Unit 4 - Business Fluctuations

 Business Fluctuations

are ups and downs in economic activity as

measured by increases and decreases in real GDP.

Macroeconomics
Unit 4 - Business Fluctuations
 Recessions and Expansions

A recession is a decrease in real GDP of at least

two consecutive quarters (6 months).

An expansion is any period during which real

GDP is increasing.

Macroeconomics
 Using the official definition, when, of the
following years, did the United States have a
recession?
1. 1998
2. 2001
3. 1991
4. 1943
5. We have never had a
recession

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Unit 4 - Business Fluctuations
 GDP fluctuations in the United States

For the latest GDP fluctuations in the United

States, visit
http://www.bea.gov

Macroeconomics
Unit 4 - Business Fluctuations
 Recessions and Expansions

Historically, the average recession has lasted

approximately one year.

The average expansion lasts more than 5 years.

Macroeconomics
Unit 4 - Business Fluctuations
 The Cause of Business Fluctuations

Why do business fluctuations occur?

Macroeconomics
Unit 4 - Business Fluctuations
 Possible Causes of a Recession:
 High inflation and high interest rates
 National security problems
 Lack of confidence in the economy
 Government policies that discourage productivity
 Other productivity problems
 Natural disasters
 Poor decision-making by businesses (including fraud),
households, the government
 Problems with resources (shortages)
 Foreign competition or foreign countries not doing well
Macroeconomics
 When was the Great Depression?
1. During the 1890s
2. During the 1930s
3. During the 1940s
4. During the 1980s

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Unit 4 - Business Fluctuations
 Great Depression Symptoms

 Stock market crash

 Significant decline in GDP and incomes
 Very high unemployment (25%)
 Many business and bank failings
 Low confidence by businesses and households

Macroeconomics
Unit 4 - Business Fluctuations
 Events Leading Up to the Great Depression:
 Stock prices rose rapidly during the 1920s.
 Was it speculation? Was it a stock bubble?
Bernstein disagrees (profits rose 387%).
 The market crashed in October, 1929.
 Many people borrowed a lot of money to buy
stocks; loans were not paid back; banks went
bankrupt; individuals lost their life savings;
people lost confidence in the economy; many
jobs were lost.
Macroeconomics
Unit 4 - Business Fluctuations
 The U.S. Government in the 1930s

 In the early- and mid-1930s, the economy worsened partly

because of flawed government policies. The government:
 raised taxes in an attempt to balance the budget.
 raised interest rates in an attempt to stem the outflow of
gold to other countries.
 raised tariffs and quotas in an attempt to protect domestic
industries and employment.

Macroeconomics
Unit 4 - Business Fluctuations
 Recession and Depression Symptoms

High unemployment is a serious symptom of a

stagnating economy.

The unemployment rate is the number of people

who do not have a job and are actively looking for
one, as a percentage of the labor force.

Macroeconomics
 The unemployment rate in the U.S. is
currently:
1. Between 5 and 7%
2. Between 7 and 9%
3. Between 9 and 11%
4. Between 11 and
15%
5. More than 15%

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 In the U.S. the government measures the
unemployment rate by:
1. Counting the number of
people on
unemployment
compensation
2. Counting the number of
people on welfare
3. Taking a survey of
66,000 representative
households
4. Taking a survey of
business leaders

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Unit 4 - Business Fluctuations
 The Unemployment Rate
The U.S. rate is determined by a survey of
approximately 66,000 representative households.

A person is unemployed if (s)he is without a job

and actively looking
for one.

Macroeconomics
Unit 4 - Business Fluctuations
 Unemployment Rates around the World

For United States and other countries’

unemployment rates, see our CD, Unit 4, Section
3.

Or visit
http://www.bls.gov

Macroeconomics
Unit 4 - Business Fluctuations
 Types of Unemployment

Types of unemployment include:

 Seasonal (out of season)

 Cyclical (recession)

 Structural (technology, outsourcing)

 Frictional (in between jobs; finished study)

Macroeconomics
 A teacher who is off during the summer
and not looking for a job, is:
1. Seasonally
unemployed
2. Frictionally
unemployed
3. Cyclically
unemployed
4. Structurally
unemployed
5. None of the above

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 The Natural Rate of Unemployment

According to some government economists, when

unemployment is at approximately 5 or 6 %, the
economy is at “full employment”, or the natural
rate of unemployment.

This is when cyclical and seasonal unemployment

are zero.
Unit 4 - Business Fluctuations

 The Natural Rate of Unemployment

Keynesian economists claim that when

unemployment is around 5 or 6%, then
further growth in the economy causes
inflation.

Macroeconomics
Unit 4 - Business Fluctuations
 The Natural Rate of Unemployment

Classical and Austrian-school economists disagree.

They believe that
 inflation is caused by a rising money supply.
 we can do better than 5 or 6% unemployment.
 in the past, unemployment has been below 5%
while the economy grew, without causing inflation.
Unit 4 - Business Fluctuations
 Unemployment Rates by States and Groups

For unemployment rates by states and

demographic groups, see the CD (Bouman), Unit
4, Section 5.