The Business Cycle

Business Cycle and Unemployment

Expansionary Phase

• GDP is Rising

• Unemployment Is Falling

• Inflation at some point begins to grow

Peak

• GDP is at its highest

• Unemployment is low

• Inflation tends to be high

Recessionary

• GDP is falling

• Unemployment will increase

• Inflation will eventually decrease (disinflation) and then possible deflation

• 2 Consecutive quarters of negative GDP = Recession

Trough

• GDP is at its lowest

• Unemployment is high

• Very low inflation or deflation

• 
  

Miscellaneous

• Average duration of cycle is 7-8 years

• Products that do well during a recession are necessities and cheap products

• Products that do well during an expansion are luxuries, durable goods, more expensive goods

Multiple Choice

What phase of the business cycle are we in today?

• Expansionary

• Recessionary

• Peak

• Trough

Employment

Jobs with greatest projected growth. BLS

Unemployment

• Goal is 4-6%. This is considered full employment

• Why not greater than 6%?

• Why not less than 4%

Types of Unemployment

• Structural- the basis of the economy is changing. You do not have the skills that the changing economy needs (glass blower or a coal mine worker)

• Frictional- In between jobs, looking for a better job, just got out of college and looking for a job.

• Cyclical- economy is in the recessionary phase of business cycle. Not enough overall demand for products. The worst type of unemployment.

Natural Rate of Unemployment

This is just the combination of Frictional and Structural. This occurs in an economy all the time-no matter the business cycle phase. It amounts to 4-6%. That is why 4-6% is considered fully employed.

Multiple Choice

Nick quits his job at Topps in order to find a better job. What type of unemployment is this?

• Cyclical

• Frictional

• Structural

Multiple Choice

Steve can type 100 words a minute, yet he can’t find a job as a secretary. What type of unemployment is this?

• Cyclical

• Frictional

• Structural

Multiple Choice

If the US economy has 9% unemployment, what percent of this rate is cyclical?

• 9%

• 3%-5%

• 2%-4%

• I don’t know, so I will probably be unemployed.

Calculating the Unemployment Rate

Unemployed/Labor Force

Unemployed = do not have any job AND are actively searching for a job during the last 4 weeks.

Labor Force = Unemployed + Fully Employed + Part-Time Workers

Government contacts 60,000 households for a monthly survey. Amounts to about 110,000 people.

Who is not in the Labor Force?

• Discouraged Workers

• Military

• Homeless

• Full Time Students

• Institutionalized

• Retired

Multiple Choice

The US economy adds a net 100,000 jobs in October and the unemployment rate increases. How is this possible?

• More workers than 100,000 become discouraged

• More than 100,000 workers go from being discouraged to actively looking.

• More than 100,000 workers leave the Labor Force