Unemployment & Business Cycles

Chapter 8

The Three Faces of GDP

= =

Market Market value of value of

final final goods goods

and and servicesservices

Production Expenditure Income

InvestmentInvestment

ConsumptionConsumption

GovernmentGovernment

purchasespurchases

Net exportsNet exports

Capital Capital IncomeIncome

Labor IncomeLabor Income

Components of GDP

C: consumption

I : investment in plant & equipment

G: government spending

X-M: net exports

Limitations as a Measure

Not a measurement of well-being, just economic activity.

Does not consider the distribution of income.

Unreported economic activity is not included.

Problems comparing per capita GDP across countries

Bangladesh $270

USA $35,000

Exchange rate method and purchasing power method.

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.

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 %

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

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

Source: www.bls.gov.

Composition of theUnemployed by Reason

• There are various reasons why persons were unemployed in 2003.

• A little more than two-fifths (42.4%) of the unemployed were dismissed from their previous jobs.

• 35.5% of the unemployed were either new entrants or reentrants into the labor force.

Dismissed from previous jobs

42.4%

Jobleavers9.3 %

Newentrants7.3%

Reentrants28.2%

Onlayoff12.8%

How Accurate Is the Official Unemployment Rate?

• The unemployment rate includes as unemployed, people who say they are looking for a job who are really not.

• Many are “working off the books, others are vacationing.

• But does not include discouraged workers who have left the labor force.

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.

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

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 %

The Inflation Problem?

If all prices are rising, including wages, why is inflation a problem?

Using a price index to compare dollar values across time.

A Manhattan graduate from 1970 was offered a starting salary of $12,000.

What is that equivalent to in today’s dollars?