Transcript Business Cycles & Banking

Business Cycles &
Banking
Chapter 4
Business Cycle
Period of time when the economy
grows followed by a period of time
when the economy shrinks
U.S. Economy

U.S. Department of Commerce keeps track
of our economy

Collect and measure data
– Gross Domestic Product
– Gross National Product

Tells how healthy the economy is
Gross Domestic Product

GDP

Total dollar value of all goods & services
that are produced by a country in one
year

Looks at final product & price
– Ex: Making of Bread & selling for $2.00
Gross Domestic Product

Increase in GDP means production is up

Increase in production, business are doing well

Businesses doing well, more jobs

More jobs, more money to spend

Economy is better
Gross National Product
Amount of income earned by a
country’s companies & citizens in one
year
Phases of Business Cycle

4 phases
– Expansion
– Peak
– Recession
– Trough
Expansion

Measured by rise in GDP

Economy is in good shape

Plenty of jobs

People willing to spend money

Businesses make a profit & grow
Peak

Production is at a high point

When GDP reaches a high point

GDP stops rising

Second phase of business cycle

Marks turning point of business cycle
Recession

3rd phase of business cycle

GDP falls

Business activity slows down

People spend less money

Unemployment rises
Trough

4th phase of business cycle

Economy reaches the lowest level

GDP stops falling & starts to rise again

Economy begins to recover

People are hired

People spend money again
Recession

GDP falls for at least 6 months in a row

Usually last 6 to 18 months

If especially long becomes a depression
Depression

1930’s

Great Depression

Lasted 10 years

WWII helped bring U.S. out of Great
Depression
Money
Anything that serves as a medium
of exchange, a measure of value,
and a store of value
Money

Medium of Exchange

Measure of Value

Store of Value
Medium of Exchange
Accepted as payment for goods & services
by everyone
 Ex: gold, silver & salt
 Barter System

– Buy goods & services without money
– Exchange one set of goods or services for
another
– Ex: trade loaf of bread for farmer’s vegetables
Measure of Value

Expresses the worth of something

Able to compare products according to
their value

Bargain shopping
– Ex: Pair of shoes
Store of Value

Money keeps its value if you store it or
keep it

Is the same value today as it will be in 3
months

One exception -- Inflation
Inflation

Economy goes through a fast, general increase
in prices

Inflation occurs, value of dollar decreases

Average person will pay more for goods &
services than before

If wages stay same & prices go up, people can’t
afford things they need
Money

Past Currency
– Used gold, silver, precious stones, salt & cattle
– Do not meet the needs of all the
characteristics of money

Today
– Use coins & paper bills
– Meet needs of all the characteristics of money
Characteristics of Money

Be portable

Be durable

Be divisible

Limited availability
Banking

Federal Deposit Insurance Corporation
– FDIC
– Guarantees and insures money in banks
– Provides safe and convenient place to store
money
Beginning of Banking
People asked goldsmiths to store their
gold
 A receipt would be written
 Charged people a fee to store their gold
 Goldsmiths then started lending out some
of the gold
 Charged a fee to borrow gold
 1st banks

Banking Today

Savings Accounts
– Store money for a long time
– Earn interest
– More money the more interest earned

Checking Accounts
– Used for day-to-day expenses
– Withdraw money anytime
Banking

Banks Loaning Money
– People borrow money
– Pay back amount borrow plus interest
– Pay back more than he/she borrowed
– Borrow money for
 Improving homes
 Paying tuition
 businesses
Banking

Default
– Borrowers do not pay loan back

Bank loses money

Need to apply for loan
– Bank makes decision
Stock Market

Stocks
– Certificates of ownership in a corporation

Shares
– Corporations sell portions of stock
– Help raise money for corporations

Equities
– Same as stocks
Stock Market

Stockholders make profit by
– Dividends
 Paid 4 times a year
 Profit high dividends are high; profit low dividends
are low
– Capital gains/capital loss
 Stockholder selling stock
 Sell stock for more or less than original amount
 More = gain; less = loss
Stock Market

Stockbroker
– Person who buys & sells stock for a company
– Specializes in trading stocks

Stock Market/Stock Exchange
– Market for buying & selling stock
Major Stock Market

New York Stock Exchange (NYSE)

National Association of Securities Dealers
Automated Quotation System (NASDAQ)
New York Stock Exchange
Largest & most powerful in U.S
 Started in 1972
 Trading on floor
 List only largest & best-known companies
in U.S.
 Blue-chip companies

– Have very good reputations
NASDAQ

OTC Market

Over-the-counter

No trading floor

Trading through computers
Stock Market

Buy stocks & keep for a long time

Expect value will increase over time

Dow Jones Industrial Average
– Shows how certain stocks are traded each day
– Show how market is doing
Bull Market

Stock Market rises steadily over a period
of time

Expect increase in profits

Buy more stocks
Bear Market

Stock market falls steadily over a period of
time

Sell stocks

Expect lower profits