Business Cycles and Unemployment

• Alternating periods of economic growth and contraction, measured by changes in real GDP.

Cycle Phases

1. Peak: Maximum real GDP.

2. Recession: Decline in real GDP (two+ quarters), rising unemployment.

3. Trough: Minimum real GDP.

4. Expansion: Rising real GDP.

Economic Growth

• Annual percentage increase in real GDP, raising living standards.

Economic Indicators

1. Leading: Change before real GDP.

2. Coincident: Change with real GDP.

3. Lagging: Change after real GDP.

Business-Cycle Indicators

• Leading: Average workweek, unemployment claims, new orders, deliveries, permits, stock prices, money supply, interest rates, consumer expectations.

• Coincident: Payrolls, personal income, industrial output, sales.

• Lagging: Unemployment rate/duration, labor cost, CPI services, loans, credit ratio, prime rate.

Causes of Business Cycles

• Changes in aggregate expenditures: $Real GDP = C + I + G + (X - M)$

Spending Changes During Expansion

• C, I, G, X increase; M decreases.

Spending Changes During Recession

• C, I, G, X decrease; M increases.

Unemployment Rate

• Percentage of unemployed in the civilian labor force.

• $Unemployment\,rate = \frac{unemployed}{civilian\,labor\,force} × 100$

Criticisms

• False reporting, excludes discouraged/part-time workers, doesn't measure underemployment.

Types of Unemployment

1. Frictional: Temporary, workers moving jobs.

2. Structural: Mismatch of skills and job requirements.

3. Cyclical: Lack of jobs during recession.

Full Employment

• Natural rate of unemployment (frictional + structural), approximately 5%.

GDP Gap

• Difference between actual and potential real GDP, measuring cyclical unemployment cost.