The following is a summary from my Economics textbook, of Business cycles, Unemployment, and Inflation:
1. The United States and other industrial economies have gone
through periods of fluctuations in real GDP, employment,
and the price level. Although they have certain phases in
common—peak, recession, trough, expansion—business
cycles vary greatly in duration and intensity.
- Although economists explain the business cycle in terms of
underlying causal factors such as major innovations, productivity
shocks, money creation, and financial crises, they generally
agree that changes in the level of total spending are the
immediate causes of fluctuating real output and employment.
- The business cycle affects all sectors of the economy,
though in varying ways and degrees. The cycle has greater
effects on output and employment in the capital goods and
durable consumer goods industries than in the services and
nondurable goods industries.
- Economists distinguish between frictional, structural, and
cyclical unemployment. The full-employment or natural
rate of unemployment, which is made up of frictional
and structural unemployment, is currently between 4 and
5 percent. The presence of part-time and discouraged workers
makes it difficult to measure unemployment accurately.
- The GDP gap, which can be either a positive or a negative
value, is found by subtracting potential GDP from actual
GDP. The economic cost of unemployment, as measured
by the GDP gap, consists of the goods and services forgone
by society when its resources are involuntarily idle. Okun’s
law suggests that every 1-percentage-point increase in unemployment
above the natural rate causes an additional
2 percent negative GDP gap.
- Inflation is a rise in the general price level and is measured
in the United States by the Consumer Price Index (CPI).
When inflation occurs, each dollar of income will buy fewer
goods and services than before. That is, inflation reduces
the purchasing power of money.
- Unemployment rates and inflation rates vary widely
globally. Unemployment rates differ because nations have
different natural rates of unemployment and often are
in different phases of their business cycles. Inflation and
unemployment rates in the United States recently have
been in the middle to low range compared with rates in
other industrial nations.
- Economists discern both demand-pull and cost-push
(supply-side) inflation. Demand-pull inflation results from
an excess of total spending relative to the economy’s capacity
to produce. The main source of cost-push inflation is
abrupt and rapid increases in the prices of key resources.
These supply shocks push up per-unit production costs and
ultimately raise the prices of consumer goods.
- Unanticipated inflation arbitrarily redistributes real income
at the expense of fixed-income receivers, creditors, and
savers. If inflation is anticipated, individuals and businesses
may be able to take steps to lessen or eliminate adverse
- When inflation is anticipated, lenders add an inflation
premium to the interest rate charged on loans. The nominal
interest rate thus reflects the real interest rate plus the
inflation premium (the expected rate of inflation).
- Cost-push inflationreduces real output and employment.
Proponents of zero inflation argue that even mild demand-pull
inflation (1 to 3 percent) reduces the economy’s real
output. Other economists say that mild inflation may be
a necessary by-product of the high and growing spending
that produces high levels of output, full employment, and
- Hyperinflation, caused by highly imprudent expansions of
the money supply, may undermine the monetary system and
cause severe declines in real output.
As a Latino, I think a basic understanding of these concepts would greatly benefit Latinos because it will help us to understand the economic world around us better. If we can understand the world around us we can understand how to make better financial decisions that would cause our Latino economy to grow more rapidly and more uniformly.
For example, a (Latino) relative of mine has owned a business for 38 years, and over the course of the 38 years there have been several years of expansion, growth, profit, and success; and there have been years of the business struggling, shrinking, and year over year losses. The events of the business over the past 38 occurred without a deep understanding of the concepts above by the owner. Without understanding how the U.S. economy fluctuates in the business cycle can make it is easy to blame one’s self more harshly than one deserves because one will fail to recognize that the macro economy has more influence on your business that you as a business owner have.
This at least can be said about what happens to people who do not understand that the marco-economy is causing massive fluctuations in the success of their business: One will falsely attribute successes to their own superior intelligence too often when the economy is performing at peak; and one will too harshly blame their own inferior intelligence when the business does poorly as a result of the economy being in a trough.
I hope this information useful,
Fabian, Latino Economist
McConnel; Brue; Flynn. Economics. 18th Edition. McGraw-Hill. 537-538. 2009. Print.