Transcript unemployment

2.01 –Understand economic
indicators to recognize economic
trends and conditions
Determine the impact of business
cycles on business activities
Objectives
• Define the following terms; business cycles, expansion,
peak, contraction, and trough.
• Identify the phases of a business cycle.
• Describe the peak phase of a business cycle.
• Describe the contraction phase of a business cycle.
• Describe the trough phases of a business cycle.
• Explain how knowledge of business cycles benefits
businesspeople.
• Describe internal causes of business cycles.
• Explain external causes of business cycles.
Business Cycles
• The business cycle describes the phases of
growth and decline in an economy.
• The goal of economic policy is to keep the
economy in a healthy growth rate -- fast
enough to create jobs for everyone who wants
one, but slow enough to avoid inflation.
Expansion
• An expansion, which is a period of increasing economic activity
• The second of the two primary business-cycle phases is an expansion.
• An expansion, which is a period of increasing economic activity. Clearly
real GDP increases over this segment.
• An expansion generally takes the economy from below the long-run trend
to at or above the long-run trend.
– The early part of an expansion is usually termed a recovery because the
economy is "recovering" from the contraction
– An expansion typically lasts about three to four years, but could be as short as
one year or as long as a decade.
– The longest expansion on record, occurring during the 1990s, lasted ten years.
• The inflation rate tends to increase during an expansion.
• The unemployment rate, is almost guaranteed to decrease during an
expansion and
Peak
• The transition from expansion to contraction is
a peak.
• An expansion, like a contraction, eventually
comes to an end. The end of an expansion, and
the onset of a contraction is a peak.
• While a peak, the highest level of the business
cycle, might seem like a good thing, it really has a
down side.
• A peak means that the expansion has ended and
that a contraction is about to begin.
Contraction
• A contraction, which is a period of declining economic
activity
• A period of decline in which economic
• activity decreases for at least six months
is termed a contraction.
– Contractions, also termed recessions.
– The inflation rate, tends to decrease during a contraction
– The unemployment rate, for example, is almost
guaranteed to increase during a contraction.
Contraction (Continued)
• One of the two primary business-cycle phases is a contraction.
• A contraction, which is a period of declining economic activity.
• A contraction generally takes the economy from at or above
the long-run trend to below the long-run trend.
– Because the long-run trend represents full
employment, unemployment results when real GDP is below the
long-run trend, or when actual real GDP is less than potential real
GDP.
– Moreover, the lower real GDP dips below the long-run trend, then
the greater is unemployment.
• A contraction typically lasts about a year, but could be as short
as six months or as long as eighteen months.
– The longest contraction on record, occurring during the Great
Depression, lasted almost four years.
Trough
• The transition from contraction to expansion
• is a trough .
• A contraction does not last forever, at least none have
so far. The end of a contraction, and the onset of an
expansion is a trough.
• The trough in the previous exhibit is indicated by point
B. It is the end of the previous contraction that took
the economy from point A to point B.
• While a trough, the lowest level of the business cycle,
might not seem like a good thing, it really is.
• A trough means that the contraction has ended and
that an expansion is about to begin.
Four Phases of a Business Cycle
•
•
•
•
Recession
Recovery
Growth (Prosperity)
Decline. (Depression)
Prosperity Phase
When there is an expansion of output, income, employment, prices and profits, there
is also a rise in the standard of living. This period is termed as Prosperity phase.
• The features of prosperity are :• High level of output and trade.
• High level of effective demand.
• High level of income and employment.
• Rising interest rates.
• Inflation.
• Large expansion of bank credit.
• Overall business optimism.
• A high level of MEC (Marginal efficiency of capital) and investment.
Due to full employment of resources, the level of production is Maximum and there is
a rise in GNP (Gross National Product). Due to a high level of economic activity, it
causes a rise in prices and profits. There is an upswing in the economic activity and
economy reaches its Peak. This is also called as a Boom Period.
Recession Phase
The turning point from prosperity to depression is termed as Recession
Phase.
• During a recession period, the economic activities slow down.
When demand starts falling, the overproduction and future
investment plans are also given up.
• There is a steady decline in the output, income, employment, prices
and profits.
