lectures in macroeconomics- charles w. upton unemployment and business cycles

Lectures in Macroeconomics- Charles W. Upton

Unemployment and Business Cycles

SSRSLR

D

H’ H*

w*

w’

Here, U = Un

Unemployment and Business Cycles

Counter-Cyclical andPro-Cyclical Indicators

Business Failures Counter-Cyclical New Business Starts Pro-Cyclical Unemployment Counter-Cyclical Average Work Week Pro-Cyclical Average Wage Rate Pro-Cyclical Capital Utilization Pro Cyclical GDP Pro-Cyclical

Unemployment and Business Cycles

Counter-Cyclical andPro-Cyclical Indicators

Business Failures Counter-Cyclical New Business Starts Pro-Cyclical Unemployment Counter-Cyclical Average Work Week Pro-Cyclical Average Wage Rate Pro-Cyclical Capital Utilization Pro Cyclical GDP Pro-Cyclical

Unemployment and Business Cycles

A Change in Demand

SSRSLR

D

H’ H*

w*

w’

Here, U = Un

Unemployment and Business Cycles

A Change in Demand

D’

SSRSLR

D

H’ H*

w*

w’

Unemployment and Business Cycles

A Change in Demand

D’

SSRSLR

D

H’ H*

w*

w’We know a temporary demand reduction causes a

business cycle

Unemployment and Business Cycles

A Change in Demand

D’

SSRSLR

D

H’ H*

w*

w’We know a temporary demand reduction causes a

business cycle

So what does it do to

unemployment?

Unemployment and Business Cycles

A Modest Proposal

D’

SSRSLR

D

H’ H*

w*

w’We know a temporary demand reduction causes a

business cycle

So what does it do to

unemployment?

*

*

H

HHUU n

Unemployment and Business Cycles

A Modest Proposal

D’

SSRSLR

D

H’ H*

w*

w’We know a temporary demand reduction causes a

business cycle

So what does it do to

unemployment?

*

*

H

HHUU n

Ergo, U is counter cyclical

Unemployment and Business Cycles

The Formal Relation

• GDP– Actual GDP = what you think it is

– Potential GDP = GDP when U = Un

Unemployment and Business Cycles

The Formal Relation

• GDP– Actual GDP = what you think it is

– Potential GDP = GDP when U = Un

• Employment– Actual Employment = CLF(1-U)

– Potential Employment = CLF(1-Un)

Unemployment and Business Cycles

GDP and Unemployment

3

2

3

1

)]1([ tttActual UCLFKAGDP

Unemployment and Business Cycles

Potential GDP & the Natural Rate

3

2

3

1

)]1([ tnttPotential UCLFKAGDP

Unemployment and Business Cycles

GDP and Unemployment

3

2

3

1

3

2

3

1

)]1([

)]1([

tttActual

tnttPotential

UCLFKAGDP

UCLFKAGDP

Unemployment and Business Cycles

The Relation

)(3

2n

Actual

ActualPotential UUGDP

GDPGDP

Unemployment and Business Cycles

Unemployment and GDP

Actual

ActualPotentialn GDP

GDPGDPUU

5.1

Unemployment and Business Cycles

An Illustration

)(3

2n

Actual

ActualPotential UUGDP

GDPGDP

GDP is $10 trillion; Un = 4%;U = 7%

Unemployment and Business Cycles

An Illustration

Trillion $10.2GDP

)47(3

2

10$

10$

Potential

PotentialGDP

GDP is $10 trillion; Un = 4%;U = 7%

Unemployment and Business Cycles

A Second Illustration

)(3

2n

Actual

ActualPotential UUGDP

GDPGDP

GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?

Unemployment and Business Cycles

A Second Illustration

UGDP

GDP

GDP

GDP

Actual

Actual

Potential

Potential

3

2

GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?

Unemployment and Business Cycles

A Second Illustration

UGDP

GDP

GDP

GDP

Actual

Actual

Potential

Potential

3

2

GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?

year a %5.3

Potential

Potential

GDP

GDP

Unemployment and Business Cycles

A Second Illustration

%5.1

3

2%5.4%5.3

U

U

GDP grew from $10 Trillion to $10.45 TrillionWhat will happen to U?

Unemployment and Business Cycles

Okun’s Law

)(3

2n

Actual

ActualPotential UUGDP

GDPGDP

Unemployment and Business Cycles

Okun’s Law

)(2

1n

Actual

ActualPotential UUGDP

GDPGDP

Unemployment and Business Cycles

The Facts

Change in GDP vs Change in U

-1.5000-1.0000-0.50000.00000.50001.00001.50002.0000

-20.0000 -10.0000 0.0000 10.0000 20.0000

Change in GDP

Ch

an

ge

in U

Unemployment and Business Cycles

The Facts

Change in GDP vs Change in U

-1.5000-1.0000-0.50000.00000.50001.00001.50002.0000

-20.0000 -10.0000 0.0000 10.0000 20.0000

Change in GDP

Ch

an

ge

in U

Unemployment and Business Cycles

End

©2004 Charles W. Upton. All rights reserved

Unemployment data from BLS, GDP data from Dept of

Commerce