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Unformatted text preview: Business Cycles, Unemployment and Economic Growth
Recessions, Expansions and Potential Real GDP The Business Cycle: Expansions and Contractions along an Upward Trend
During contractions or recessions unemployment rates increase as the economy operates below its potential During expansions or recoveries unemployment rates fall and sometimes the economy even exceeds its potential Long-term rate of growth of real GDP has averaged 3% per year in the U.S. since 1900. In 2006 U.S. growth was 3.2% but it fell to 2.0 in 2007 and was only 1.1% in 2008 Real GDP per Capita, 1959-2006 Measuring Unemployment: Based on a sample of 60,000 households
Labor Force: The sum of the total number of persons over the age of 16 with jobs and workers who are actively seeking a job but currently do not have one Unemployed Person: A member of the labor force available for work who has actively sought employment during the previous 4 weeks Unemployment Rate: The percent of the labor force unemployed Categories of Unemployment:
Frictional unemployment: results from workers leaving jobs for which they were unsuited and from people entering or re-entering the labor force Structural unemployment: results from shifts in the pattern of demand or changes in technology that affects the hiring of workers in specific industries Cyclical unemployment: results from contractions in real GDP when the economy fails to operate at its potential The natural rate of unemployment and potential real GDP The sum of rates of frictional and structural unemployment is called the "natural rate" of unemployment. It is currently estimated to be around 5%. When the actual unemployment rate is equal to the natural unemployment rate the economy is said to be at "full" employment. As of February 2007 actual U.S. unemployment rate was 4.8%. In February 2009 the U.S. Unemployment rate was 8.1%. Potential real GDP is the level that would prevail if the economy achieves the natural rate of unemployment over a year. Potential Real GDP
Potential real GDP is the "benchmark" against which actual performance of the economy is measured When the economy operates below potential real GDP there will be cyclical unemployment Sometimes the economy operates at levels of production that exceed potential real GDP as the economy "overheats". When the economy is overheated upward pressures on wages and prices occur and real GDP falls. Facts about Potential Real GDP Potential real GDP is not the economy's capacity output -- more than potential real GDP is produced when the unemployment rate is less than the natural rate. It is not easy to measure Potential real GDP Potential real GDP grows over time with growth in resources, and improvement in resource quality and in technology ...
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