Macroeconomics Lecture 8

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MacroeconomicsLecture 8

• Chapter 8
• Unemployment Inflation

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Homework 6, pg. 158, 4, 5, 6, 11

• 4. 136,391 - 141,975 -5,584
• 5. -5,584 (16,644 - 31,526) (4,952 -
  18, 035) 6,313 -27,236
• 6. Yes, because it ran a financial account
  balance of 27,236.
• 11. Debits to the unilateral transfers account.

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Business Cycles

• What is a business cycle?
• The pattern of real GDP rising and falling.
• Occurs over and over
• The pattern is not regular
• The rate at which GDP rises and falls varies.
• A business cycle has 4 phases.

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Business Cycle

• Phases of a business cycle
• Expansion (boom) this is when real GDP is
  rising
• Peak The point at which the expansion ends and
  real GDP begins to contract
• Contraction (recession) real GDP is falling (a
  severe prolonged contraction/recession is called
  a depression)
• Trough The point at which contraction ends and
  real GDP begins to expand.
• Business cycle repeats itself over and over.

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The Business Cycle
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Indicators

• Real GDP is not the only factor affected business
  cycles. Other factors include
• Leading Indicators
• Coincident Indicators
• Lagging Indicators

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Leading Indicators

• A leading indicator is a factor that changes
  before real GDP changes.
• This allows economists to forecast changes in
  output.
• Leading indicators include
• Unemployment claims
• Stock prices
• Consumer expectations
• Why would these indicators help economists
  forecast GDP?

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Coincident Indicators

• Coincident indicators are economic factors that
  change at the same time real GDP changes.
• Coincident indicators can include
• Manufacturing sales
• Personal income
• Payroll employment

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Lagging Indicators

• Lagging indicators will not change in value until
  after real GDP has changed in value.
• Examples include
• Unemployment duration
• Inflation rate for services
• All three indicators (leading, coincidental, and
  lagging) help identify the peaks and troughs in
  the business cycle.

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Unemployment

• How is unemployment related to business cycles?
• Unemployment is directly reflected in the
  nations recurring periods of prosperity and
  recession (peaks and troughs).

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Unemployment Rate

• The unemployment rate measures the percentage of
  the labor force that is not working.
• The labor force in the U.S. is defined as
• All U.S. residents
• minus residents under 16
• minus institutionalized adults
• minus adults not looking for work

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Formula

• Unemployment rate number unemployed
• number in labor
  force
• Example If there are 500,000 people in the labor
  force and 10,000 are unemployed, the unemployment
  rate would be
• 10,000/500,000 .02 or 2

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Unemployment Rate

• The unemployment rate may actually underestimate
  the true reality of unemployment because it does
  not account for discouraged workers.
• Discouraged workers are workers who have stopped
  looking for jobs because they believe no one will
  hire them.
• Why arent these people included in the
  unemployment rate?

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Underemployment

• Underemployment is a situation where the worker
  is employed in a job that does not utilize their
  full productive potential.
• How does underemployment affect GDP?

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The Underground Economy

• The underground economy causes the unemployment
  rate to be overstated.
• This is because the underground economy is not
  included in official statistics, thus, workers
  who are counted as unemployed may actually be
  employed.
• Examples?

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Types of Unemployment

• There are 4 basic types of unemployment
• Seasonal
• Frictional
• Structural
• Cyclical

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Seasonal Unemployment

• Seasonal unemployment is caused by regular,
  recurring, changes in the hiring needs of certain
  industries on a monthly or seasonal basis.
• Examples?

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Frictional Unemployment

• Frictional unemployment (also called search
  employment) is caused by the short-term movement
  of workers between jobs and first-time job
  seekers.
• Examples?

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Structural Unemployment

• Structural unemployment is caused by
  technological changes and other changes in the
  structure of the economy.
• Examples?

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Cyclical Unemployment

• Cyclical unemployment is caused by the
  fluctuations in the business cycle. During
  recessions, cyclical unemployment increases, and
  during times of growth, cyclical unemployment
  decreases.
• Examples?

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Cost of Unemployment

• Economists measure the cost of unemployment in
  terms of lost output. This lost output is
  referred to as the GDP gap.
• GDP gap potential real GDP actual real GDP

The natural rate of unemployment is the
unemployment rate that would exist in the absence
of cyclical employment.
Potential GDP is the output produced at the
natural rate of unemployment
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The U.S. GDP Gap, 1975-2002
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Record of Unemployment

• Page 173 indicates the U.S. unemployment rates
  from 1951 2002.
• We observe some trends
• Women tend to have higher rates than men
• Teenagers have the highest rates
• Whites have lower rates than non-whites
• What could be some reasons for these trends?

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Inflation

• What is inflation?
• Inflation is a rise in the average level of
  prices over a prolonged period of time (not
  short-term price changes).

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Effects of Inflation

• During times of inflation, the value of money
  changes. That is, moneys purchasing power
  changes.
• Purchasing power of money is simply the amount of
  goods and services it can buy.

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The Real Value of a Dollar

• Real value of 1 1
• price level
• The higher the price level, the lower the real
  value (purchasing power) of the dollar.
• Table 4 on Page 177.

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Inflation

• Why can inflation be a problem?
• If inflation is high and unexpected, who would it
  hurt? Who would it benefit?

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Types of Inflation

• Economists distinguish between 2 types of
  inflation
• Demand-pull inflation
• Cost-push inflation

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Demand-Pull Inflation

• Demand-pull inflation is caused by demand
  pressures.
• Example Lets say an economy is operating at full
  capacity (all resources are fully employed) thus
  it cannot increase the supply of goods to meet
  demands in the short run. Goods would then be
  distributed through higher prices.

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Cost-Push Inflation

• Cost-plus inflation is caused by supply
  pressures.
• Example Lets say oil prices increase. Because
  oil is used in the production of so many goods
  and services, the price of goods and services
  will rise simply because the price of one its
  resources rose (not because of a change in demand
  for goods and services).

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Hyperinflation

• Hyperinflation is an extremely high rate of
  inflation.
• Hyperinflation can lead to the current currency
  (used by a country) being abolished a new
  currency being introduced.
• What countries in the Commanding Heights video
  experienced hyperinflation in the 1900s?

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Next Week

• Test 2, Chapters 6, 7, 8
• Study lectures and Chapter 6 worksheet.