11- Business cycles and unemployment

Question 1

Why does GDP fluctuate?

Answer 1

Short term- AD changes
C + I (most important) + G + X-M and monetary policy shocks through interest changes

Question 2

Why investment spending rises with GDP?

Answer 2

• Accelerator effect
• Availability of funds
• Expectations

Question 3

How availability of funds affects investment

Answer 3

• Higher GDP- higher retained profits- used to invest
• Looser credit terms during recession

Question 4

How expectations affects investment

Answer 4

• All production plans take time to fulfil
• Banks and other lending institutions can become cautious in their lending.

Question 5

Why upswings stop?

Answer 5

Expansion may slow because of capacity constraints: plant equipment and other resources.
As constraints become tighter so prices of labour, capital and other inputs go up; as GDP slows then the accelerator says that
investment slows, which may in turn ináuence expectations and
the expansion comes to a halt.
Rapid contractions are also brought to an end.
The floor is a low level of GDP not zero because households use up savings
or go into debt to sustain the essentials of life.
Unemployment benefits and welfare payments serve to limit the
fall in GDP ñ these are the so-called built in stabilisers

Question 6

Measurements of unemployment

Answer 6

• ILO measure
• Claimant count

Question 7

Claimant count

Answer 7

All those claiming unemployment benefits at Employment Services offices
= no. of claimants/ no. employed in full-time or part-time jobs and no of claimants x100

Question 8

3 problems with claimant count

Answer 8

• As the benefit system changes No of claimants changes.
• Those who don’t claim benefit are not counted
• Counts anyone with two jobs twice

Question 9

ILO measurement

Answer 9

All people between 16-65 are put into 3 categories:
- ILO employed- work at least an hour a week, or unpaid in family business
- unemployed- either out of work, haven’t looked for work in 4 weeks, will start job in 2 weeks
- economically inactive- everyone else

Question 10

Advantage of ILO

Answer 10

It measures those who say they are unemployed and not just those claiming benefits.

Question 11

Disadvantage of ILO

Answer 11

It lumps together as employed anyone who does just one hours paid work with those who work much longer
hours.

Question 12

3 concepts used in ILO

Answer 12

• Unemployment rate- unemployed/total labour force
• Labour force survey- total unemployed and employed
• Participation rate- percentage of working-age population in the labour force

Question 13

Types of unemployment

Answer 13

• Structural
• Cyclical
• Frictional
• Equilibrium - frictional + structural
• Involuntary- due to redundancy

Question 14

Causes of cyclical unemployment

Answer 14

• Presence of negative output gap
• Sticky wages- labour markets not competitive

Question 15

Frictional unemployment cause

Answer 15

Caused by the normal turnover of labour, as people take a break between jobs

Question 16

Structural unemployment cause

Answer 16

Caused by shifts in demand for
existing products and development of new products; also geographical distribution of jobs and technological change.