Chapter 13: Economic Instability

How is economic growth affected by business cycles?

Economic growth does not increase continually, but rather in spurts, by cycling through peaks and troughs, which happen during recessions and expansions.

How do economists measure the economic cost in instability?

Economists measure the cost of instability with GDP and misery index.

How are business cycles forecast?

Economists use several methods to predict business cycles. One uses the statistical series and another makes use of macroeconomic modeling.

hyperinflation

inflation in excess of 500 percent per year

structural unemployment

unemployment caused by a fundamental change in the economy that reduces the demand for some workers

seasonal unemployment

unemployment caused by annual changes in the weather or other conditions that reduce the demand for jobs

technological unemployment

unemployment caused by technological developments or automation that makes some workers' skills obsolete

creditor

person or institution to whom money is owed

debtor

person who borrows and therefore owes money

peak

point in time when real GDP stops declining and begins to expand

depression

state of the economy with large numbers of unemployed people, declining real incomes, overcapacity in manufacturing plants, and general economic hardship

leading economic indicator

statistical series that turns down before the economy turns down, or up before the economy turns up

price index

statistical series used to measure changes in the price level over time

Use Figure 13.1 on page 354 to explain how a business cycle can be compared to a roller coaster.

Business cycles go through peaks and troughs which are like roller coasters' ups and downs. It also has upswings, downturns, and plateaus.

What is frictional unemployment?

Frictional unemployment is unemployment involving workers changing jobs or waiting to go to new ones.

composite index of leading economic indicators (LEI)

composite index of 10 economic series that move up and down in advance of changes in the overall economy; statistical series used to predict turning points in the business cycle

depression scrip

currency issued by towns, chambers of commerce, and other civic bodies during the Great Depression of the 1930s

recession

decline in real GDP lasting at least two quarters

deflation

decrease in the general level of prices for goods and services

GDP gap

difference between what the economy can and does produce

demand-pull inflation

explanation that prices rise because all sectors of the economy try to buy more goods and services than the economy can produce

cost-pull inflation

explanation that rising input costs, especially energy and organized labor, drive up the prices of products

trend line

growth path the economy would follow if it were not interrupted by alternating periods of recession and recovery

outsourcing

hiring outside firms to perform non-core operations to lower operating costs

inflation

increase in the general level of prices of goods and services

implicit GDP price deflator

index used to measure price changes in GDP

producer price index (PPI)

index used to measure prices received by domestic producers

business fluctuations

irregular increases and decreases in real GDP

stagflation

period of slow economic growth coupled with inflation

expansion

period of uninterrupted growth of real GDP

List three reasons why a person may become discouraged from finding a job.

1. shortage of jobs 2. discrimination for reasons like age, genera, race,etc. 3. lack of necessary skills

How can inflation destabilize a nation's economy?

Inflation can reduce purchasing power, distort spending, and the distribution of income of a nation.

Why is structural unemployment a more difficult problem for the economy and for individual workers than other types of unemployment?

Structural unemployment is a more difficult problem for the economy and for individual workers than other types of unemployment because it causes long-term unemployment and the unemployed must learn new skills.

What factors make it difficult to determine the unemployment rate?

The Bureau of Labor Statistics list part-time workers as being fully employed. Discouraged workers are not counted as unemployed, so this also understates the unemployment rate. This can be confusing because the labor force includes those who are employed and those who are unemployed but actively seeking work and are capable of wok. Also this can be confused with friction and structural unemployment.

What are the main causes and consequences of inflation?

The demand causes of inflation are demand-pull inflation, cost-pull inflation, wage-price spiral, and excessive monetary growth.

What are the two main phases of a business cycle?

The first phase is recession, a period during which real GDP usually declines for at least two quarters in a row, or six consecutive months. As soon as the declining real GDP bottoms out, the economy moves into the second phase, expansion- a period of recovery from a recession.

Look at Figure 13.4 on page 363. How does the rate of inflation change during times of recessions? What might explain these changes?

The rate of inflation reaches a peak then drops drastically during recession years. This happens because during recessions, consumers don't spend as much money as they do during expansion periods.

In 2005 and 2006, the price of crude oil suddenly increased. What type of inflation might this development cause? Why?

The sudden increase of crude oil caused cost-push inflation because it not only raised the prices of plastics and gasoline but also shipping costs and airline fares.

Assume that business inventories are falling, the average number of hours worked per week is going up, and there is an increase in the number of new building permits. What would these indicators say about the economy, and why?

These indicators suggest that an expansion is taking place in the economy. If new inventories are falling, then businesses are at capacity and will then make new efforts to become more competitive and get rid of their surplus inventory. Hours of labor/week going up suggests an efficient use of labor as well as high employment rates. New building permits suggest an increase in the demand for commercial space, thereby also suspecting an increase in production greater than what is currently sustained.

What kind of inflation might be described as "too many dollars chasing too few goods"? Why?

This type of inflation is excessive monetary growth.

econometric model

mathematical expression used to describe how the economy is expected to perform in the future

civilian labor force (labor force)

non-institutionalized part of the population, aged 16 and over, either working or looking for a job

unemployment rate

percentage of people in the civilian labor force who are classified as unemployed

business cycles

regular increases and decreases in real GDP

creeping inflation

relatively low rate of inflation, usually 1 to 3 percent annually

market basket

representative selection of goods and services used to compile a price index

consumer price index (CPI)

series used to measure price changes for a representative sample of frequently used consumer items

cyclical unemployment

unemployment directly related to swings in the business cycle

frictional unemployment

unemployment involving workers changing jobs or waiting to go to new ones

misery index/discomfort index

unofficial statistic that is the sum of the monthly inflation and unemployment rates

unemployed

working for less than one hour per week for pay or profit in a non-family-owned business, while being available and having made an effort to find a job during the past month

base year

year serving as point of comparison for other years in price index or other statistical measure