unemployment and business cycle

Question 1

Business Cycle

Answer 1

The business cycle depicts the rise and fall in output (production of goods and services) over time. Each business cycle has four phases: expansion, peak, contraction and trough.

Question 2

concept of the business cycle

Answer 2

The business cycle refers to fluctuations in growth in economic output.
It takes into consideration the “potential output” of the economy
Output is defined as real Gross Domestic Product (real GDP)

Question 3

potential output of an economy

Answer 3

The potential output of an economy is the level of output that an economy can sustainably achieve using all of its resources – without putting excessive upward pressure on prices – inflation.

Question 4

expansion

Answer 4

Expansion – the upswing of the business cycle towards a peak is called an economic expansion,

Question 5

expansion characteristics

Answer 5

Increase in production/output, decrease in unemployment, increase in wages and increase in consumer spending

Question 6

Increase in production/output

Answer 6

As an economy expands, businesses generally see an increase in sales or demand for their products. They produce more goods and services to meet this increase in demand.

Question 7

decrease in unemployment

Answer 7

As businesses need to produce more goods and services to meet demand, they need to hire more workers. Consequently, the level of unemployment declines.

Question 8

increase in wages

Answer 8

Since businesses are doing well, they need to attract and keep workers by offering higher wages.

Question 9

increased consumer spending

Answer 9

As people are earning higher wages, they spend more money in the economy – adding to demand

Question 10

contraction

Answer 10

the downswing of the business cycle towards a trough is called an economic contraction,

Question 11

contraction characteristics

Answer 11

Decrease in production/output, increase in unemployment, decrease in wages, decrease in consumer spending

Question 12

Decrease in production/output

Answer 12

As the economy contracts, businesses generally see a decrease in sales or demand for their products. Businesses will respond to this reduction in demand by producing fewer goods and services.

Question 13

increase in unemployment

Answer 13

As businesses don’t need to produce as much to meet demand, some businesses will reduce the size of their workforce by letting go of some of their employees. This increases the number of unemployed workers.

Question 14

decrease in wages

Answer 14

Because businesses are doing less well, they don’t need as many workers. They can attract enough workers at lower wages. Workers are willing to accept lower wages, as the increase in unemployment has meant there is more competition for jobs.

Question 15

decreased consumer spending

Answer 15

Because people are earning lower wages, they spend less on goods and services. They may be more concerned about losing their job, so they may be more likely to save, rather than spend, their money.

Question 16

boom

Answer 16

A boom is a period of strong economic expansion where many businesses are operating at full capacity or above capacity, and the unemployment rate is very low. Income and production are at very high levels. This can lead to rapid growth in prices.

Question 17

recession

Answer 17

A recession is when output has fallen for a period of time and the unemployment rate increases.

Question 18

depression

Answer 18

A depression is a very severe recession. There is a large contraction in the economy, and the unemployment rate is likely to be at a very high level.

Question 19

inflation and the business cycle during an expansion

Answer 19

As consumers demand more output (goods and services), businesses produce more output to meet this increased demand, but they will eventually reach their productive capacity (their maximum level of supply). There will be more demand for their output than output available. This pulls prices up.

Question 20

inflation and the business cycle during a contraction

Answer 20

As consumers demand less, businesses produce less output. Some businesses may lower their prices or offer discounts to increase sales. This leads to lower inflation or deflation.

Question 21

Economic indicators are classified by when they change relative to the business cycle. They are

Answer 21

Leading Economic Indicators
Coincident Economic Indicators
Lagging Economic Indicators

Question 22

leading indicators

Answer 22

Leading indicators change before a direction change in the business cycle becomes evident.
They increase before the level of economic activity actually increases.
They therefore predict trends in economic activity

Question 23

coincident indicators

Answer 23

These indicators typically move in line with the overall economic activity, providing real-time insights into economic performance.
In other words they change simultaneously with economic activity.

Question 24

leading indicator examples

Answer 24

Home building approvals, share prices, inventory held by firms, new employment vacancies and business confidence.

Question 25

coincident indicator examples

Answer 25

GDP, retail sales, job advertisements, household income.

Question 26

lagging indicators

Answer 26

These indicators typically change after the economy has already begun to follow a particular trend, providing confirmation of the pattern and helping to validate the current state of the economy.
For example, the unemployment rate will change after there is a change in economic activity. Similarly, inflation increases after there is an increase in economic activity.

Question 27

lagging indicator examples

Answer 27

Unemployment rate, wages, inflation rate, interest rates.

Question 28

procyclical indicators

Answer 28

A procyclical indicator is one that increases when the level of economic activity or business cycle increases.

Question 29

countercyclical indicators

Answer 29

A countercyclical indicator is one that decreases when the level of economic activity or business cycle increases or vice versa

Question 30

abs measuring unemployment

Answer 30

The Australian Bureau of Statistics (ABS) is the official government agency that provides data on unemployment.
Every month, a survey is held to find out how many people are working, who is looking for job and how many are not.
The first step is to find out the total population of Australia. For simplicity’s sake, we will say it is 100.
From there, we need to find the working age population aged 15 or over.

Question 31

labour force

Answer 31

The labour force is the amount of people who are of working age (15 or over), who are either working or seeking work.
If you are in the labour force you can either be
Employed (have a paid job)
Unemployed (don’t have a job, or paid job)

Question 32

definition of unemployment

Answer 32

When people who are willing and able to work, cannot find paid work.

Question 33

unemployment rate

Answer 33

The unemployment rate is the percentage of the labour force that is unemployed and actively seeking work. It is calculated by dividing the number of unemployed individuals by the total labour force and multiplying by 100.

