The overall economy transitions from growth periods to times of decline. These adjustments are known as the business cycle.

Business Cycle - Alternating periods of growth and contraction

The four phases of the Business Cycle

• Peak - The phase of the business cycle in which real GDP reaches a maximum after rising during a recovery.
• Recession - The phase of the business cycle during which real GDP declines, and the unemployment rate rises. Also called a contraction.
• Trough - The phase of the business cycle in which real GPD reaches a minimum after falling during a recession.
• Expansion - An upturn in the business cycle during which real GDP rises. Also called a recovery.

Business Cycle

Long-term Economic Growth is around 3%

Quarterly Changes in GDP

• Leading Indicators - Variables that change before read GDP changes
• Coincident Indicators - Variables that change at the same timer real GDP changes
• Lagging Indicators - Variables that change after real GDP changes

• Average workweek
• Unemployment Claims
• New Consumer goods orders
• Delayed deliveries
• New orders for plant and equipment
• New building permits
• Stock prices
• Money supply
• Interest rates
• Consumer expectations

• Nonagricultural payrolls
• Personal income minus transfer payments
• Industrial production
• Manufacturing and trade sales

• Unemployment rate
• Duration of unemployment
• Labor cost per unit of output
• Cosnumer price index for services
• Commercial and industrial loans
• Consumer-credit-to-personal-income ratio
• Prime rate

Unemployment Rate - The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs.

Working age Population - Population aged 15-64

Civilian Labor Force - Count of people in the working age population who have jobs or are actively seeking jobs.

Labor Force Participation Rate - Proportion of people in the civilian labor force relative to the working age population.

Numbers are in 1,000’s of people

Unemployment Rate - Proportion of people in the labor force who are actively searching for a job but are unable to find one.

The unemployment rate isn’t a perfect measure of the employment situation. It’s possible that the unemployment rate might not capture everyone who is wanting a job. For insntance:

• Discouraged Worker - A person who wants to work, but has given up searching for a job.

• Frictional

• Structural

• Cyclical

Frictional Unemployment - Temporary unemployment caused by the time required of workers to switch from one job to another.

• Short term matching problem where people are searching for jobs
• Imperfect information in the labor market creates friction
• The Great Resignation or The Great Reshuffle

Structural Unemployment - Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities.

• Lack of education - work force might generally be lacking education or skills that are currently needed in the job market
• Changes in consumer demand - Changes in demand in markets will change the general demand for labor in some markets
• Technological Advances - New technologies can displace the workforce. Capital or labor substitution
• Globalization - Development of increased international trade and higher competition among workers

Unemployment caused by the changes in the business cycle

The situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates.

• Does not include cyclical unemployment
• Represents the ideal level of unemployment
• Potential Real GDP - The level of GDP produced at full employment
• Actual Real GDP - The current level of GDP adjusted for inflation
• GDP GAP = Actual Real GDP - Potential GDP