Intro to BusinessIntro to Business

2-22-2

The Business The Business CycleCycle

All economies experience good and bad All economies experience good and bad economic periodseconomic periods

This economic shift between good and bad This economic shift between good and bad economic conditions is called the economic conditions is called the business business cyclecycle..

Business cycles have four phasesBusiness cycles have four phasesProsperityProsperityRecessionRecessionDepressionDepressionRecoveryRecovery

ProsperityProsperityProsperity Prosperity is a period in which is a period in which

most people who want to work are most people who want to work are working, wages are high, and the working, wages are high, and the rate of GDP growth increases.rate of GDP growth increases.

Demand for goods and services is Demand for goods and services is high.high.

Prosperity is usually the high Prosperity is usually the high point of the business cycle.point of the business cycle.

RecessionRecessionOccurs when the economy slows down from Occurs when the economy slows down from

the prosperity phase.the prosperity phase.A A recessionrecession is a period in which demand is a period in which demand

begins to decrease as production decreases, begins to decrease as production decreases, unemployment begins to rise, and GDP unemployment begins to rise, and GDP growth slows for two or more quarters,growth slows for two or more quarters,

May not be serious, but often signals trouble May not be serious, but often signals trouble for workers in related businesses.for workers in related businesses.

Eventually weakens economy and total Eventually weakens economy and total output declines in the next quarter.output declines in the next quarter.

DepressionDepressionOccurs when a recession deepens and Occurs when a recession deepens and

spreads throughout the entire economy.spreads throughout the entire economy.DepressionDepression is a phase marked by a is a phase marked by a

prolonged period of high prolonged period of high unemployment, weak consumer sales, unemployment, weak consumer sales, and business failures.and business failures.

GDP falls rapidly. GDP falls rapidly. Has not occurred in the US since the Has not occurred in the US since the

1930’s.1930’s.

RecoveryRecoveryRecovery Recovery is the phase in which is the phase in which

unemployment begins to decrease, unemployment begins to decrease, demand increases, and GDP begins to rise.demand increases, and GDP begins to rise.

Can occur quickly or slowlyCan occur quickly or slowly

Consumer confidence increasesConsumer confidence increases

Returns the country to the prosperity Returns the country to the prosperity phase.phase.

Consumer PricesConsumer PricesBuying power of money changes Buying power of money changes

over time.over time.Technology becomes less Technology becomes less

expensive over timeexpensive over timeAmounts of an item may be sold for Amounts of an item may be sold for

the same price in smaller quantities.the same price in smaller quantities.Changes may occur as either Changes may occur as either

inflation or deflation.inflation or deflation.

InflationInflationAn economic issue that all developed An economic issue that all developed

nations must deal with.nations must deal with.InflationInflation is an increase in the general level is an increase in the general level

of pricesof pricesDecreases buying power of the nation’s Decreases buying power of the nation’s

currency.currency.Most harmful to families living on fixed Most harmful to families living on fixed

incomes.incomes.Retirees and others on fixed income cannot Retirees and others on fixed income cannot

afford as many goods or services.afford as many goods or services.

Causes of Causes of InflationInflation

When demand for goods or services in greater than When demand for goods or services in greater than supply.supply.

Wages tend to rise during inflation, but prices Wages tend to rise during inflation, but prices usually rise faster.usually rise faster.

Typically considered harmful, as consumers must Typically considered harmful, as consumers must earn more money to maintain the same standard earn more money to maintain the same standard of living.of living.

If wages increase too quickly, business tend to hire If wages increase too quickly, business tend to hire fewer workers, raising unemployment.fewer workers, raising unemployment.

Measuring Measuring InflationInflationInflation rates vary.Inflation rates vary.

Mild inflation (around 2 or 3 percent) can Mild inflation (around 2 or 3 percent) can stimulate economic growth as prices increase stimulate economic growth as prices increase faster than wages, allowing the producer to hire faster than wages, allowing the producer to hire more workers.more workers.

The most watched measure of inflation in the US The most watched measure of inflation in the US is the Consumer Price Index (CPI). is the Consumer Price Index (CPI).

A A price indexprice index is a number that compares prices is a number that compares prices in one year with prices in some earlier base year.in one year with prices in some earlier base year.

Cost of living inflation may change differently Cost of living inflation may change differently than the products used to calculate inflation with than the products used to calculate inflation with the CPI. the CPI.

