ECO121 MACRO: Chapter 9, Business Cycles, Unemployment and Inflation

recession

A period of declining real GDP, accompanied by lower real income and higher unemployment. is a period of decline in total output, income, and employment. This downturn, which lasts 6 months or more, is marked by the widespread contraction of business activity in many sectors of the economy. Along with declines in real GDP, significant increases in unemployment occur.

Mixed effects

A person who is simultaneously an income earner, a holder of financial assets, and a debtor will probably find that the redistribution impact of unanticipated inflation is cushioned. If the person owns fixed-value monetary assets (savings accounts, bonds, and insurance policies), inflation will lessen their real value. But that same inflation may produce an increase in the person's nominal wage. Also, if the person holds a fixed-interest-rate mortgage, the real burden of that debt will decline. In short, many individuals are simultaneously hurt and helped by inflation. All these effects must be considered before we can conclude that any particular person's net position is better or worse because of inflation.

expansion

A phase of the business cycle in which real GDP, income, and employment rise. At some point, the economy again approaches full employment. If spending then expands more rapidly than does production capacity, prices of nearly all goods and services will rise. In other words, inflation will occur. an expansion usually follows recession in a Buisness cycle

inflation

A rise in general level of prices in an economy When inflation occurs, each dollar of income will buy fewer goods and services than before. Inflation reduces the "purchasing power" of money.

cyclical unemployment

A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand). typically begins in the recession phase of the business cycle.

frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs. consisting of search unemployment and wait unemployment—for workers who are either searching for jobs or waiting to take jobs in the near future. Frictional unemployment is inevitable and, at least in part, desirable

GDP gap

Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap).

Cost-of-living adjustment (COLA)

An automatic increase in the incomes (wages) of workers when inflation occurs; often included in collective bargaining agreements between firms and unions. Cost-of-living adjustments are also guaranteed by law for Social Security benefits and certain other government transfer payments.

unanticipated inflation

An increase of the price level (inflation) at a rate greater than expected.

Consumer Price Index

An index that measures the prices of a fixed "market basket" of some 300 goods and services bought by a "typical" consumer.

core inflation

Another complication relating to inflation (regardless of type) is noteworthy. Some price-flexible items within the consumer price index—particularly, food and energy—experience rapid changes in supply and demand and therefore considerable price volatility from month to month and year to year. For example, the prices of grain, fruit, vegetables, and livestock sometimes move rapidly in one direction or the other, leading to sizable changes in the prices of food items such as bread, oranges, lettuce, and beef.

Irregular innovation

Economists cite several possible general sources of shocks that can cause business cycles. Significant new products or production methods, such as those associated with the railroad, automobile, computer, and Internet, can rapidly spread through the economy, sparking sizable increases in investment, consumption, output, and employment. After the economy has largely absorbed the new innovation, the economy may for a time slow down or possibly decline. Because such innovations occur irregularly and unexpectedly, they may contribute to the variability of economic activity.

Monetary factors

Economists cite several possible general sources of shocks that can cause business cycles. Some economists see business cycles as purely monetary phenomena. When a nation's central bank shocks the economy by creating more money than people were expecting, an inflationary boom in output occurs. By contrast, printing less money than people were expecting triggers an output decline and, eventually, a price-level fall.

financial instability

Economists cite several possible general sources of shocks that can cause business cycles. Unexpected financial bubbles (rapid asset price increases) or bursts (abrupt asset price decreases) can spill over to the general economy by expanding or contracting lending, and boosting or eroding the confidence of consumers and businesses. Booms and busts in the rest of the economy may follow.

political events

Economists cite several possible general sources of shocks that can cause business cycles. Unexpected political events, such as peace treaties, new wars, or the 9/11 terrorist attacks, can create economic opportunities or strains. In adjusting to these shocks, the economy may experience upswings or downswings.

productivity change

Economists cite several possible general sources of shocks that can cause business cycles. When productivity—output per unit of input—unexpectedly increases, the economy booms; when productivity unexpectedly decreases, the economy recedes. Such changes in productivity can result from unexpected changes in resource availability (of, say, oil or agricultural commodities) or from unexpected changes in the general rate of technological advance.

cost-push inflation

Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply. The theory of cost-push inflation explains rising prices in terms of factors that raise per-unit production costs at each level of spending. A per-unit production cost is the average cost of a particular level of output. This average cost is found by dividing the total cost of all resource inputs by the amount of output produced. A major source of cost push inflation is supply shock

anticipated inflation

Increases in the price level (inflation) that occur at the expected rate.

