Business Cycles
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Transcript Business Cycles
Intro to Business
2-2
The Business Cycle
All economies experience good and bad economic periods
This economic shift between good and bad economic
conditions is called the business cycle.
Business cycles have four phases
1.
2.
3.
4.
Prosperity
Recession
Depression
Recovery
Business Cycles
Prosperity / Expansion is a period in which
most people who want to work are working,
wages are high, and the rate of GDP growth
increases.
Demand for goods and services is high.
Prosperity is usually the high point of the
business cycle.
The Business Cycles
During a time of contraction the economy slows
down, unemployment goes up, and consumer
demand lessons.
Business Cycles
Depending on the severity of a contraction it may be
referred to as a recession of a depression.
A recession is a period of economic slowdown.
Demand begins to decrease as production decreases
Unemployment rate begins to rise
GDP growth slows for two or more quarters
May not be serious, but often signals trouble for workers
in related businesses.
Eventually weakens economy and total output declines in
the next quarter.
The Business Cycles
The trough is the low point of a contraction just
before recovery begins.
Business Cycles
Depression is a phase marked by a prolonged period of
high unemployment, weak consumer sales, and business
failures.
Occurs when a recession deepens and spreads throughout
the entire economy.
GDP falls rapidly.
Has not occurred in the US since the 1930’s.
Business Cycles
Recovery occurs when the economy shows signs of
improvement.
s the phase in which unemployment begins to decrease, demand
increases, and GDP begins to rise.
Can occur quickly or slowly
Consumer confidence increases
Returns the country to the prosperity phase.
Consumer Prices
Buying power of money changes over time.
Technology becomes less expensive over time
Amounts of an time may be sold for the same
price in smaller quantities.
Changes may occur as either inflation or
deflation.
Inflation
An economic issue that all developed nations
must deal with.
Inflation is an increase in the general level of
prices
Occurs when prices rise faster than consumer
income. Lower rate = more stable econ.
Decreases buying power of the nation’s
currency.
Most harmful to families living on fixed incomes.
Retirees and others on fixed income cannot
afford as many goods or services.
Causes of Inflation
When demand for goods or services in greater than supply.
Wages tend to rise during inflation, but prices usually rise
faster.
Typically considered harmful, as consumers must earn
more money to maintain the same standard of living.
If wages increase too quickly, business tend to hire fewer
workers, raising unemployment.
Measuring Inflation
Inflation rates vary.
Mild inflation (around 2 – 3%) can stimulate economic growth as
prices increase faster than wages, allowing the producer to hire
more workers.
The most watched measure of inflation in the US is the Consumer
Price Index (CPI).
A price index is a number that compares prices in one year with
prices in some earlier base year.
Cost of living inflation may change differently than the products
used to calculate inflation with the CPI.
Deflation
Deflation is the opposite of inflation.
Deflation means a decrease in the general level of prices.
Usually occurs in recession and depression.
Even though prices drop, people tend to have less money to
afford them.
Occurred most significantly during the Great Depression
Many technological products are deflating in price as
technology advances.
Cool Web Resources
http://www.westegg.com/inflation/
http://www.aier.org/research/worksheets-and-tools/cost-of-
living-calculator
http://inflationdata.com/Inflation/Consumer_Price_Index/Historic
alCPI.aspx
http://www.homefair.com/real-estate/salarycalculator.asp?type=to
http://www.foodtimeline.org/foodfaq5.html#cocacola
http://www.msnbc.msn.com/id/19332035/ns/us_newssummer_of_love_40/
Interest Rates
Interest rates represent the “cost of money.”
Interest rates have a strong influence on business
activities.
Companies and governments that borrow money are
affected by interest rates.
Consumers are affected by interest rates.
Interest on loans reflects current interest rates, as to
earnings from savings and investments.
Types of Interest Rates
There are many different types of interest rates that
represent the cost of money in different settings.
The prime rate is the rate banks make available for their best
customers, such as large corporations
The discount rate is the rate financial institutions are charged
to borrow funds from Federal Reserve banks.
The T-bill rate is the yield on short-term
(13 week) U.S. government debt obligations.
Types of Interest Rates (cont.)
The treasury bond rate is the yield on long-term (20 year) U.S.
government debt obligations.
The mortgage rate is the amount individuals pay to borrow for
the purchase of a new home.
The corporate bond rate is the cost of borrowing for large U.S.
corporations.
The certificate of deposit rate is the rate for
time deposits at savings institutions.
Changing Interest Rates
The cost of money changes every day due to various
factors.
The supply and demand for money is the major influence on
the level of interest rates.
As amounts saved increase, interest rates tend to decline.
When borrowing by consumers, businesses, and
government increases, interest rates are likely to rise.
See assignment in G:drive (Banks)
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