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In this chapter, you willlearn to solve theseeconomic puzzles:

What is the difference between a recession

and a depression?

Is a worker who has givenup searching for work

counted as unemployed?

Can an economy produce more output

than its potential?


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What is aBusiness Cycle?Alternating periods of

economic growth andcontraction, which can

be measured bychanges in real GDP


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What are the four phasesof a Business Cycle?

Peak Recession

Trough Recovery


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What is a Peak?The phase of the business

cycle during which realGDP reaches itsmaximum after risingduring a recovery


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What is a Recession?A downturn in the business cycle duringwhich real GDP declines


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What is a Trough?The phase of the business

cycle in which real GDPreaches its minimum afterfalling during a recession


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What is a Recovery?An upturn in the business cycle duringwhich real GDP rises


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Hypothetical Business Cycle

Peak

Peak

Trough

Recession Recovery

Real GDPper year


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How long before adownturn is a Recession?The Department of Commerce

usually considers a recessionto be at least two consecutive

quarters in which there is adecline in GDP


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When is a downturnconsidered a Depression?

The term depression is primarily an historicalreference to the extreme

deep and long recessionof the early 1930s


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What isEconomic Growth?

An expansion in nationaloutput measured by theannual percentage increasein a nations real GDP


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Why is Economic Growthone of our nationseconomic goals?

It increases our standardof living - it creates a

bigger economic pie


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What are the three typesof Economic Indicators?

Leading Coincident

Lagging


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What is aLeading Indicator?

Variables that change before real GDP changes


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Leading Indicators

Changes in business and consumer creditNew orders for plant and equipmentNew consumer goods orders

Unemployment claimsDelayed deliveriesNew business formed

Average workweekNew building permitsChanges in inventories

Material pricesStock prices

Money supply


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What is aCoincident Indicator?

Variables that changeat the same time thatreal GDP changes


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Coincident Indicators

Nonagricultural payrolls

Personal incomeIndustrial Production

Manufacturing and trade sales


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What is aLagging Indicator?

Variables that changeafter real GDP changes


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Lagging Indicators

Unemployment rate

Duration of unemployment rate

Labor cost per unit of outputInventories to sales ratio

Outstanding commercial loans

Commercial credit to personal income ratio

Prime interest rate


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What causesUnemployment?

When total spending falls, businesses will find it profitable to produce a

lower volume of goods andavoid unsold inventory


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Who is consideredUnemployed?

Anyone who is 16years of age andabove who is activelyseeking employment


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Who is consideredEmployed?

Anyone who works at leastone hour a week for payor at least 15 hours per

week as an unpaid workerin a family business


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What is theUnemployment Rate?

The percentage of peoplein the labor force who arewithout jobs and areactively seeking jobs


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Unemployment

rate

unemployed

civilian labor forceX 100=


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How is the UnemploymentRate calculated?

56,000 households aresurveyed each month


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What is theCivilian Labor Force?

People 16 years or older whoare either employed orunemployed, excluding

members of the armed forcesand people in institutions


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Total Populationage 16 and over

Not in Labor ForceArmed forces

Household workersStudentsRetirees

Persons with disabilities

InstitutionalizedDiscourage workers

Civilian labor forceEmployedEmployees

Self-employedUnemployedNew entrants

Re-entrantsLost last jobQuit last job

Laid off


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Who is aDiscouraged Worker?A person who wants to

work, but who has givenup searching for work.

He or she believes therewill be no job offers


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What isUnderemployment?People working at jobs below their level of skills


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What are criticisms of theUnemployment Rate?

Does not includediscouraged workers

Includes part-time workers Does not measure

underemployment


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20

1510

5

1930 40 50 60

25

70 80 90 00

The U.S. Unemployment Rate


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4.3%4.5%

6.3% 6.3%8.3%

11.7% 12.4%

Japan U.S. Germany U.K. Canada ItalyFrance


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What are the types ofUnemployment?

Seasonal Frictional

Structural Cyclical


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What is SeasonalUnemployment?

Unemployment caused byrecurring changes inhiring due to changes inweather conditions


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What is FrictionalUnemployment?

Unemployment caused by

the normal search timerequired by workers withmarketable skills who arechanging jobs, entering, orre-entering the labor force


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What is StructuralUnemployment?

