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Business Cycle and Unemployment

Recession
Occurs when a Contraction, or decline in Real GDP, lasts 6 months or longer.
Frictional Unemployment
Someone who has left their job or has joined the labor force(looked for a job) for the first time.
Aggregate Demand
Measures overall spending in the economy. Is the sum of C+I+G+Xn.
Unemployment – Natural Rate
Defined by the government at a level of 5-6%.
Is the lowest level of unemployment while maintaining stable prices.
Was 3-4% in the 1960’s and included Frictional unemployment.
Was increased to 5-6% to account for Frictional and Structural unemployment.
Aggregate Supply
Measures the potential output of our economy(remember PPF?). It is based on our level of resources, education, capital and technology.
Discouraged Worker
Someone who should be in the labor force who is currently unemployed and NOT looking for work.
Okun’s Law
Belief that their is a relationship between changes in output and changes in the unemployment rate.
Examples:
If Actual GDP growth falls 4% short of Potential GDP growth. The unemployment rate will INCREASE by 2%.
If Actual GDP growth exceeds Potential GDP growth by 6 percent. The unemployment rate will FALL by 3%.
Involuntary Unemployment
People who are looking for work but can’t find a job with current wages.
Contraction
Phase in the Business Cycle where Real GDP is falling, inflation is falling and unemployment is rising.
Unemployed
Anyone 16 or older who is unemployed but looking for work, waiting to be recalled from layoff or waiting to report to a job in the next month.
Expansion
Phase in the Business Cycle where Real GDP is increasing, inflation is increasing and unemployment is decreasing.
Cyclical Unemployment
Unemployment caused by a downturn(contraction or recession) in the economy.
Business Cycle
Shows ups and downs in Real GDP, inflation, and unemployment over a period of 7-12 years.
Full Employment
A level of unemployment of 4%.
Voluntary Unemployment
When people choose to remove themselves from the labor force because they believe wages are too low.
Seasonal Unemployment
Unemployment caused by changing seasons.
Structural Unemployment
Unemployment caused by workers lacking skills to participate in the economy, have been replaced by machines or have had their jobs outsourced to other countries.
Trough
Phase in the Business Cycle where Real GDP is at its lowest, inflation is at its lowest and unemployment is at its highest.
Labor Force
Members of the population that have been classified as either EMPLOYED OR UNEMPLOYED.
Seasonal Adjustments
Economics take into account changes in spending habits during different times of the year.
Potential GDP
Level of output where we have reached our productive capacity. We can no longer produce more goods. If spending continues to grow, prices will rise sharply based on market shortages.
Peak
Phase in the Business Cycle where Real GDP is at his highest, inflation is at its highest and unemployment is at its lowest.
Employed
Anyone 16 or older who is working full-time or part-time at least 1 hour a week. Includes workers on strike or on a leave of absence.

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