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Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles S SR S LR D H’ H* w* w’ H ere, U = U n

Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

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Page 1: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Lectures in Macroeconomics- Charles W. Upton

Unemployment and Business Cycles

SSRSLR

D

H’ H*

w*

w’

Here, U = Un

Page 2: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

Counter-Cyclical andPro-Cyclical Indicators

Business Failures Counter-Cyclical New Business Starts Pro-Cyclical Unemployment Counter-Cyclical Average Work Week Pro-Cyclical Average Wage Rate Pro-Cyclical Capital Utilization Pro Cyclical GDP Pro-Cyclical

Page 3: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

Counter-Cyclical andPro-Cyclical Indicators

Business Failures Counter-Cyclical New Business Starts Pro-Cyclical Unemployment Counter-Cyclical Average Work Week Pro-Cyclical Average Wage Rate Pro-Cyclical Capital Utilization Pro Cyclical GDP Pro-Cyclical

Page 4: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Change in Demand

SSRSLR

D

H’ H*

w*

w’

Here, U = Un

Page 5: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Change in Demand

D’

SSRSLR

D

H’ H*

w*

w’

Page 6: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Change in Demand

D’

SSRSLR

D

H’ H*

w*

w’We know a temporary demand reduction causes a

business cycle

Page 7: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Change in Demand

D’

SSRSLR

D

H’ H*

w*

w’We know a temporary demand reduction causes a

business cycle

So what does it do to

unemployment?

Page 8: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Modest Proposal

D’

SSRSLR

D

H’ H*

w*

w’We know a temporary demand reduction causes a

business cycle

So what does it do to

unemployment?

*

*

H

HHUU n

Page 9: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Modest Proposal

D’

SSRSLR

D

H’ H*

w*

w’We know a temporary demand reduction causes a

business cycle

So what does it do to

unemployment?

*

*

H

HHUU n

Ergo, U is counter cyclical

Page 10: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

The Formal Relation

• GDP– Actual GDP = what you think it is

– Potential GDP = GDP when U = Un

Page 11: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

The Formal Relation

• GDP– Actual GDP = what you think it is

– Potential GDP = GDP when U = Un

• Employment– Actual Employment = CLF(1-U)

– Potential Employment = CLF(1-Un)

Page 12: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

GDP and Unemployment

3

2

3

1

)]1([ tttActual UCLFKAGDP

Page 13: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

Potential GDP & the Natural Rate

3

2

3

1

)]1([ tnttPotential UCLFKAGDP

Page 14: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

GDP and Unemployment

3

2

3

1

3

2

3

1

)]1([

)]1([

tttActual

tnttPotential

UCLFKAGDP

UCLFKAGDP

Page 15: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

The Relation

)(3

2n

Actual

ActualPotential UUGDP

GDPGDP

Page 16: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

Unemployment and GDP

Actual

ActualPotentialn GDP

GDPGDPUU

5.1

Page 17: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

An Illustration

)(3

2n

Actual

ActualPotential UUGDP

GDPGDP

GDP is $10 trillion; Un = 4%;U = 7%

Page 18: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

An Illustration

Trillion $10.2GDP

)47(3

2

10$

10$

Potential

PotentialGDP

GDP is $10 trillion; Un = 4%;U = 7%

Page 19: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Second Illustration

)(3

2n

Actual

ActualPotential UUGDP

GDPGDP

GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?

Page 20: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Second Illustration

UGDP

GDP

GDP

GDP

Actual

Actual

Potential

Potential

3

2

GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?

Page 21: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Second Illustration

UGDP

GDP

GDP

GDP

Actual

Actual

Potential

Potential

3

2

GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?

year a %5.3

Potential

Potential

GDP

GDP

Page 22: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

A Second Illustration

%5.1

3

2%5.4%5.3

U

U

GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?

Page 23: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

Okun’s Law

)(3

2n

Actual

ActualPotential UUGDP

GDPGDP

Page 24: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

Okun’s Law

)(2

1n

Actual

ActualPotential UUGDP

GDPGDP

Page 25: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

The Facts

Change in GDP vs Change in U

-1.5000-1.0000-0.50000.00000.50001.00001.50002.0000

-20.0000 -10.0000 0.0000 10.0000 20.0000

Change in GDP

Ch

an

ge

in U

Page 26: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

The Facts

Change in GDP vs Change in U

-1.5000-1.0000-0.50000.00000.50001.00001.50002.0000

-20.0000 -10.0000 0.0000 10.0000 20.0000

Change in GDP

Ch

an

ge

in U

Page 27: Lectures in Macroeconomics- Charles W. Upton Unemployment and Business Cycles

Unemployment and Business Cycles

End

©2004 Charles W. Upton. All rights reserved

Unemployment data from BLS, GDP data from Dept of

Commerce