Unemployment caused bya mismatch of the skillsof workers out of work

and the skills required forexisting job opportunities


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What is CyclicalUnemployment?

Unemployment caused by the lack of jobsduring a recession


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What is

Full Employment?The situation in which an

economy operates at anunemployment rate equalto the sum of the seasonal,frictional, and structuralunemployment rates


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What percentunemployment is considered

Full Employment?

The natural rate ofunemployment changes

over time, but today it isconsidered to be about 5%


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What is the GDP Gap?The GDP gap is the

difference between full-employment real GDPand actual real GDP


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What is the Cost ofUnemployment?

The GDP gap


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Demographic GroupsCivilian Unemployment Rates 1998

OverallMaleFemaleWhiteBlackTeenagers (16 - 19 years)White malesBlack malesWhite femalesBlack femalesLess than high schoolHigh school graduatesCollege graduates

4.5%4.4%4.6%3.9%8.9%14.6%14.1%30.1%10.9%25.3%7.1%4.0%1.8%


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Key Concepts


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Key Concepts

What is a Business Cycle? What are the phases of a Business Cycle? How long before a downturn is a Recession?

What are the types of Economic Indicators? What causes Unemployment? Who is considered Unemployed? Who is considered Employed? What is the Unemployment Rate?


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Key Concepts cont.

What is the Civilian Labor Force? Who is a Discouraged Worker? What is Underemployment?

What are the types of Unemployment? What is Full Employment? What percent unemployment is

considered Full Employment? What is the Cost of Unemployment?


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Summary


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Business cycles are recurrentrises and falls in real GDP over a period of years. Business cycles

vary greatly in duration andintensity. A cycle consists of four phases: peak, recession, trough andrecovery.


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The generally accepted theorytoday is that changes in the forces ofdemand and supply cause businesscycles.


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A recession is officially definedas at least two consecutive quartersof real GDP decline. A trough is theturning point in national output

between recession and recovery.During a recovery, there is anupturn in the business cycle duringwhich real GDP rises.


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Hypothetical Business Cycle

Peak

Peak

Trough

Recession Recovery

Real GDPper year


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Economic growth is measured by the annual percentage change Ireal GDP in a nation. The long-term

annual average growth rate in theUnited States is 3 percent.


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Leading, coincident, andlagging indicators are economicvariables that change before, at the

same time as, and after changes inreal GDP, respectively.


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The unemployment rate is theratio of the number of unemployedto the number in the labor force

multiplied by 100. The nationslabor force consists of people whoare employed plus those who are outof work, but seeking employment.


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Discouraged workers are areason critics say the unemploymentrate is understated. Discouragedworkers are persons who want towork , but who have given up.Another criticism of theunemployment rate is that it

overstates unemployment becauserespondents can falsely report theyare seeking a job.


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Seasonal unemployment isunemployment due to seasonal

changes.


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Frictional unemployment results when workers are seekingnew jobs that exist. The problem is

that imperfect information preventsmatching the applicants withavailable jobs.


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Structural unemployment isunemployment caused by factors inthe economy, including lack of

skills, changes in product demand,and technological change.


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Cyclical unemployment isunemployment resulting frominsufficient aggregate demand.


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Full employment occurs when

the unemployment rate is equal tothe total of the seasonal, frictional,and structural unemployment rates.

Currently, the full-employment rateof unemployment in the UnitedStates is considered to be close to 5

percent. At this rate ofunemployment, the economy is

producing at its maximum potential.


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The GDP gap is the difference between full employment, or potential real GDP, and actual realGDP. Therefore, the GDP gapmeasures the loss of output due tocyclical unemployment.


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1. The phases of a business cycle are

a. upswing and downswing.b. full employment and unemployment.c. peak, recession, trough, and recovery.d. full employment, depression, expansion,

and plateau.

C. These are the four phases of changesin real GDP which mirrors changes inemployment and other key measures ofthe macro economy.


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2. The phase of a business cycle during which realGDP reaches its minimum level is the

a. recession.b. depression.c. recovery.d. trough.

D. Recession is the phase during which realGDP fall and recovery is the phase duringwhich real GDP rises. Depression is anhistorical reference to the deep and longrecession of the early 1930s.