– The businessmen lose confidence and become pessimistic (Negative).
It reduces investment.
– The banks and the people try to get greater liquidity, so credit also
contracts.
– Expansion of business stops, stock market falls. Orders are cancelled
and people start losing their jobs.
– The increase in unemployment causes a sharp decline in income and
aggregate demand. Generally, recession lasts for a short period.
Depression Phase
When there is a continuous decrease of output, income, employment, prices
and profits, there is a fall in the standard of living and depression sets in.
• The features of depression are :• Fall in volume of output and trade.
• Fall in income and rise in unemployment.
• Decline in consumption and demand.
• Fall in interest rate.
• Deflation.
• Contraction of bank credit.
• Overall business pessimism.
• Fall in MEC (Marginal efficiency of capital) and investment.
In depression, there is under-utilization of resources and fall in GNP (Gross
National Product). The aggregate economic activity is at the lowest, causing a
decline in prices and profits until the economy reaches its Trough (low point).
Recovery Phase
The turning point from depression to expansion is termed as Recovery or
Revival Phase.
• During the period of revival or recovery, there are expansions and rise in
economic activities. When demand starts rising, production increases and
this causes an increase in investment.
• There is a steady rise in output, income, employment, prices and profits.
– The businessmen gain confidence and become optimistic (Positive). This
increases investments. The stimulation of investment brings about the revival
or recovery of the economy.
– The banks expand credit, business expansion takes place and stock markets
are activated.
– There is an increase in employment, production, income and aggregate
demand, prices and profits start rising, and business expands. Revival slowly
emerges into prosperity, and the business cycle is repeated.
• Thus we see that, during the expansionary or prosperity phase, there is
inflation and during the contraction or depression phase, there is a
deflation.
Explain how knowledge of business
cycles benefits businesspeople.
•
First, on the academic side, business cycles are an inherent part of the
macroeconomy, they are part of the mechanism of the economy.
– Understanding the ups and downs of business cycles means a better understanding of the
macroeconomy.
– Through this understanding, key macroeconomic problems, especially unemployment and
inflation, can be addressed.
•
Second, on the selfish side, human lives are seriously affected by the ups and
downs of business cycles.
– The unemployed take a serious hit to their living standards during recessionary downturns.
– Those with fixed incomes or financial wealth take a serious hit to their living standards during
inflationary upturns.
•
The study of business cycles makes it possible to anticipate and prepare for these
problems.
–
Knowing that the economy is on the verge of higher inflation, gives people the opportunity to
convert financial wealth into something less affected, or even helped, by inflation.
– Knowing a downturn is imminent, lets people plan for an extended period of unemployment.
Explain how knowledge of business
cycles benefits businesspeople.
• Small business owners can take several steps to help ensure that their
establishments weather business cycles with a minimum of uncertainty
and damage.
• "The concept of cycle management may be relatively new," wrote
Matthew Gallagher in Chemical Marketing Reporter, "but it already has
many adherents who agree that strategies that work at the bottom of a
cycle need to be adopted as much as ones that work at the top of a cycle.
• While there will be no definitive formula for every company, the
approaches generally stress a long-term view which focuses on a firm's key
strengths and encourages it to plan with greater discretion at all times.
• Essentially, businesses are operating toward operating on a more even
keel."
–
Specific tips for managing business
cycle downturns include the following:
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Flexibility—According to Gallagher, "part of growth management is a flexible business plan that
allows for development times that span the entire cycle and includes alternative recession-resistant
funding structures."
Long-Term Planning—Consultants encourage small businesses to adopt a moderate stance in their
long-range forecasting.
Attention to Customers—This can be an especially important factor for businesses seeking to
emerge from an economic downturn. "Staying close to the customers is a tough discipline to
maintain in good times, but it is especially crucial coming out of bad times," stated Arthur Daltas in
Industry Week. "Your customer is the best test of when your own upturn will arrive. Customers,
especially industrial and commercial ones, can give you early indications of their interest in placing
large orders in coming months."
Objectivity—Small business owners need to maintain a high level of objectivity when riding business
cycles. Operational decisions based on hopes and desires rather than a sober examination of the
facts can devastate a business, especially in economic down periods.
