The Business Cycle: Introduction to Macroeconomic Indicators Overview ‘The 1930s were marked by periods of chronically high unemployment in the United States. After World ‘War IL Congress passed the Employment Act of 1946, which stated that it was the policy and responsibility of the federal government to use all practical means to promote maximum employment, production, and purchasing power. The Employment Act of 1946 established three important goals for the economy: 1. Full employment exists when most individuals who are willing and able to work at the prevailing. ‘wages in the economy are employed. Even under conditions of full employment, there will be ‘some temporary unemployment as workers change jobs and as new workers seek their first jobs, 2. Price stability exists when the average level of prices in the economy is neither increasing nor decreasing. The goal of price stability does not imply that prices of individual items should not ‘change—only that the average level of prices should not change. 3. Economic growth exists when the economy produces increasing amounts of goods and services ‘over the long term. If the increase is greater than the increase in population, the amount of goods and services available per person will rise, and thus the nation’s standard of living will improve. Measuring the Achievement of Economic Goals ‘To determine how well we are achieving economic goals requires measuring the levels of employment, prices, and economic growth. Measuring Employment ‘The civilian unemployment rate measures how well we are achieving the goal of full employment. The unemployment rate is derived from a national survey of about 60,000 households. Each month the federal government asks the households about the employment status of household members aged 16 and older (the adult population). The survey puts each person in one of three categories: employed, ‘unemployed, or not in the labor force. People who are at work (the employed) plus those who are not working but are willing and able to work and are actively looking for work (the unemployed) make up the labor force. The labor force is much smaller than the total adult population bectuse many individuals are not willing or able to work. Measuring Price Changes ‘A price index measures price changes in the economy. By using a price index, you can combine the prices of a number of goods and/or services and express in one number the average change for all the prices. The consumer price index, or CPI, is the measure of price changes that is probably most familiar to people. It measures changes inthe prices of goods and services commonly bought by consumers. ‘Atal acemen comomics MacroncnomiceStaeot Renae Maral © Covet for Resor Foucatan, New York NY a Scanned with CamScanneri k a ; Measuring Short-Run Economic Growth ‘To measure fluctuations in output (short-run economic growth), we measure increases in the quantity of goods and services produced in the economy from quarter to quarter or year to year. The gross domestic product, or GDP, is commonly used to measure economic growth. The GDP is the dollar value at market prices of all final goods and services produced in the economy during a stated period. Real GDP is the GDP adjusted for changes in the price of goods. The Business Cycle ‘The business cycle refers to the ups and downs in an economy. In the short run, the economy alternates between upturns and downturns as measured by the three macroeconomic indicators. Figure 1-10.1 shows a graph of the business cycle. a Figure 1-10.1 The Business Cycle REAL GDP Ise | see [eee [eC eee te [eset fee Lesa PERIODS OF TIME ‘The curved line on Figure 1-10.1 shows a sample business cycle for an economy. The straight line represents the long-run trend of real GDP. Advance Purest Beoomiey MaroaaomicsStdent Rawr Manel © Coun fr Benomi Baucaon, New York Y. Scanned with CamScanner‘The business cycle can be divided into four phases: 1, Expansionary. Real output in the economy is increasing and the unemployment rate is declining, ‘As the economic expansion continues, inflation may begin to accelerate. The early part of an expansionary phase is also called a recovery phase. 2, Peak. Real output, GDP, is at its highest point of the business cycle. 3. Contractionary. Real output in the economy is decreasing, and the unemployment rate i rising. As the contraction continues, inflationary pressures subside. The later stage of a contractionary phase is also called a recession. 4. Trough. The lowest point of real GDP reached during the business cycle is known as the trough. If the trough is particularly deep, it may be called a depression. A depression is an economic situation where the level of output falls to especially low levels and unemployment climbs to very high levels. There is no precise decline in output at which a serious recession becomes a depression. However, most business cycles do not end in a depression. Draw a graph of a business cycle using unemployment as your measure of economic activity. That is, label the vertical axis with the unemployment rate. Make sure that you also label the horizontal axis. Label the phases of the business cycle on your graph. Remember that you are graphing the unemployment rate (rather than output) on your graph. Think about what happens to the ‘unemployment rate during each phase of the business cycle! rags i Gora \ g 3 Nem / Contraction ? i ee 3 eae year ‘On your graph, plot a point indicating where in the business cycle you think the economy is currently ‘operating. Explain how you selected that location. Aten the receltiun trang COD, the ceonimy It Leginmiay expamsion ib reenvert, ‘dace Pacement Ezonomics Macocconomic