Chapter 6: BUSINESS CYCLE, UNEMPLOYMENT, ; INFLATION – Flashcards
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Business Cycle
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irregular but recurrent increases and decreases in the level of aggregate economic activity during a relatively short period of time
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Phases of Business Cycle
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1. expansion 2. peak 3. contraction (recession if lasts more than 2 consecutive quarters) 4. trough
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Turning Points for Business Cycle
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peak + trough only knowable after fact
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Causes of Business Cycles
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1. Supply Shocks: output shocks (i.e. innovation, unexpected increase in output) 2. Demand Shocks: unanticipated change in demand for output (i.e. political events, war)
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Business Cycle: Cyclical Impact on Product Demand
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durable vs. non-durable 1. durable good: manufacturing has greater fluctuation in product demand than non-durable goods (postponable) 2. non-durable good: most likely necessities (i.e. food)
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2 Problems that arise from Business Cycles
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1. unemployment 2. inflation
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Measuring Unemployment
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Through Bureau of Labor Students (BLS)
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Unemployment: BLS
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2 monthly surveys: 1. household survey 2. establishment survey 1. household survey: individuals 2. establishment survey: over 16, non-institutionalized, employed, unemployed, labor force but will NOT survey self-employed
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Unemployment: Labor Force
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includes employed and unemployed
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Unemployment Rate
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Urate: # of unemployed ÷ labor force
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Types of Unemployment
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1. Frictional Unemployment 2. Structural Unemployment 3. Cyclical Unemployment
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Frictional Unemployment
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temporary unemployment as people are temporarily between jobs. Unemployed have job skills that are in demand by employees
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Structural Unemployment
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chronic unemployment where unemployed do not have job skills that are in demand for employed (mismatch)
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Cyclical Unemployment
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unemployment caused during the recessionary phase of business cycle by insufficient aggregate demand to employ all who want to work
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Full Employment Unemployment
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-the unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 4 and 5 percent in the U.S. because some frictional and structural unemployment is unavoidable. -unemployment rate when the economy is "fully employed' is the sum of frictional and structural unemployment and is achieved when cyclical unemployment is zero (real output of economy is equal to its potential output)
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Costs of Unemployment
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1. Economic Cost -GDP Gap: actual GDP minus potential GDP -Okun's Law: for every 1% increase in unemployment, the GDP gap will increase by 2% -full employment: 5% -Unemployment not equally distributed among various groups 2. Psychological Cost
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Inflation
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persistent increase in the general level of prices
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Measure of Inflation
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1. Consumer Price Index (CPI) 2. Rate of Inflation 3. Producer Price Index (PPI) 4. GDP Price Deflator 5. Personal Consumption 6. "Core" Price Inflation
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Measure of Inflation: Consumer Price Index
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an increase that compares the price of a market basket of consumer goods & services in one period to price of same (or highly similar) market basket in the base period -most common measure to measure inflation
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Measure of Inflation: Rate of Inflation
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rate of growth at general price level (look at equation in notebook)
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Measure of Inflation: Producer Price Index
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prices of producer purchased inputs -formerly the wholesale price index
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Measure of Inflation: GDP Price Deflator
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includes price of all goods and services in GDP
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Measure of Inflation: Personal Consumption
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-component from GDP price deflator that does not take into account government or foreign purchases but only consumer purchases
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Measure of Inflation: Core Price Inflation
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inflation minus the effects of certain volatile components, especially energy and foods
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Types of Inflation
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1. Demand Pole Inflation 2. Cost Push Inflation
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Types of Inflation: Demand Pole Inflation
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caused by excessive spending "too much money chasing too few goods"
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Types of Inflation: Cost Push Inflation
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caused by sharp increase in cost of key resources
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Effects of Inflation
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redistributive effects: redistributes real income among members of an economy -real income: nominal income ÷ price index -% change in income=change in nominal income, % price level
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annuity
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reverse of insurance
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Types of Inflation
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1. Anticipated Inflation 2. Unanticipated Inflation
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People who get hurt from Unanticipated Inflation
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1. fixed income recipients (nominal) 2. savers --real interest rate: % change in purchasing power that borrower pays the lender 3. lenders aka creditors
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People who DON'T get hurt from inflation
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1. those whose nominal income is adjusted by cost of living adjustments (COLAs) 2. borrowers
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Does Inflation Affect Output?
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1. Cost-Push Inflation & Real Output: decreases it 2. Demand-Pull Inflation & Real Output: Questionable in terms of change in real output. Modest (2-4%) inflation better than deflation
