Transcript Chapter 13 Powerpoint

Business Cycles and Fluctuations
• Business cycles and business
fluctuations can interrupt economic
growth.
• Economists predict where economy is
headed so forecasting models and
statistical tools are key to predicting
these changes.
Business Cycles: Characteristics
and Causes (cont.)
• Phases of the business cycle
– Recession
• Begins when the economy reaches a peak
• Ends when the economy reaches a trough
Business Cycles
Business Cycles: Characteristics
and Causes (cont.)
– Expansion
• Begins after the declining real GDP
bottoms out
• Continues until economy reaches a new peak
Business Cycles: Characteristics
and Causes (cont.)
• The economy would follow a steady
growth path, trend line, if periods of
recession and expansion did not occur.
• Severe recessions can turn into a
depression.
Business Cycles: Characteristics
and Causes (cont.)
• Causes of business cycles
– Changes in capital expenditures
– Innovation and imitation
– Monetary policy decisions
– External shocks
Business Cycles in the United States
(cont.)
• Causes of the Great Depression
– Enormous gap in the distribution of
income
– Easy credit
– Global economic conditions
The Great Depression
The Great Depression [continued]
Great Depression Stats
Global Depression, 1929-1932
Ave. Unemployment Rate, 1925-1928
Ave. Unemployment Rate, 1929-1933
Percent Decrease in Prices, 1929-1932
Six Million “Rosie the Riveters”
World War II Production of these items brought us ou
of the Great Depression.
300,000 warplanes
124,000 ships
289,000 combat vehicles and tanks
36 billion yards of cotton goods
41 billion rounds of ammunition
2.4 million military trucks
111,527 tank guns and howitzers
•$288 billion was spent on the war,
•$100 billion in the first six months.
Unemployment hit an all-time low of 1.2%
and personal savings were 25.5%.
Business Cycles in the United States
(cont.)
• Laws passed and government agencies
were established to prevent another
depression.
– Social Security Act of 1935
– Minimum Wage
– Unemployment programs
Business Cycles in the United States
(cont.)
– Securities and Exchange Commission
– Federal Deposit Insurance Corporation
• After World War II, business cycles had
shorter recessions and longer periods of
expansion.
Forecasting Business Cycles (cont.)
• Methods used to predict business cycles
– Statistical series
• Leading economic indicator
• Composite index of leading economic
indicators (LEI)
The Index of Leading Economic Indicators
Inflation
• Inflation—increase in the general level
of prices
• Deflation—decline in the general level
of prices
• Both are harmful to the economy and
should be avoided whenever possible.
Measuring Prices and Inflation
Several price indexes are
used to measure inflation.
Measuring Prices and Inflation (cont.)
• Measuring inflation
– Price index for a range of items is
constructed
– Consumer price index (CPI)
• Select a market basket and add up prices
to determine value
• Base year is selected for
comparison.
Constructing the Consumer Price Index
Measuring Prices and Inflation (cont.)
• Dollar cost of market basket is converted to
a price index.
• Percentage change of price index from one
period to another is inflation.
Measuring Prices and Inflation
Measuring Prices and Inflation (cont.)
• Inflationary changes
– Creeping inflation
– Hyperinflation
– Stagflation
Causes of Inflation
Causes of inflation include
strong demand, rising
costs, and wage-price
spirals, along with a
growing supply of money.
Cost-push Inflation
• Cost-push inflation is resulting from rising
costs during periods of high unemployment.
• Cost-push inflation is a new phenomenon of
modern industrial economies.
Demand –Pull Inflation
• Demand-pull inflation occurs when Demand
rises more rapidly than the economy’s
productive potential.
• Demand-pull inflation can arise from:
– High supply of money
– Excessive fiscal deficits
Consequences of Inflation
• Effects of inflation
– Reduced purchasing power
– Distorted spending patterns
Consequences of Inflation (cont.)
– Encourages speculation
– Distorted distribution of income
• Creditors are hurt more than debtors
generally.
Measuring Unemployment (cont.)
• The civilian labor force or labor force
is the sum of all persons aged 16 and
above who are either employed or
actively seeking employment.
• Unemployed—individuals who are
willing, able, and available to work and
actively seeking employment
The Labor Force
The labor-force participation rate is the percentage of the
working-age population working or seeking employment.
Since 1960, the labor-force participation rate has increased by
100%. The increase in the rate has come from the increased
participation of women in the workforce.
Participation rates for men have fallen from 86.4% in 1950 to
73.5% in 2004. Participation rates for women have increased
from 33.9% in 1950 to 59.5% in 2004.
Sources of Unemployment
Unemployment is often
caused by circumstances
outside an individual’s
control and is therefore very
difficult to remedy.
Sources of Unemployment (cont.)
– Technological unemployment
– Cyclical unemployment
– Seasonal unemployment
Sources of Unemployment (cont.)
• Kinds of unemployment
– Frictional unemployment
– Structural unemployment
• Outsourcing
Types Of Unemployment
Seasonal unemployment is unemployment due to seasonal
changes in employment or labor supply.
Examples include students employed during the summer at
Mackinaw Island in northern Michigan, employment in the
construction industry, and people employed at Cedar Point
Amusement Park in Ohio.
Types of Unemployment
Frictional unemployment is a brief period
of unemployment experienced by people
moving between jobs or into the labor
market. People have the skills and
knowledge necessary to get a job, and the
jobs are available.
Examples of frictionally unemployed
people include new college graduates and
people quitting a job and looking for
something different or better.
Types of Unemployment
Structural unemployment is unemployment caused by a
mismatch between the skills or location of job seekers and the
requirements or location of available jobs.
Jobs may be available in other geographic areas or for
individuals with specific skills and abilities.
Examples include laid off steelworkers in the 1980s and
defense contractors in the 1990s. Also teenagers and others
with a lack of job skills are included.
Types of Unemployment
Cyclical unemployment is
unemployment caused by a lack of job
vacancies; an inadequate level of
aggregate demand.
Cyclical unemployment commonly
occurs during recessions. Companies
cut back on workers due to reduced
sales, fears of an economic recession,
and insufficient consumer demand.
Underemployment includes those individuals who are either
working part-time and seeking full-time employment, or are
employed at jobs below their capacity.
Examples of underemployment include a college graduate
with a Bachelor’s degree in business working as a cook at a
fast food restaurant, and a teacher who is unable to find a fulltime job working as a substitute teacher.
Underemployed people are counted as being employed and
not included in the unemployment rate.
Measuring Unemployment (cont.)
• The unemployment rate is equal to the
number of unemployed persons divided
by the civilian labor force.
The Unemployment Rate
– Misery index or discomfort index
– Uncertainty leads to fewer consumer
purchases.
– Political instability
– Crime, poverty, and family instability
Measuring Consumer Discomfort
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