Question 34

participation rate

Answer 34

The participation rate is the percentage of the working age population (those aged 15 and over) that is either employed or actively seeking employment. It reflects the proportion of the working-age population that is engaged in the labour force.

Question 35

This According to the ABS, if you work 1 hour or more a week you are considered to be employed. This means you are not counted in the

Answer 35

unemployment figures

Question 36

participation rate formula

Answer 36

labour force/working age population age 15 and over

Question 37

underemployment

Answer 37

The number of people who are employed but would like to work longer hours due to part time work.
Underemployment is a much bigger issue for younger workers who are more likely to identify as seeking more working hours.

Question 38

underemployment prevalent

Answer 38

in female workers who have a higher share of part time work in Australia.
in the retail, food service and arts/recreation sectors, as they all have higher proportions of part time staff.

Question 39

underutilisation rate

Answer 39

The underutilisation rate is the percentage of the labour force that is underutilised, including both the unemployed and underemployed (those who are employed but want more hours).

Question 40

underutilisation rate formula

Answer 40

unemployment rate % + underemployment rate %

Question 41

causes of unemployment

Answer 41

frictional, seasonal, structural, cyclical

Question 42

frictional unemployment: movement between jobs

Answer 42

is voluntary and occurs when workers are transitioning between jobs and have a temporary period of unemployment

Question 43

structural unemployment: change and technology

Answer 43

occurs when there is a mismatch of available and required skills in a sector of the economy.
Results of the changes that are constantly modifying the structures of the economy

Question 44

cyclical unemployment: the business cycle

Answer 44

in periods of recession and trough, when there is a slowdown in the level of economic activity, unemployment will tend to rise in certain jobs where the sales/production has fallen

Question 45

full employment

Answer 45

Full employment refers to the situation where all individuals who are willing and able to work can find employment at current wage rates, without the presence of unemployment due to contractions in the business cycle. This does not imply zero unemployment, as there will always still be some level of frictional, structural, and seasonal unemployment.

Question 46

natural rate of unemployment

Answer 46

Full employment is also called the natural rate of unemployment. This happens when the unemployment rate equals the natural rate of unemployment.

Question 47

The situation where the quantity of labour demanded is the quantity of labour supplied in the economy

Answer 47

At full employment there are frictional, seasonal and structural unemployment but no cyclical unemployment.

Question 48

NAIRU

Answer 48

The NAIRU is the lowest unemployment rate that can be sustained without causing wages growth and inflation to rise. It represents the level of “spare capacity” in the economy, indicating how far the economy is from operating at full capacity.

Question 49

nairu is the level of unemployment

Answer 49

at which there is no cyclical unemployment, it tells how to further reduce unemployment , an increase in economic growth will not see a further decrease in unemployment because increased economic growth only reduces cyclical unemployment, at nairu theres no cyclical unemployment

Question 50

If the unemployment rate is higher than the NAIRU, the economy would not be at full employment and there would be downward pressure on inflation

Answer 50

If inflation is likely to be below the Board’s target, the Reserve Bank Board might want to stimulate the economy by lowering the cash rate target and/or implementing unconventional policies (see Explainer: Unconventional Monetary Policy). This encourages spending, thereby stimulating aggregate demand and reducing spare capacity (see Explainer: Transmission of Monetary Policy).

Question 51

If the unemployment rate is lower than the NAIRU, the economy is operating above its full capacity, and there is upward pressure on inflation

Answer 51

If inflation is likely to be above the Board’s target, the Reserve Bank Board might want to cool the economy by raising the cash rate target and/or withdrawing other policy support. This would help to reduce aggregate demand and inflationary pressures.

Question 52

Natural rate of unemployment is influenced by many changes in the market

Answer 52

1. Environment and climate change awareness
2. The internet
3. Casualisation and outsourcing
4. Globalisation
5. Changes in technology

Question 53

the GDP gap:

Answer 53

: the difference between the actual GDP and the potential GDP of an economy

Question 54

Effects of unemployment:

Answer 54

Positive: improved pay & conditions & performance. New skills & knowledge generated
Negative: direct and indirect costs, low income and tax revenue, Production inefficiency ( GDP gap )

Question 55

Effects of unemployment and the GDP gap BENEFITS

Answer 55

people in and out of workforce (frictional) individuals improved pay and conditions and better conditions
structural change makes individuals improve their performance and acquire new skills and knowledge

Question 56

Effects of unemployment and the GDP gap NEGATIVES

Answer 56

direct: lost income, lost tax, cost of unemployment benefits
indirect: opportunities/benefits obtained w jobseeker payments if spent instead on health, education or infrastructure
lower standard of living, spending flows, wastage human capital

Question 57

The natural rate of unemployment

Answer 57

frictional + structural unemployment
hypothetical rate of unemployment and suggests that there is never zero unemployment in an economy
is the unemployment rate that persists in a well-functioning, healthy economy that is considered to be at “full employment”

Question 58

Philips curve

Answer 58

The Phillips curve shows the relationship between inflation and unemployment. In the short-run, inflation and unemployment are inversely related; as one quantity increases, the other decreases. In the long-run, there is no trade-off.

Question 59

Inflation is a procyclical variable => demand inflation will rise when the level of economic activity increases.

Answer 59

During booms, inflation will be VERY high,
During recessions, it will fall below 2%.
Sometimes inflation could be negative (Deflation): when the price level falls from one quarter to the next.

Question 60

Unemployment is a countercyclical variable => (cyclical) unemployment will fall as the level of economic activity increases,.

Answer 60

During booms, unemployment will Fall below the natural rate.
During recessions, it will increase relatively quickly!
It can never be zero or negative.

Question 61

seasonal unemployment

Answer 61

Occurs when people are unemployed at particular times of the year when demand for labour is lower than usual.