unemployment & business cycles chapter 8. the three faces of gdp == market value of final goods...
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Unemployment & Business Cycles
Chapter 8
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The Three Faces of GDP
= =
Market Market value of value of
final final goods goods
and and servicesservices
Production Expenditure Income
InvestmentInvestment
ConsumptionConsumption
GovernmentGovernment
purchasespurchases
Net exportsNet exports
Capital Capital IncomeIncome
Labor IncomeLabor Income
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Components of GDP
C: consumption
I : investment in plant & equipment
G: government spending
X-M: net exports
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Limitations as a Measure
Not a measurement of well-being, just economic activity.
Does not consider the distribution of income.
Unreported economic activity is not included.
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Problems comparing per capita GDP across countries
Bangladesh $270
USA $35,000
Exchange rate method and purchasing power method.
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Which of the following are included in GDP?
a) Your mother-in-law buys a new car from a U.S. producer.
b) Your mother-in-law buys a new car imported from Sweden.
c) Your mother-in-law’s car rental business buys a new car from a U.S. producer.
d) Your mother-in-law’s car rental business buys a new car imported from Sweden.
e) The U.S. government buys a new domestically produced car for the use by your mother-in-law, who has been appointed the ambassador to Sweden.
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PotentialGDP
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Actual & Potential GDP, 1960-2003Real GDP(billions of 2000 $)
8,000
6,000
4,000
2,000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2003
10,000
1970recession
1974-75recession
1980recession
1982recession
1990-91recession
2001recession
ActualGDP
1960recession
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The Unemployment Rate
• Measuring UnemploymentLabor force = employed + unemployed
force labor
unemployed rate ntUnemployme
over and 16 population
force labor rate ionParticipat
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Labor Force Participation Rate of Men and Women
Source: www.bls.gov.
200319751948 1960
87 % 83%74 %
33 % 38 %
46 %
58 %
––––––– Men –––––––
Labor Force Participation Rateof Men and Women: 1948-2003
–––––– Women ––––––1990 200319751948 1960 1990
78 % 76 %
60 %
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Source: Economic Report of the President, various issues.
Instability in the Growth of Real GDP
Annual growth rate of real GDP
6
8
4
2
0
- 2
1960 1965 1970 1975 1980 1985 1990 1995 2000 2004
Long-run growth rate(approx. 3%)
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Time
Real GDP
Business peak
Recessionary trough
Contraction Exp
ansi
on
The Hypothetical Business Cycle
Business peak
Recessionary trough
Trend line
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U.S. Population, Employment,and Unemployment: 2004
Civilian population 16 and over
Civilian labor force
Employed• Employees • Self-employed
workers
Unemployed
• New entrants • Reentrants • Lost last job • Quit last job • Laid off
Not in the labor force
• Household workers • Students • Retirees • Disabled
Labor Force Participation Rate =
Civilian labor forceCivilian population (16+) = 66.0%
Employment / Population Ratio =
Number employedCivilian population (16+) = 62.3%
Rate ofUnemployment =
Number unemployedCivilian labor force = 5.5%
147.4 million
139.3 million
76.0 million
223.4 million
8.1 million
147.4223.4 =
139.3223.4 =
8.1147.4 =
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Unemployment Rate, 2003
Source: www.bls.gov.
Allworkers
19.3 %
10.6 %
6.0 % 5.7 %
15.6 %
9.3 %
25+16-19 20-24–– Men aged ––
The Unemployment RateBy Age and Gender: 2003
Allmen
Allwomen –– Women aged ––
25+16-19 20-24
5.0 %6.3 %
4.6 %
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5.1 %
8.6 %
10.6 %
4.2 %
6.5 %
10.5 %
14.6 %Spain
Italy
Germany
Japan
Average Unemployment Rate(1994-2003)
France
U.K.
U.S.
Source: Economic Outlook, OECD (June 2004).
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Types of Unemployment
Frictional: worker “between jobs”
Cyclical: caused by bad economic conditions
Structural: worker’s skill set is no longer in demand
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Source: www.bls.gov.
Composition of theUnemployed by Reason
• There are various reasons why persons were unemployed in 2003.
• A little more than two-fifths (42.4%) of the unemployed were dismissed from their previous jobs.
• 35.5% of the unemployed were either new entrants or reentrants into the labor force.
Dismissed from previous jobs
42.4%
Jobleavers9.3 %
Newentrants7.3%
Reentrants28.2%
Onlayoff12.8%
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How Accurate Is the Official Unemployment Rate?
• The unemployment rate includes as unemployed, people who say they are looking for a job who are really not.
• Many are “working off the books, others are vacationing.
• But does not include discouraged workers who have left the labor force.
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Labor Force, unemployment rate & Participation Rate
65 people10 <16 years of age10 retired25 full-time jobs5 part-time jobs5 full-time homemakers5 full-time students over 162 disabled and cannot workRest did not have jobs but wanted one but one has
not searched in 3 months.
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U. S. Business Cycles
20
10
0
–10
–20
‘90‘801860 ‘70 1900 ‘10 ‘20 ‘30 ‘40 ‘50 ‘60 ‘70 ‘80 ‘90 ‘102000
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Civil War
Recoveryof 1895
World War I
Panicof 1893 Panic
of 1907Great
Depression
Korean War Vietnam War
World War II
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Inflation Since 1900
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
3020101900 40 50 60 70 80 90 2000
–10
–5
0
5
10
15
20
25
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Sources: Derived from computerized data supplied by FAME ECONOMICS. Also see Economic Report of the President (annual).
The Inflation Rate, 1953-2003Inflation rate
1955 1960 1965 1970 1975 1980 1985 1990 20001995
10
5
0
15
2003
1953-1965 averageinflation rate = 1.3 %
1973-1981 averageinflation rate = 9.2 %
1983-2003 averageinflation rate = 3.1 %
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The Inflation Problem?
If all prices are rising, including wages, why is inflation a problem?
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Using a price index to compare dollar values across time.
A Manhattan graduate from 1970 was offered a starting salary of $12,000.
What is that equivalent to in today’s dollars?