education

Less-educated workers, on average, have higher unemployment rates than workers with more education. Less education is usually associated with lower-skilled, less-permanent jobs; more time between jobs; and jobs that are more vulnerable to cyclical layoff.

labor force

Persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work.

buisness cycle

Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases. Business cycles are alternating rises and declines in the level of economic activity, sometimes over several years. Individual cycles (one "up" followed by one "down") vary substantially in duration and intensity.

age

Teenagers have much higher unemployment rates than adults. Teenagers have lower skill levels, quit their jobs more frequently, are more frequently fired, and have less geographic mobility than adults. Many unemployed teenagers are new in the labor market, searching for their first jobs. Male African-American teenagers, in particular, have very high unemployment rates. The unemployment rate for all teenagers rises during recessions.

part-time employment

The BLS lists all part-time workers as fully employed. In 2015 about 30 million people worked part-time as a result of personal choice. But another 6 million part-time workers either wanted to work full-time and could not find suitable full-time work or worked fewer hours because of a temporary slack in consumer demand. These last two groups were,Page 183 in effect, partially employed and partially unemployed. By counting them as fully employed, say critics, the official BLS data understate the unemployment rate.

real income

The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation. is a measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation.

per-unit production costs

The average production cost of a particular level of output; total input cost divided by units of output.

Deflation

The effects of unanticipated deflation—declines in the price level—are the reverse of those of inflation. People with fixed nominal incomes will find their real incomes enhanced. Creditors will benefit at the expense of debtors. And savers will discover that the purchasing power of their savings has grown because of the falling prices.

Nominal income

The number of dollars received by an individual or group for its resources during some period of time. is the number of dollars received as wages, rent, interest, or profit

duration

The number of persons unemployed for long periods—15 weeks or more—as a percentage of the labor force is much lower than the overall unemployment rate

Peak

The point of the business cycle at which an expansion ends and a recession begins. such as the middle peak shown in Figure 9.1, business activity has reached a temporary maximum. Here the economy is near or at full employment and the level of real output is at or very close to the economy's capacity. The price level is likely to rise during this phase.

potential output

The real output (GDP) an economy can produce when it fully employs its available resources

Arbitrariness

The redistribution effects of inflation occur regardless of society's goals and values. Inflation lacks a social conscience and takes from some and gives to others, whether they are rich, poor, young, old, healthy, or infirm.

full-employment rate of unemployment

The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 4 and 5 percent in the United States because some frictional and structural unemployment is unavoidable.

Race and Ethnicity

The unemployment rates for African Americans and Hispanics are higher than that for whites. The causes of the higher rates include lower rates of educational attainment, greater concentration in lower-skilled occupations, and discrimination in the labor market. In general, the unemployment rate for African Americans is twice that of whites and rises by more percentage points than for whites during recessions.

Gender

The unemployment rates for men and women normally are very similar. But in the recent recession, the unemployment rate for men significantly exceeded that for women.

structural unemployment

Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.

occupation

Workers in lower-skilled occupations (for example, laborers) have higher unemployment rates than workers in higher-skilled occupations (for example, professionals). Lower-skilled workers have more and longer spells of structural unemployment than higher-skilled workers. They also are less likely to be self-employed than are higher-skilled workers. Moreover, lower-skilled workers usually bear the brunt of recessions. Manufacturing, construction, and mining tend to be particularly hard-hit, and businesses generally retain most of their higher-skilled workers, in whom they have invested the expense of training.

trough

a point in a Buisness cycle at which Buisness activities have reached a temporary minimum In the trough of the recession or depression, output and employment "bottom out" at their lowest levels. The trough phase may be either short-lived or quite long.

neutral rate of unemployment

the full-employment rate of an employee: the unemployment rat occurring when there is no cyclical and the economy achieved its political output.

discouraged workers

employees who have left the labor force because they have not been able to find employment

demand-pull inflation

increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand

real interest rate

is the percentage expressed in dollars of constant values and equal to nominal interest rate less then expected interest rate of inflation is the percentage increase in purchasing power that the borrower pays the lender. In our example the real interest rate is 5 percent.

Nominal interest rate

the interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation is the percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectation of inflation, if any. In equation form:

unemployment rate

the percentage of the labor force that is unemployed at any time