Business Cycle - Business Cycle - StocksStocks

Ch. 23, Section 2Ch. 23, Section 2

The Business CycleThe Business Cycle The Business Cycle (AKA The The Business Cycle (AKA The

Economic Rollercoaster)Economic Rollercoaster)– The ups & downs of the The ups & downs of the

economyeconomy– Alternating periods of Alternating periods of

growth & declinegrowth & decline 4 Phases4 Phases

1.1. Expansion (Also known as Expansion (Also known as Prosperity or Recovery)Prosperity or Recovery) Economy is improvingEconomy is improving Businesses produce Businesses produce

more needing more more needing more employeesemployees

Higher employment Higher employment means higher wagesmeans higher wages

Higher wages mean Higher wages mean higher consumptionhigher consumption

Higher consumption Higher consumption means more productionmeans more production

The Business CycleThe Business Cycle

2. Boom2. Boom Economic activity is at its peakEconomic activity is at its peak Peak – the highest point of the boomPeak – the highest point of the boom Businesses are working at full Businesses are working at full

capacitycapacity– Law of Diminishing Returns – as a Law of Diminishing Returns – as a

business adds more resources to business adds more resources to production profits will rise until a production profits will rise until a point where more resources begin point where more resources begin reducing profits reducing profits

Business CycleBusiness Cycle

Expansion Decline/Recession

Boom

Recovery/Prosperity

Peak

Trough

The Business CycleThe Business Cycle3. Decline 3. Decline (Contraction)(Contraction)

The economy is slowing downThe economy is slowing down Production is cut downProduction is cut down Workers are laid offWorkers are laid off

4. Recession4. Recession Occurs when Real GDP goes down over 6 monthsOccurs when Real GDP goes down over 6 months

– Real GDP – shows economy’s production after the Real GDP – shows economy’s production after the distortions of price increases have been removeddistortions of price increases have been removed

– Eliminates impression that output has gone up when Eliminates impression that output has gone up when only prices have gone uponly prices have gone up

Lowest period of productionLowest period of production Unemployment is highUnemployment is high People do not buy as muchPeople do not buy as much TroughTrough: lowest point of a recession: lowest point of a recession DepressionDepression: a severe recession: a severe recession

Business Cycle

UnemploymentUnemployment Unemployment Rate

– Percentage of labor force without jobs but actively lookingPercentage of labor force without jobs but actively looking– Unemployment reduces living standards, disrupts families Unemployment reduces living standards, disrupts families

& causes a loss of self respect& causes a loss of self respect– Reaches its highest during a recessionReaches its highest during a recession

Types of UnemploymentTypes of Unemployment– Cyclical – associated with the ups & downs of the economyCyclical – associated with the ups & downs of the economy– Structural – changes in the economy based on technologyStructural – changes in the economy based on technology– Seasonal – based on the weatherSeasonal – based on the weather– Frictional – based on people being terminated or looking Frictional – based on people being terminated or looking

for new jobsfor new jobs– Current Unemployment rateCurrent Unemployment rate

VideosVideos– Dealing with unemployment– The Pain of UnemploymentThe Pain of Unemployment– Slow RecoverySlow Recovery

Types of Unemployment Types of Unemployment GameGame Sara, worker at Ford, loses his job because of a machine that can Sara, worker at Ford, loses his job because of a machine that can

it do his job more efficiently.it do his job more efficiently.– StructuralStructural

Zach works at the Sugar Mountain Ski Lodge. Zach works at the Sugar Mountain Ski Lodge. – SeasonalSeasonal

Jordan, Tom’s friend at Ford, loses her job because of low car Jordan, Tom’s friend at Ford, loses her job because of low car sales.sales.– Cyclical Cyclical

Tori is tired of working at In-n-Out Burger quits her job. Tori is tired of working at In-n-Out Burger quits her job. – FrictionalFrictional

Tyler has just graduated from college and is unemployed.Tyler has just graduated from college and is unemployed.– Frictional Frictional

Elizabeth lost her job at the neighborhood swimming pool after Elizabeth lost her job at the neighborhood swimming pool after Labor Day. Labor Day. – SeasonalSeasonal

Mr. Cleland is laid off due to the tight budget of ISS for 2012-2013 Mr. Cleland is laid off due to the tight budget of ISS for 2012-2013 school year. school year. – Cyclical Cyclical

Tina loses her job as a cleaning lady because she is replace by the Tina loses her job as a cleaning lady because she is replace by the RoboMaid. RoboMaid. – StructuralStructural

Inflation Rate World Inflation Rate World WideWide

The Great DepressionThe Great Depression The Great DepressionThe Great Depression

– Began in 1929 with a Began in 1929 with a stock market crash stock market crash Black Tuesday, Black Tuesday,

October 29, 1929October 29, 1929– Many saw it as the end Many saw it as the end

of capitalismof capitalism– Bank runs – people tried Bank runs – people tried

to get all their cash out to get all their cash out of banks, banks ran out of banks, banks ran out of moneyof money

– Herbert Hoover was Herbert Hoover was presidentpresident Hoovervilles – were Hoovervilles – were

names of shanties names of shanties (homeless towns) (homeless towns) during the Depressionduring the Depression

The Great DepressionThe Great Depression

Black Tuesday Hoovervilles Suffering

What is the highest point in What is the highest point in the business cycle?the business cycle?

