Force, unemployment rate & Participation Rate

65 people10 <16 years of age10 retired25 full-time jobs5 part-time jobs5 full-time homemakers5 full-time students over 162 disabled and cannot workRest did not have jobs but wanted one but one has

not searched in 3 months.

Inflation Since 1900

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

3020101900 40 50 60 70 80 90 2000

–10

–5

0

5

10

15

20

25

Sources: Derived from computerized data supplied by FAME ECONOMICS. Also see Economic Report of the President (annual).

The Inflation Rate, 1953-2003Inflation rate

1955 1960 1965 1970 1975 1980 1985 1990 20001995

10

5

0

15

2003

1953-1965 averageinflation rate = 1.3 %

1973-1981 averageinflation rate = 9.2 %

1983-2003 averageinflation rate = 3.1 %