Economic Fluctuations Unemployment and Inflation Wednesday May 20 2015 1 09 PM a b a b c a I Potential GDP OUTPUT The maximum sustainable level of output About 3 annual growth i Actual GDP can be greater or less than potential GDP II Full Employment III Potential GDP output The normal rate of unemployment the amount due to job shopping and imperfect information The sustainable employment level About 95 i Actual employment level can be higher or lower than full employment Operating at potential GDP has the same meaning as operating at full employment i ii iii The economy is neither in a boom or a bust There is no cyclical un employment about 5 will always be present in a dynamic economy 1 2 3 This is the natural rate of unemployment This is due to job searching or finding better jobs Not a recession CYCLICAL from a recession IV Business Cycle Phases Business Peak CONTRACTION Recessionary Trough EXPANSION Business Peak a b c d e V Instability in the Growth of Real GDP 1960 2013 a Although real GDP in the United States has grown at an average rate of approximately 3 the growth has been characterized by economic ups and downs The Business Cycle VI a During a recession CONTRACTION Unemployment is higher than the natural rate Actual GDP is below potential GDP Demand for resources is weak i ii iii During a boom EXPANSION b Economic Fluctuations Unemployment and Inflation and downs The Business Cycle VI a During a recession CONTRACTION Unemployment is higher than the natural rate Actual GDP is below potential GDP Demand for resources is weak i ii iii During a boom EXPANSION i ii iii Unemployment is below the natural rate Actual GDP is abovepotential GDP Demand for resources is strong VII Everyone is Employed in the labor force Unemployed in the labor force Not in the Labor Force VIII Labor Market i A person CANNOTbe in more than one of these categories at a time LABOR FORCE the number of people 16 who are employed or unemployed Employed got a job UNEMPLOYED 1 2 Actively seeking employment Waiting to begin or return to a job b Not in the labor force i ii i ii Neither employed nor unemployed NO JOB ANDNOT LOOKING FOR WORK 1 Full time students WITHOUT JOBS homemakers retiree LABOR FORCE PARTICIPATION RATE fraction of adult population that is in the labor force UNEMPLOYMENT RATE percentage of the labor force that is unemployed IX Labor Market Equations Labor Force Participate Rate Labor Force Adult Population Unemployment rate Unemployed Labor Force Employment Population Ratio Employed Adult Population i Examples 1 The U S in 2009 in millions b a b c a c d a b c a b c Civilian pop age 16 and over 235 5 Employed 140 6 Unemployed 14 5 A Labor Force Employed Unemployed 140 6 14 5 155 1 B Calculate the unemployment rate 9 3 Unemployed Labor Force 14 5 155 1 0 0935 100 9 3 C Calculate the labor force participation rate A Labor Force Employed Unemployed 140 6 14 5 155 1 B Calculate the unemployment rate 9 3 Unemployed Labor Force 14 5 155 1 0 0935 100 9 3 C Calculate the labor force participation rate 65 9 Labor Force Adult Population 155 1 235 5 0 6586 100 65 9 D Calculate the employment population ratio 59 7 Employed Adult Population 140 6 235 5 0 597 100 59 7 TEST 1 STOPS HERE I Three Type of Unemployment Frictional Structural Cyclical a b c a II Frictional Unemployment FRICTIONAL UNEMPLOYMENT cause by constant changes in the labor market i ii iii Imperfect information Search activities Workers have the skills to fill job opening
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