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3. Which of the following is not a variable inthe index of leading indicators?a. New consumer goods orders.b. Delayed deliveries.c. New businesses formed.

d. Prime rate.

D. The prime rate is a lagging indicator.


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4. Which of the following is a coincidentindicator?

a. Personal income.b. Industrial production.c. Manufacturing and trade sales.

d. All of the above.

D. All of these will change at the same

time that real GDP changes.


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5. The labor force consists of all persons

a. 21 years of age and older.b. 21 years of age and older who are working.c. 16 years of age and older.d. 16 years of age and older who are working

or actively seeking work.

D. The labor force also includes the armed

forces, but excludes the category calledpersons not in labor force.


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6. People who are not working will be counted asemployed if they are

a. on vacation.b. absent from their job because of badweather.

c. absent from their job because of a labordispute.

d. all of the above. D. A person who works at least 1 hour per

week for pay or at least 15 hours per weekas an unpaid worker in a family business iscounted as employed regardless of thespecial situations listed in a, b, and c.


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7. The number of people officially unemployed isnot the same as the number of people who cantfind a job becausea. people who have jobs continue to look for

better ones.b. the armed forces are included.

c. discouraged workers are not counted.d. of all of the above.

C. A person can quit looking for a job becausehe is discouraged after trying to find one, butwants to work if he could find a job, yet thisperson is not considered unemployed becausehe is not actively seeking employment.


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8. Frictional unemployment applies toa. workers with skills not required for existing

jobs.b. short periods of unemployment needed tomatch jobs and job seekers.

c. people who spend long periods of time out ofwork.

d. unemployment related to the ups and downsof the business cycle.

B. Frictional unemployment includes peoplechanging jobs, initially entering the laborforce, or re-entering the labor force.


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9. Structural unemployment is caused bya. shifts in the economy that make certain job

skills obsolete.b. temporary layoffs in industries such asconstruction.

c. the impact of the business cycle on jobopportunities.

d. short-term changes in the economy.

A. Structural unemployment is long-termunemployment because the skills ofunemployed workers do not match theskills required for existing jobs.


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10. Unemployment that is due to a recession is

a. involuntary unemployment.b. frictional unemployment.c. structural unemployment.d. cyclical unemployment.

D. Only cyclical unemployment is

attributable directly to the business cycle.


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11. Seasonal, frictional and structuralunemployment is equal to

a. frictional unemployment.b. structural unemployment.c. cyclical unemployment.

d. full employment.

D. Full employment does not mean zerounemployment. Even in the best times,there is always seasonal, frictional, andstructural unemployment.

12 Which of the following statements is true?


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12. Which of the following statements is true?a. The four phases of the business cycle, in

order, are peak, recovery, trough, andrecession.

b. When unemployment is rising, then realGDP is rising.

c. The economic problem typically associatedwith a recovery is rising unemployment.d. Full employment exists in an economy when

the unemployment rate equals the sum of

seasonal, frictional, and structuralunemployment rates. D. There will always be some people

looking for work.


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13. Which of the following groups typically hasthe highest unemployment rate?a. White men and women.b. African-American men and women as a

group.

c. Teenagers.d. Persons who completed high school.

B. In 1998 the unemployment rate of blackmales was 30.1% and black males was 25.3%.

Civilian Unemployment Rates 1998


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Demographic GroupsCivilian Unemployment Rates 1998

OverallMaleFemaleWhiteBlackTeenagers (16 - 19 years)White malesBlack malesWhite femalesBlack femalesLess than high schoolHigh school graduatesCollege graduates

4.5%4.4%4.6%3.9%8.9%14.6%14.1%30.1%10.9%25.3%7.1%4.0%1.8%

h h f h f ll


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14. Which of the following is true?a. The GDP gap is the difference between full

employment real GDP and actual real GDP.b. We desire economic growth because itincreases the nations real GDP.

c. Economic growth is measured by the annualpercentage increase in a nations real GDP.

d. Discouraged workers are a reason critics saythe unemployment rate is understated.

e. All of the above are true. E. All of the above are true.


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Internet ExercisesClick on the picture of the book,

choose updates by chapter forthe latest internet exercises
http://www.swcollege.com/bef/tucker/tucker.html


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