consequences of business fluctuations chapter 14
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Consequences of Business Fluctuations
Chapter 14
Discussion Topics
Fluctuations in business activityConsequences of business fluctuationsMacroeconomic policy options
Nature of Business Fluctuations
Expansionary phasePeak of business cycleRecessionary phaseTrough of business cycle
Page 338
Page 338
Four Phases of a Business CycleFour Phases of a Business Cycle
Length of cycles variesover time…
Length of cycles variesover time…
Indicators of Economic Activity
Coincident indicators: current production, current disposable income, current sales
Lagging indicators: business inventories, duration of employment, average interest rate
Leading indicators: new orders for goods, new building permits, new investment in plant and equipment, changes in the money supply
Forecasting models: mathematical methods of forecasting future trends in the economy
Pages 339-340
Page 340
Indicatorindex
Indicatorindex
Actual activityseveral monthslater…
Actual activityseveral monthslater…
A classical example of a leading indicator
A classical example of a leading indicator
Two Consequences of Business Fluctuations
Fluctuations in the civilian unemployment rate and implications for policy
Fluctuations in the rate of inflation and implications for policy
Pages 354-364
Unemployment Rate
Calculation of Civilian Unemployment Rate
Calculation of Civilian Unemployment Rate
Annual rate
Number of civilians unemployedSize of total civilian labor force
=
where the size of the total civilian labor force is determined by subtracting those not seeking jobs(homemakers, students, etc.) from the total non-institutional population (those not in prison) over 16 years of age as well as those who are in militaryservice.
Pages 341
An ExampleAssume the following values:Total labor force1 143.8 millionMembers of armed services 1.7 millionEmployed persons 136.2 million
Annual rate
143.8 – 1.7 – 136.2 143.8 – 1.7
=
= .0415 or 4.15 percent
1 The total labor force equals total population minus those notseeking employment over age 16 and those in institutions.
Pages 341
Forms of Unemployment
Frictional: changing jobs and currently unemployed
Cyclical: associated with business cyclesSeasonal: associated with seasonal
business activityStructural: associated with technological
change
Pages 341
Page 342
Full employmentbarometer?
Full employmentbarometer?
Unemployment rateduring the great depression was 25%
Unemployment rateduring the great depression was 25%
Inflation Rate
What is Inflation?
Sustained rise in the general price level
Not a change in the price of a single commodity
Core rate of inflation excludes fuel and food price increases
Deflation (prices falling) vs. disinflation (prices increasing at a slower rate)
Pages 342 – 343
Measuring the CPIThe consumer price index is a weighted average ofthe prices consumers pay for goods and services.It is measured by:
CPI =
Or:
CPI = WFB(PFB) + WH(PH) + … + WOTHER(POTHER)
= 16.302(PFB) + 39.636(PH) + … + 10.203(POTHER)
Cost of market basket in current yearCost of market basket in base year
× 100
See Table 14.3 on page 344See Table 14.3 on page 344
Page 342
Rate of Inflation
The rate of inflation can be measured by the percentchange in the CPI, or:
Inflation rate = current CPI – previous CPIprevious CPI
If the CPI was 166.6 in 1999 and 172.3 in 2000, theannual rate of inflation in 2000 would be:
Inflation rate = (172.3 – 166.6) ÷ 166.6 = .0342 or 3.42%
Pages 344
Inflation thought to be“under control” in thisrange
Inflation thought to be“under control” in thisrange
Brought about a majormonetary policy actiondescribed in Chapter 13
Brought about a majormonetary policy actiondescribed in Chapter 13
Page 345
Page 347
When describing growth in the economy onthe nightly newscast, the newscaster willrefer to the growth in real GDP after adjustmentsfor inflation. In the above example, real GDPgrew over the 1992-1999 period, but not at therate implied by comparisons in nominal terms.
When describing growth in the economy onthe nightly newscast, the newscaster willrefer to the growth in real GDP after adjustmentsfor inflation. In the above example, real GDPgrew over the 1992-1999 period, but not at therate implied by comparisons in nominal terms.
Page 346Some examples of annual rates ofinflation around the world vs. U.S.
Some examples of annual rates ofinflation around the world vs. U.S.
Trade off between Inflation and
Unemployment
Page 349
Phillips curve named afterBritish economist A. W.Phillips…
Phillips curve named afterBritish economist A. W.Phillips…
Page 349
Policies that reduceunemployment mayincrease inflation inthe short run, andvice versa…
Policies that reduceunemployment mayincrease inflation inthe short run, andvice versa…
Page 348
Demand oriented policiesthat shift the aggregatedemand curve from AD2
to AD3 “pull up” thegeneral price level from P0
to P1.
This small increase in inflation may make sensesince output increasedfrom Y2 to Y3, which wouldlower unemployment.
Demand oriented policiesthat shift the aggregatedemand curve from AD2
to AD3 “pull up” thegeneral price level from P0
to P1.
This small increase in inflation may make sensesince output increasedfrom Y2 to Y3, which wouldlower unemployment.
Page 348
Demand oriented policiesto maximize output at theeconomy’s potential orYPOT may bring about asubstantial increase in the general price level (and hence rate of inflation) fora relatively small gain in output and employment.
Demand oriented policiesto maximize output at theeconomy’s potential orYPOT may bring about asubstantial increase in the general price level (and hence rate of inflation) fora relatively small gain in output and employment.
Page 351
Both demand and supplyoriented policies stimulate aggregate output.
Both demand and supplyoriented policies stimulate aggregate output.
Page 351
But demand expansion policy“pulls up” the general price level….
But demand expansion policy“pulls up” the general price level….
Page 351
…while supply oriented policiesthat enhance productivity reduce the general price level.
…while supply oriented policiesthat enhance productivity reduce the general price level.
Page 351
In reality, both forms of policy are typically carried out at the same time.
In reality, both forms of policy are typically carried out at the same time.
SummaryA business cycle has four phases: peak,
recession, trough and expansion The two major consequences of
business fluctuations are unemploy-ment and inflation
Know how to calculate the civilian unemployment rate and the rate of inflation facing consumers
Understand the nature of the index of leading economic indicators
Understand the concept graphing of demand pull inflation
Understand the Phillips curve and demand and supply policy impacts
Chapter 15 focuses on how macroeconomic policy affects agriculture….