The Business CycleThe Business Cycle

The Business CycleThe Business Cycle

The The business cyclebusiness cycle is the is the alternating periods of economic alternating periods of economic growth and contraction experienced growth and contraction experienced by the economy.by the economy.

It shows the rise and fall of the It shows the rise and fall of the economy over time.economy over time.

The Business Cycle in U.S. The Business Cycle in U.S. HistoryHistory

Assessing the Economy as a Assessing the Economy as a WholeWhole

There are three basic measures of There are three basic measures of performance:performance: Output (GDP) growthOutput (GDP) growth UnemploymentUnemployment InflationInflation

GDPGDP

GDP = Gross Domestic Product GDP = Gross Domestic Product (overall value of finished goods and (overall value of finished goods and services produced in the U.S. in a services produced in the U.S. in a given time period)given time period)

Business cycles are measured by Business cycles are measured by changes in real GDP (GDP adjusted changes in real GDP (GDP adjusted for inflation)for inflation)

UnemploymentUnemployment

Unemployment is the inability of Unemployment is the inability of labor-force participants to find jobs.labor-force participants to find jobs.

When production declines, When production declines, jobsjobs are are eliminated.eliminated.

The Labor ForceThe Labor Force

The labor force consists of all The labor force consists of all persons over age 16 who are either persons over age 16 who are either working for pay or actively seeking working for pay or actively seeking paid employment.paid employment.

The Unemployment RateThe Unemployment Rate

The unemployment rate is the The unemployment rate is the proportion of the labor force that is proportion of the labor force that is unemployed.unemployed.

Unemployment in U.S. Unemployment in U.S. HistoryHistory

Seasonal UnemploymentSeasonal Unemployment

This is caused by seasonal changes:This is caused by seasonal changes: An example is when school is out in the An example is when school is out in the

summer and teens are looking for summer and teens are looking for summer jobs.summer jobs.

Frictional Unemployment Frictional Unemployment

This is a brief period of This is a brief period of unemployment associated with a job unemployment associated with a job search.search. Examples include students with Examples include students with

marketable skills entering the work marketable skills entering the work force after graduation, and workers in force after graduation, and workers in between jobs.between jobs.

Structural UnemploymentStructural Unemployment

This results from a mismatch This results from a mismatch between the skills of labor force between the skills of labor force participants and the skills needed by participants and the skills needed by employers.employers. For example, when the For example, when the ““dot.comdot.com”” boom boom

burst, it was difficult for programmers burst, it was difficult for programmers and software engineers to find jobs.and software engineers to find jobs.

Cyclical UnemploymentCyclical Unemployment

When there are not enough jobs to When there are not enough jobs to go around due to downturns in the go around due to downturns in the business cycle.business cycle.

This is unemployment due to a This is unemployment due to a recessionrecession.. The Great Depression is the most The Great Depression is the most

striking example of cyclical striking example of cyclical unemployment.unemployment.

The Policy GoalThe Policy Goal

To try to achieve full employment.To try to achieve full employment. Full employmentFull employment is the lowest rate is the lowest rate

of unemployment compatible with of unemployment compatible with price stability:price stability: It is estimated to be between 4 and 6 It is estimated to be between 4 and 6

percent.percent.

InflationInflation

The biggest fear as an economy The biggest fear as an economy reaches full employment is inflation.reaches full employment is inflation.

Costs rise, pushing up prices.Costs rise, pushing up prices.

Inflation & DeflationInflation & Deflation

InflationInflation is an is an increaseincrease in the in the average level of prices, not a change average level of prices, not a change in any specific price.in any specific price.

DeflationDeflation is a is a decreasedecrease in the in the average level of prices of goods and average level of prices of goods and services.services.

Price EffectsPrice Effects

Not all prices rise at the same rate Not all prices rise at the same rate during an inflation.during an inflation.• Not everyone suffers equally from

inflation.

Wealth EffectsWealth Effects

Inflation may reduce the Inflation may reduce the realreal value of value of your savings.your savings.

Measuring InflationMeasuring Inflation

Consumer Price IndexConsumer Price Index ( (CPICPI)) - a - a measure (index) of changes in the measure (index) of changes in the average price of consumer goods average price of consumer goods and services.and services.

Inflation rateInflation rate - the annual rate of - the annual rate of increase in the average price level.increase in the average price level.

Quality ImprovementsQuality Improvements

Because of quality improvements Because of quality improvements and new products, the CPI is and new products, the CPI is notnot a a perfect measure of inflation.perfect measure of inflation.

Old products become better as a Old products become better as a result of quality improvements.result of quality improvements.

Quality ImprovementsQuality Improvements

A 1955 television does not compare A 1955 television does not compare in quality to a television today.in quality to a television today.

• Today's automobiles cost more than Henry Ford’s model T, but part of that price is reflected in the higher quality.

New ProductsNew Products

The market basket (choice of The market basket (choice of consumer goods) used to measure consumer goods) used to measure the CPI changes.the CPI changes.

Products like computers did not exist Products like computers did not exist in the 1972-73 market basket.in the 1972-73 market basket.

DVD players did not exist in the 1987 DVD players did not exist in the 1987 CPI market basket.CPI market basket.