Economic Fluctuations, Unemployment, and Inflation

1. Economic Fluctuations, Unemployment, and Inflation Chapter 8

2. Which of the following are included in GDP? • Your mother-in-law buys a new car from a U.S. producer. • Your mother-in-law buys a new car imported from Sweden. • Your mother-in-law’s car rental business buys a new car from a U.S. producer. • Your mother-in-law’s car rental business buys a new car imported from Sweden. • 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.

4. 20 10 0 –10 –20 1860 ‘70 ‘80 ‘90 1900 ‘10 ‘20 ‘30 ‘40 ‘50 ‘60 ‘70 ‘80 ‘90 2000 ‘10 U. S. Business Cycles World War II World War I Recovery of 1895 Civil War Korean War Vietnam War Panic of 1893 Panic of 1907 Great Depression McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

5. 8 6 4 2 0 Long-run growth rate(approx. 3%) - 2 2000 2004 1960 1965 1970 1975 1980 1985 1990 1995 Instability in the Growth of Real GDP Annual growth rate of real GDP Source: Economic Report of the President, various issues.

6. Business Trend line peak Business peak Recessionary trough Expansion Contraction Recessionary trough The Hypothetical Business Cycle Real GDP Time

7. 2001recession PotentialGDP 1990-91recession 1982recession 1980recession ActualGDP 1960recession 1974-75recession 1970recession Actual & Potential GDP, 1960-2003 Real GDP(billions of 2000 $) 10,000 8,000 6,000 4,000 2,000 1960 1965 1970 1975 1980 1985 1990 1995 2000 2003 Source: U.S. Department of Commerce, Bureau of Economic Analysis.

10. The Unemployment Rate • Measuring Unemployment Labor force = employed + unemployed

12. 87 % 83% 78 % 76 % 74 % 60 % 58 % 46 % 38 % 33 % Labor Force Participation Rate of Men and Women: 1948-2003 Labor Force Participation Rate of Men and Women 1990 1990 1948 1960 1975 2003 1948 1960 1975 2003 –––––– Women –––––– ––––––– Men ––––––– Source: www.bls.gov.

13. 223.4 million Civilian population 147.4 million 16 and over 76.0 million Civilian Not in the 8.1 million labor force labor force • Household workers • Students • Retirees • Disabled Employed Unemployed • Employees • New entrants • Self-employed • Reentrants 139.3 million workers • Lost last job • Quit last job 147.4 Civilian labor force = Labor Force Participation Rate = = • Laid off 223.4 Civilian population (16+) 139.3 = Number employed = Employment / Population Ratio = 223.4 Civilian population (16+) 8.1 Number unemployed = = Rate ofUnemployment = 147.4 Civilian labor force U.S. Population, Employment, and Unemployment: 2004 66.0% 62.3% 5.5%

14. 19.3 % 15.6 % 10.6 % 9.3 % 6.3 % 6.0 % 5.7 % 5.0 % 4.6 % 20-24 16-19 25+ 16-19 20-24 25+ –– Women aged –– –– Men aged –– The Unemployment Rate By Age and Gender: 2003 Unemployment Rate, 2003 Allmen Allwomen Allworkers Source: www.bls.gov.

15. Average Unemployment Rate (1994-2003) 14.6 % Spain 10.6 % France 10.5 % Italy 8.6 % U.K. 6.5 % Germany 5.1 % U.S. 4.2 % Japan Source: Economic Outlook, OECD (June 2004).

16. Types of Unemployment Frictional: worker “between jobs” Cyclical: caused by bad economic conditions Structural: worker’s skill set is no longer in demand

17. Natural Rate of Unemployment Structural + Frictional • Average rate of unemployment over the business cycle. • Non-inflationary rate of unemployment. • Full-employment. • Associated with potential output.

18. Labor Force, unemployment rate & Participation Rate 65 people 10 <16 years of age 10 retired 25 full-time jobs 5 part-time jobs 5 full-time homemakers 5 full-time students over 16 2 disabled and cannot work Rest did not have jobs but wanted one but one has not searched in 3 months.

20. 25 20 15 10 5 0 –5 –10 1900 10 20 30 40 50 60 70 80 90 2000 Inflation Since 1900 McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

21. 1973-1981 averageinflation rate = 9.2 % 1983-2003 averageinflation rate = 3.1 % 1953-1965 averageinflation rate = 1.3 % The Inflation Rate, 1953-2003 Inflation rate 15 10 5 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2003 Sources: Derived from computerized data supplied by FAME ECONOMICS. Also see Economic Report of the President (annual).