Principles of Economics - Topic 3 - Unemployment - PDF

Principles of Economics Topic 3 (Chapter 28) Unemployment Macroeconomic Instability l Economic Growth l Business Cycle l Unemployment l Inflation Economic Growth l Economists define and measure economic growth as either: à An increase in real GDP occurring over so...

Principles of Economics Topic 3 (Chapter 28) Unemployment Macroeconomic Instability l Economic Growth l Business Cycle l Unemployment l Inflation Economic Growth l Economists define and measure economic growth as either: à An increase in real GDP occurring over some time period à An increase in real GDP per capita occurring over some time period. Economic Growth l If real GDP was $ 200 billion in some country last year and $ 210 billion this year, the rate of growth would be 5 percent. lRule of 70: Approximate number of years required to double real GDP = (70 / annual percentage rate of growth) The Business Cycle l The term business cycle refers to alternating rises and declines in the level of economic activity. l Decline in real GDP leads to significant increases in unemployment. l Rapid economic growth has been marred by rapid inflation. The Business Cycle l The term business cycle refers to alternating rises and declines in the level of economic activity. l Decline in real GDP leads to significant increases in unemployment. l Rapid economic growth has been marred by rapid inflation.  The Business Cycle Growth Trend Level of real output Peak Recovery Recession Trough Time Phases of the Business Cycle l Peak: à at a peak business activity has reached a temporary maximum. à the economy is at full employment. à very close to full productivity. l The price level is likely to rise during this phase. Phases of the Business Cycle l Recession: à a period of decline in total output, income, employment, and trade. à wide spread contraction of business activity. l The price level is likely to fall. Phases of the Business Cycle l Trough: à output and employment bottom out at their lowest levels. à the trough phase may be either short lived or quite long. Phases of the Business Cycle l Recovery: à in the recovery phase, output and employment rise toward full employment. l The price level may begin to rise before full employment and full capacity production return. Unemployment l The labor force consists of people who are able and willing to work. l Both those who are employed and those who are unemployed but actively seeking work are counted as being in the labor force. BLS divides population into 3 groups: l Employed: paid employees, self-employed, and unpaid workers in a family business l Unemployed: people who were available and not working but who have looked for work during previous 4 weeks l Not in the labor force: those who do not fit either any of the above two categories. i.e. full- time student, homemaker, or retiree The labor force is the total # of workers, including the employed and unemployed. Labor Force Statistics l Compute the labor force, u-rate, adult population, and labor force participation rate using this data: Labor force = employed + unemployed = 145.9 + 8.5 = 154.4 million U-rate = 100 x (unemployed)/(labor force) = 100 x 8.5/154.4 = 5.5% Population = labor force + not in labor force = 154.4 + 79.2 = 233.6 LF partic. rate = 100 x (labor force)/(population) = 100 x 154.4/233.6 = 66.1% Unemployment l The unemployment rate is the percentage of the labor force unemployed: Unemployment rate= (unemployed / labor force) X 100