Business Cycles

Chapter 10 (Business Cycles)
Business Cycles (business Flucuations)
The ups and downs in economy wide economic activities are called business cycles or busyiness fluctuations.
When business fluctuations are positive they are called expansion, the opposite of expansion is contraction which is slow down in the pace of national economic activities.
Phases of the business cycle over a several year period
1. A peak is when business activity reaches a temporary maximum with full employment and near capacity output.
2. A recession is a decline in total output; income, employment, and trade lasting six months or more.
3. The trough is the bottom of the recession period.
4. Recovery is when output and employment are expanding toward full employment.
Causes of business fluctuations
A. Internal (endogenous) theories
1. Innovation theory
2. Psychological theory
3. Monetary theory
B. External (exogenous) Theories
1. War theory
a. Examples are WW2, the Korean war, and the Vietnam War
2. External shock
a. 1973 oil embargo
b. Price Shock
c. Demand Shock
Recent recessions
1973-1975
1982-1982
1991-1992
3/2001-11/2001
Non-cyclical fluctuations
1. Seasonal fluctuations that are not related to the business cycle.
2. Long term growth trend is positive and cyclical fluctuations occur around this trend.
Unemployment
Types of unemployment
1. Frictional unemployment consists of those searching for jobs or waiting to take jobs soon.
2. Structural unemployment is due to changes in the structure of demand for labor, ex. When certain skills become obsolete or geographic distribution of jobs changes.
3. Cyclical unemployment is caused by the recession phase of the business cycle, which is sometimes called deficient demand unemployment.
Definition of full employment
The full employment does not mean zero unemployment.
Full employment (natural rate of unemployment) = frictional unemployment + structural unemployment.
The natural rate of unemployment is achieved when labor markets are in balance; the number of job seekers equals the number of job vacancies.
The natural rate of unemployment is between 4 to 6.
The unemployment is defined as the percentage of the labor force which is not employed.
Unemployment rate = Unemployed / labor force * 100
The population divided into 3 groups:
1. Under age 16 and those people who are not able to work permanently.
2. Those who are not in labor force (students, homemaker, …)
3. Labor force includes those who are employed and those who are unemployed, but looking for work.
Unemployment rate for 1982 = 11%
Unemployment rate for year 1991 = 6.7%
Unemployment rate for 1997 = 4.9%
Unemployment rate for August 1999 = 4.3%
Unemployment rate for January 2000 = 4%
The official unemployment rate might underestimate the unemployment rate because they:
A. Include part time workers as fully employed
B. Discouraged workers is classified as not in the labor force
The main measure of the inflation is the Consumer Price Index (CPI), compiled by the Bureau of the Labor Statistics.
Inflation:
Is rising general level of prices.
To measure inflation rate in 1997, subtract previous year’s (1996) price index from 1997 price index and divide by the previous year’s price index, then multiply by 100 to express as a percentage.
CPI in 1996 = 156.9
CPI in 1997 = 160.5
Rate of inflation = 160.5-156.9/156.9*100=2.3%
All industrial nations have experienced the inflation problem.
Some nations experience very high rates of inflation.
Causes and theories of inflation
1. Demand-pull inflation
Spending increases faster than production
2. Cost-push or supply side inflation
Price rise because of rise in per unit production costs.
Per unit production costs = total input cost/units of output
a. Wage-push can occur as result of union strength
b. Supply shocks may occur with unexpected increases in the price of raw materials
Stagflation – recession and high inflation rate