1.1. BoomBoom

2.2. TroughTrough

3.3. ExpansionExpansion

4.4. PeakPeak

The Great DepressionThe Great Depression The New DealThe New Deal

– Franklin D. Roosevelt’s plan to end the depressionFranklin D. Roosevelt’s plan to end the depression– First 100 DaysFirst 100 Days

Restored faith in banks – Bank holidayRestored faith in banks – Bank holiday Fireside ChatsFireside Chats Financial ReformFinancial Reform

– Glass-Steagall Act – 1933 Glass-Steagall Act – 1933 Banks could not invest in the stock marketBanks could not invest in the stock market Repealed in 1980. Some believe the reason we are in Repealed in 1980. Some believe the reason we are in

this financial mess today. (move up)this financial mess today. (move up) FDIC created Guarantees usually $100,000, but from Oct. 3, 2008 to Guarantees usually $100,000, but from Oct. 3, 2008 to

December 31, 2013 up to $250,000December 31, 2013 up to $250,000– Federal Securities Act – 1933Federal Securities Act – 1933

SEC created as a result of this actSEC created as a result of this act No stock market fraudNo stock market fraud

– Splits the nation’s economy Splits the nation’s economy Fiscal policy – the GovernmentFiscal policy – the Government Monetary policy – the Federal ReserveMonetary policy – the Federal Reserve

FDR’s Fireside ChatFDR’s Fireside Chat

First Fireside Chat

Measuring the EconomyMeasuring the Economy

InflationInflation– Decline in the value of moneyDecline in the value of money– Purchasing power – amount the dollar Purchasing power – amount the dollar

can buycan buy– Measured by the Consumer Price Index Measured by the Consumer Price Index

& Implicit GDP price deflator& Implicit GDP price deflator Some Relief at the end of 2008Some Relief at the end of 2008

Measuring the EconomyMeasuring the Economy

Consumer Price Index (CPI)Consumer Price Index (CPI)– Samples prices for 400 products commonly usedSamples prices for 400 products commonly used

CPI DataCPI Data

– Change in price over time of goods & services the Change in price over time of goods & services the average household usesaverage household uses

– Base year – 1982-1984 – the average of these Base year – 1982-1984 – the average of these years is compared to each yearyears is compared to each year

Implicit GDP Price DeflatorImplicit GDP Price Deflator– Takes inflation out of GDP for year to year Takes inflation out of GDP for year to year

comparisonscomparisons– Base year – 1987Base year – 1987

Measuring the EconomyMeasuring the Economy GDP CategoriesGDP Categories

– Consumer goods – bought by consumers for Consumer goods – bought by consumers for final usefinal use

– Business (Capital) goods – bought to be used by Business (Capital) goods – bought to be used by a business to produce other goodsa business to produce other goods

– Government goods – anything bought by the Government goods – anything bought by the federal, state and local governmentsfederal, state and local governments

Net ExportsNet Exports– The difference in what the nation buys & sells The difference in what the nation buys & sells

with other countrieswith other countries– Export – anything sold to another countryExport – anything sold to another country– Import – anything bought from other countriesImport – anything bought from other countries

Trade Deficit

Imports vs. Exports

StocksStocks Corporations sell stock to raise Corporations sell stock to raise

financial capitalfinancial capital People buy stock to make moneyPeople buy stock to make money

– Dividends – share of a corporation’s Dividends – share of a corporation’s profitsprofits

– Capital Gain – when stock is sold for Capital Gain – when stock is sold for more than it originally cost – Rule: Buy more than it originally cost – Rule: Buy low, sell highlow, sell high

StocksStocks Stock IndexesStock Indexes

– Statistical measures that track stock prices Statistical measures that track stock prices over timeover time

– The tickerThe ticker– Ex: Dow Jones Industrial Average (DJIA) or Ex: Dow Jones Industrial Average (DJIA) or

Standard & Poor’s (S&P) Standard & Poor’s (S&P) Stock ExchangesStock Exchanges

– Stock market – where stock is bought & soldStock market – where stock is bought & sold Ex: NYSE – largest & most prestigious Ex: NYSE – largest & most prestigious Others: American Stock Exchange, Chicago Others: American Stock Exchange, Chicago

Mercantile Exchange, Electronic – NASDAQMercantile Exchange, Electronic – NASDAQ

– Changes in stock prices are based on market Changes in stock prices are based on market forces of supply & demandforces of supply & demand

StocksStocks Bull MarketBull Market

– Investors expect growth, profits high & Investors expect growth, profits high & unemployment low unemployment low

– Prices tend to risePrices tend to rise Bear MarketBear Market

– Investors are pessimistic, profits drop & Investors are pessimistic, profits drop & unemployment risesunemployment rises

– Prices fall Prices fall Changes to Stock PricesChanges to Stock Prices

– Change in profitsChange in profits– Rumors (externalities)Rumors (externalities)– NewsNews

Stockbroker – person who buys & sells Stockbroker – person who buys & sells stockstock

Struggles in the Economy

http://www.pbs.org/newshour/video/module_byid.html?s=news01n3647q87f