551-8-1 - Chapter 8 Economic Fluctuations Unemployment and...

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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 econ stability/growth. 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 business cycle. We 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. Expansion - Low unemployment, strong retail sales, rising stock market, strong and positive growth in real output, strong car and housing markets, etc. Contraction/recession - High unemployment, weak retail sales, declining stock market, low or neg. growth in real output, falling car/housing sales. Recession - Usually defined as two or more consecutive quarters of negative real GDP growth. Depression - prolonged and severe recession lasting years. UN was 20-25% for most of the 1930s. The term business cycle 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 centuries. Business cycle dates are determined by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), http://www.nber.org/ . 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: Labor Force = 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 1
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Not in the labor force = Full time household workers, full time students, retirees, and disabled. In 2006, the rate of labor-force participation was 66.2%. 151.4m / 228.8m. Men - 73.5% Women - 59.4% (see page 173-4 for an analysis of how the labor-force participation of men and women varies over time.) The LFP (labor force participation) for women has been increasing (more than 50% of married women now work compared to 20% in 1940s) and for men LFP has been decreasing. Shows how the
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