Study—"Timing any action for an upturn is tricky, and the consequences of being early or late are
serious," said Daltas. "For example, expanding a sales force when the markets don't materialize not
only places big demands on working capital, but also makes it hard to sustain the motivation of the
sales-people. If the force is improved too late, the cost is decreased market share or decreased
quality of the customer base. How does the company strike the right balance between being early or
late? Listening to economists, politicians, and media to get a sense of what is happening is useful,
but it is unwise to rely solely on their sources. The best route is to avoid trying to predict the upturn.
Instead, listen to your customers and know your own response-time requirements."
Internal Causes of Business Cycles
• Psychological Factors-Optimistic and pessimistic mood of
the entrepreneur. When entrepreneurs are optimistic
about future market conditions they take up investiment.
• Money Supply – if there is expansion in money and credit
supply, there will be raise in economic activity. If there is
contractions there will be down fall in economic activity.
• Over investment – excessive investment in capital goods
industries brings upswing and downswing when there is a
fall in investment.
• Marginal Efficiency of capital- When the rate of marginal
efficiency of capital gets higher the expansion phase of
trade cycle commences. There is a contraction phase when
the rate of marginal efficiency of capital I lower.
External Causes of Business Cycles
• Wars-available resources are utilized for the production of weapons which
greatly affect the product of both capital and consumer goods. This fall in
production decreases income, profits which further create
unemployment. These create contraction in the economic activity.
• Postwar Period-the level of consumption and investment goes upward.
Bothe the government and individuals involve the construction (houses,
roads, bridges, etc. All these activities increase the effective due to which
the economics variable, output, income and employment goes upward.
• Scientific Development-Every day new products come to the markets like
mobile phones, laptops, etc. These products require huge amount of
investment through which new technology of products is adopted. All this
increases income, employment and profit etc. and plays an important part
in the revival of economy.
• Gold Discoveries – and mines stimulate the volume of international trade
and help in adjusting trade deficit, loans etc. the rising income lead to
expansion in economic activity.
External Causes of Business Cycles
• Surplus, Exports and Foreign Aid- raises the level
of consumption and investment spending which
helps in increasing output, income and
employment level.
• Weather-is an important factor which can cause
economic activities. If in any year, weather is
good the ouptu of agricultural sector will go
upward.
• Population Growth Rate- when it is higher than
the economic growth rate, income level and
consumption expenditure and savings will be low.
Sources
• Amadeo, K. (n.d.). Business cycle. Retrieved May 15, 2012, from
http://useconomy.about.com/od/glossary/g/business_cycle.htm
• AmosWEB. (2000-2012). Business cycle phases. Retrieved May 15, 2012, from
http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=business+cycle+phases
• AmosWEB. (2000-2012). Business cycles. Retrieved May 15, 2012, from
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=business+cycles
• AmosWEB. (2000-2012). Contraction. Retrieved May 15, 2012, from
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=contraction
• Basu, C. (n.d.). Four stages of business cycle recovery. Retrieved May 15, 2012, from
http://smallbusiness.chron.com/four-stages-business-cycle-recovery-20837.html
• MBA Research and Curriculum Center. (2011). Boom or bust (Business cycles) [LAP:
EC-009: Presentation Software]. Columbus, OH: Author.
• Roberts, S. (n.d.). What are the characteristics of each stage of the business cycle?
Retrieved May 15, 2012, from http://smallbusiness.chron.com/characteristics-stagebusiness-cycle-18492.html
• Trading Online Markets. (2005-2012). Business cycle phases. Retrieved May 15,
2012, from
http://www.tradingonlinemarkets.com/Beat_the_Market/The_Business_Cycle_Phas
es.htm
2.01 Performance Activity
• read two business articles about the current
economic conditions and draw conclusions from
those articles about the phase of the existing
business cycle.
• Write a two-paragraph page that includes the
following:
– Identify causes of the phase and businesses’
reactions.
– Tell whether changes are taking place that would
indicate a new phase is beginning.
– Turn in when completed – label this assignment 2.01
Performance Activity.