Student Rcarce Manoa © Cound for Ennomic Edsation, New York NY. 45 Scanned with CamScannerTypes of Unemployment ‘There are three types of unemployment: = Frictional unemployment includes people who are temporarily between jobs. They may have ‘quit one job to find another, or they could be trying to find the best opportunity after graduat- ing from high school or college. ‘© Cyclical unemployment includes people who are not working because firms do not need their labor due to a lack of demand or a downturn in the business cycle. For example, if people are not buying many goods and services, workers are laid off. 1= Structural unemployment involves mismatches between job seekers and job openings. Unem- ployed people who lack skills or do not have sufficient education are structurally unemployed. ‘At full employment, we have frictional and structural unemployment, but cyclical unemployment ‘would be zero. At full employment, the level of unemployment is called the natural rate of unemployment. For each of the following situations, put the appropriate letter before the example. Fifitis an example of frictional unemployment. Cit is an example of cyclical unemployment. Sif it is an example of structural unemployment. _£__ 1. Acomputer programmer is laid off because of a recession. _f_ 2. Aliterary editor leaves her job in New York to look for a new job in San Francisco. _£_ 3. An unemployed college graduate is looking for his first job. _5_ 4. Advances in technology make the assembly-line worker's job obsolete. _¢__ 5. Slumping sales lead to the cashier being laid off. _£ 6, An individual refuses to work for minimum wage. _S__ 7. Ahigh school graduate lacks the skills necessary for a particular job. _£__ 8. Workers are laid off when the local manufacturing plant closes because the product made there isn’t selling. _5__ 9. A skilled glass blower becomes unemployed when a new machine does her job faster. ‘Activity writen by Joba Morton, National Council on Economic Education, New York, N.Y, and James Spellcy, Lowell High School, ‘San Francisco, Cali. Miner Placement Eamamies Mazecssomic: Student tvs © Nation! Cone on Bane: Evan, New York NY. 85 Scanned with CamScannerTest Your Understanding of Macroeconomic Indicators Answer the questions and briefly explain your answers, 1, The unemployment rate and employment both go up. Bllen says that itis not possible for both to rise at the same time. Is Ellen correct or incorrect? Why? Ellen Mt Imcanack; 1b mire peaple carer tht Jaber mareot bub must O10 poh find Jabs, both empleyment ¢ wnentpliymeal r0tss With rite. 2, ‘True, false or uncertain, and explain why? “Gross domestic product measures the amount of wealth in the economy.” Fate; GaP mealies tee amount ut production a1 Income in a parbiealeer yterer Period in county, 3, ‘True, false or uncertain, and explain why? “A decrease in gross domestic product must reduce a person's standard of living” Palle; A portend standard of Urlag 1: N00 directly related te GDP sesaile tht & MeGIETE OF tia notion. GDP cam ge denn wrhite a perrend incre rites. 4. True, false or uncertain, and explain why? “If nominal GDP increases by 5 percent and the price level increases by 7 percent, real GDP has decreased.” Prey Peal OPP Ht caltKiated by chridingy nominal GMP by rhe plite level. The inflation rate hare U bl ghar pan the rated jnerente jn meminel GIDL reek G0) Will datreous ty 24s. 5. True, false or uncertain, and explain why? “In preparing an index of prices, itis important that all ‘commodities entering the index be given equal weight.” Fatie; $00 welghts Snoaldl bo propartadal 70 peoples ase Contnnigtioa wt PMs camntedily, indexes canned cappre Weryenad wilt of fiving becante Mitempd guoual bones differnt consump tien patterns: 6. True, false or uncertain, and explain why? “Frictional and structural unemployment are two words for the same thing” Fare; Aithioned retard te peap Inbaneeen pus; Irucrwrel inunsplyneedd eccvan het Meee clint Khve dey Leith tw dat, araiiallé jrbt. Several questions come from Philip Saunders, Introduction to Macroeconomics: Student Werkbook, 18th ed. (Bloomington, Ind. 1998). Copyright 1958 Phillip Saunders. Al rights reserve. Betty Shackleford, Maconaquah High School, Bunker Hill, Ind, and Kathleen Whitset, Princeton High School, Cincinnati, Ohio, contributed to thie activity. Ataced Placement zones Macoconcnce Stade! Ate © National Counc on Easel Bvcton NewYork NY 8 Scanned with CamScanner7. Why does unanticipated inflation help borrowers and hurt lenders? Srrromn reps olesta with payment containing lett purchasing power lhwer [al yatta) fan the Wg ind bniAhl 50 they gain. Lendlert 16ers fuese paymcesee with lait Veal raree Hom Hie Or ined value Veet oad dhcrefare are must friet unanHeipated fottation 8. True, false or uncertain, and explain why? “Inflation always increases when unemployment decreases” Fate; mitation can etl decrease eves When unapiny med slesteater. 9. True, false or uncertain, and explain why? “Ifthe economy is at full employment, the unemploy- ment rate is zero.” Falte; at dell smaptiy ment, sractural 4 frictional unenipley end teil exicty se Phe UNAmployneantt rate WAN bert. Strucrirnl emapreym enh occurs whee peaple clout have tha Skills MOCK AYY to Ks Tae ralla ble Juet. H1cnal emupleymientl OCeset hen people W0 bemrten jobs. 10, True, false or uncertain, and explain why? “Seasonal unemployment is a continual worry because some people are out of work on a regular basis Uncertain; Jasenal boresss May worry, but! salah ng tue ecomeniy WIM Ol Change ine simaricn, ‘AénacedFacanent naomi Mecroscnamice Sade attr © Nason] CoundlenEesome Elston NewYork NY. Scanned with CamScanner