Economic Growth, Business Cycles and Unemployment: Understanding the Relationships, Study notes of Introduction to Macroeconomics

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Economic Growth,Business Cycles &Business Cycles, &UnemploymentUnemployment

pages 124-

Economic Growth

Main sources of growth 1

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1.^

Increases in inputs

2.^

Increases in resource productivity

Productivity: real output per unit of inputProductivity in the U.S.

• Improved products and servicesImproved products and services- Added leisure- Other impacts (negative?)

Selected Countries Growth Rates

6 4

U.S.France

l rate)

2 0

Germany

U.K.

nge (annua

(^0) -

Japan

Italy

% Chan

(^2) - 1997

1999

2001

2003

2005

A Gloomy Forecast for the U.S.

Real GDP Growth:

A Gloomy Forecast for the U.S.

(not in your textbook)

Pat Yanez

Source: http://www.forecasts.org/gdprealgrowth.htm

US Recessions since 1950

Period

Duration,months

Depth (Decline in real output)

1953

54

10

3 7%

1953

-^

10

-3.7%

1957-

8

-3.

1960 61

10

1 6

1960-

10

-1.

1969-

11

-1.

1973-

16

-4.

1973 75

16

4.

1980

6

-2.

1981-

16

-3.

1990-

8

-1.

March-Nov 2001

8

-0.

Measurement of U.S. Unemployment

^2005

UNEMPLOYMENT

Measurement

of U.S. Unemployment

^2005

Under 16and/or

71 million

and/or^ Not in institutionalized

71 million

Not inlaborforce

Total Population

77 million

Employed

Population297 million

Employed

Labor Force150 million

142 million Unemployed

8 million

UNEMPLOYMENTUNEMPLOYMENT

3 Types of Unemployment....3 Types of Unemployment....

FrictionalFrictionalFrictional StructuralC

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FrictionalStructuralC

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CyclicalCyclical

Types of Unemployment....Types of Unemployment....yp

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yp

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Frictional UnemploymentFrictional Unemployment - Workers in between jobs:- Voluntarily:

quit but searching

- Involuntarily:

fired and searching

- A reflection of a highly mobile workforce. Career choices, new degrees., etc.

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- Tends to be of short duration

Types of UnemploymentTypes of UnemploymentTypes

of Unemployment....

Types of Unemployment.... Cyclical UnemploymentCyclical UnemploymentCyclical

Unemployment

Cyclical Unemployment^ - Unemployment caused by recessions.- Caused by a deficiency in total spending- It ends when companies start hiring- Its duration depends on the length of therecession Pat Yanez

“Full – Employment” Understanding Unemployment:

• Is less than 100% employment of the labor force- When economy is experiencing only frictional and structural unemploymentO^

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• Occurs when there is no cyclical underemployment^ Natural Rate of Unemployment (NRU)^ - Occurs at the full-employment rate of unemployment.- Number of job seekers equals number of job vacanciesAt ths point economy is producing its

potential output

• At ths point, economy is producing its

potential

output.

• Currently, NRU is about 4% – 5%^ GDP Gap and Okun’s Law^ - GDP gap = actual GDP – potential GDP- Okun’s Law: Each 1% unemployment rate = a 2% negative GDP gap^ Okun s Pat Yanez

Law: Each 1% unemployment rate

a 2% negative GDP gap