Chapter 8 - Economic Fluctuations, Unemployment and Inflation
Output (GDP), inflation and unemployment are the three main economic variables watched by the
media, investors, politicians, businesses to assess the health of the economy. Some goals of the
economy are: economic stability, low and stable inflation, real growth in output/income, low
unemployment, etc. There is disagreement about what, if anything, the government can do to promote
We want to try to understand how the economy fluctuates and changes over time, as it contracts and
expands, going through the business cycle.
FLUCTUATIONS IN THE ECONOMY - BUSINESS CYCLES
Real growth in GDP has averaged 3% per year over this century. Some periods it was 6% and other
periods it was negative. The fluctuations in real GDP growth is what we call the
are now in the expansionary phase of the ninth business cycle since WWII. Alternate periods of econ
expansion and contraction make up the business cycle. See Exhibits 1 and 2 on pages 170-171.
- Low unemployment, strong retail sales, rising stock market, strong and positive growth in
real output, strong car and housing markets, etc.
- High unemployment, weak retail sales, declining stock market, low or neg.
growth in real output, falling car/housing sales.
Usually defined as two or more consecutive quarters of negative real GDP growth.
prolonged and severe recession lasting years. UN was 20-25% for most of the 1930s.
The term business
does NOT mean that there is anything regular about the bus cycle.
Fluctuations are random and unpredictable. Periods of expansion and contraction vary quite a bit.
Expansions have lasted from two years to eight years, recessions from 6-18 months. Economists have
studied the business cycle for centuries, and will continue to conduct research on business cycles for
Business cycle dates are determined by the Business Cycle Dating Committee of the National Bureau
of Economic Research (NBER),
. Last recession officially started in March 2001
and ended in November 2001, and we have been in an economic expansion since then. Last previous
expansion was from March 1991-March 2001, longest in U.S. history.
ECONOMIC FLUCTUATIONS AND THE LABOR MARKET
Swings in the business cycle influence the demand for labor and the un rate. Some definitions:
= Those over 16 who are either employed or actively looking for a job (unemployed).
RATE OF LABOR FORCE PARTICIPATION
= Labor Force / Total population. See page 172-3.
MGT 551: BUSINESS ECONOMICS CHAPTER – 8
Professor Mark J. Perry