Business Cycles, Unemployment, and Inflation

Business cycle

The short-term fluctuations experienced in the economy due to changes in levels of economic activity

Expansion

A phase of the business cycle characterized by increasing real GDP, income and employment

Peak

A point in the business cycle where real GDP reaches a maximum.

• The peak marks the end of an expansion

Recession

A decline in real output for at least two consecutive quarters

Depression

A long-lasting and severe recession

Trough

The lowest point of economic activity in the business cycle, where real GDP reaches a minimum

• The trough marks the end of a recession

Labor force

Individuals 16 years of age and older who are not institutionalized and who either are employed or are unemployed but actively seeking employment

Employed

The number of people in the economy who hold a full or part-time position

Unemployed

The number of people in the economy who have not had a job for at least a week but have actively searched for employment in the past four weeks

Frictional unemployment

Unemployment resulting from workers searching and waiting for jobs

• have shortest lengths of employments

Structural unemployment

Unemployment occurring when the skills that some workers have to offer don’t match the skills needed by the firms in the economy

• The longest type of unemployment

Cyclical unemployment

Unemployment resulting from fluctuations in the business cycle

• Generally lasts longer than frictional unemployment

Seasonal unemployment

A type of frictional unemployment resulting from workers searching and waiting for jobs due to seasonal fluctuations in demand for certain types of workers

Discouraged worker

Someone who wants to work but is not actively searching for a job

• In a recession can leave the labor force and lower unemployment

• After economic improvement, can re-enter labor market and contribute to an increase in unemployment rate

Unemployment rate

The percentage of workers in the labor force who are unemployed; a good indicator of the overall health of the economy

Unemployment rate “Formula”

Unemployment rate = (Unemployed / Labor force) X 100

Unemployment rate = (Unemployed / Employed + Unemployed) X 100

Labor force participation rate (LFPR) formula

LFPR = (Labor force / Population 16 year and older) X 100

Full employment

The employment an economy experiences when it is operating at the natural rate of unemployment

Natural rate of unemployment

The rate of unemployment equal to the sum of the frictional and structural unemployment rates

• A fully employed economy operates at this rate

Natural rate of unemployment “Formula”

Natural rate of unemployment = Frictional unemployment rate + Structural unemployment rates

Natural rate of unemployment = (Frictionally unemployed + Structurally unemployed / Labor force) X 100

Inflation

A general increase in the prices of goods and services

Consumer Price Index (CPI)

An economic indicator used to measure over time the average price of a market basket of goods and services purchased by the typical consumer

• Eight major groups included are food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods or services

• CPI always = 100 in the base year

Consumer Price Index (CPI) “Formula”

CPI Year = (Value of a market basket in year t / Value of the same market basket in base year) X 100

Inflation Rate

The percentage change in the overall price of goods and services in the economy from one time period to another

Inflation rate “Formula”

Inflation Rate Year t = ( CPI Year t - CPI Year t-1 / CPI Year t-1 ) X 100

• year t represents the year for which we calculate the inflation rate

• year t-1 represents the year prior to year t-1

Hyperinflation

A situation in which the inflation rate is positive and greater than 50% per month

Disinflation

A sitiuation in which the inflation rate is positive but declining over time

Deflation

A situation in which the inflation rate is negative

Producer Price Index (PPI)

A price index that measures the average change over time in the selling prices received by producers of goods and services

Nominal Income

The actual number of dollars received in exchange for the different resources available in the economy

Real income

The amount of goods and services that can be purchased with nominal income

• The inflation - adjusted measure of income

Real income “Formula”

Real Income = (Nominal income / Consumer price index) X 100