DeflationDeflationDeflation is the opposite of inflation.Deflation is the opposite of inflation.Deflation Deflation means a decrease in the general means a decrease in the general

level of prices.level of prices.Usually occurs in recession and depression.Usually occurs in recession and depression.Even though prices drop, people tend to have Even though prices drop, people tend to have

less money to afford them.less money to afford them.Occurred most significantly during the Great Occurred most significantly during the Great

DepressionDepressionMany technological products are deflating in Many technological products are deflating in

price as technology advances.price as technology advances.

Cool Web Cool Web ResourcesResourceshttp://www.westegg.com/inflation/http://www.westegg.com/inflation/

http://www.aier.org/research/worksheets-ahttp://www.aier.org/research/worksheets-and-tools/cost-of-living-calculatornd-tools/cost-of-living-calculator

http://inflationdata.com/Inflation/Consumehttp://inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspxr_Price_Index/HistoricalCPI.aspx

http://www.homefair.com/real-estate/salarhttp://www.homefair.com/real-estate/salary-calculator.asp?type=toy-calculator.asp?type=to

http://www.foodtimeline.org/foodfaq5.htmlhttp://www.foodtimeline.org/foodfaq5.html#cocacola#cocacola

http://www.msnbc.msn.com/id/19332035/http://www.msnbc.msn.com/id/19332035/ns/us_news-summer_of_love_40/ns/us_news-summer_of_love_40/

http://www.westegg.com/inflation/http://www.westegg.com/inflation/http://www.aier.org/research/worksheets-http://www.aier.org/research/worksheets-

and-tools/cost-of-living-calculatorand-tools/cost-of-living-calculatorhttp://inflationdata.com/Inflation/http://inflationdata.com/Inflation/

Consumer_Price_Index/HistoricalCPI.aspxConsumer_Price_Index/HistoricalCPI.aspxhttp://www.homefair.com/real-estate/http://www.homefair.com/real-estate/

salary-calculator.asp?type=tosalary-calculator.asp?type=tohttp://www.foodtimeline.org/http://www.foodtimeline.org/

foodfaq5.html#cocacolafoodfaq5.html#cocacola

Interest RatesInterest RatesInterest rates represent the “cost of Interest rates represent the “cost of

money.”money.”Interest rates have a strong influence on Interest rates have a strong influence on

business activities.business activities.Companies and governments that borrow Companies and governments that borrow

money are affected by interest rates.money are affected by interest rates.Consumers are affected by interest rates.Consumers are affected by interest rates.Interest on loans reflects current interest Interest on loans reflects current interest

rates, as to earnings from savings and rates, as to earnings from savings and investments.investments.

Types of Types of Interest RatesInterest Rates

There are many different types of interest There are many different types of interest rates that represent the cost of money in rates that represent the cost of money in different settings.different settings.The The prime rateprime rate is the rate banks make available is the rate banks make available

for their best customers, such as large for their best customers, such as large corporationscorporations

The The discount ratediscount rate is the rate financial is the rate financial institutions are charged to borrow funds from institutions are charged to borrow funds from Federal Reserve banks.Federal Reserve banks.

The The T-bill rateT-bill rate is the yield on short-term is the yield on short-term (13 week) U.S. government debt (13 week) U.S. government debt obligations.obligations.

Types of Interest Types of Interest Rates (cont.)Rates (cont.)

The The treasury bondtreasury bond rate rate is the yield on is the yield on long-term (20 year) U.S. government debt long-term (20 year) U.S. government debt obligations.obligations.

The The mortgage ratemortgage rate is the amount is the amount individuals pay to borrow for the purchase of individuals pay to borrow for the purchase of a new home.a new home.

The The corporate bondcorporate bond raterate is the cost of is the cost of borrowing for large U.S. corporations.borrowing for large U.S. corporations.

The The certificate of deposit ratecertificate of deposit rate is the rate is the rate for time deposits at savings for time deposits at savings institutions.institutions.

Changing Changing Interest RatesInterest Rates

The cost of money changes every day due to The cost of money changes every day due to various factors.various factors.

The supply and demand for money is the The supply and demand for money is the major influence on the level of interest rates.major influence on the level of interest rates.

As amounts saved increase, interest rates As amounts saved increase, interest rates tend to decline.tend to decline.

When borrowing by consumers, businesses, When borrowing by consumers, businesses, and government increases, interest rates are and government increases, interest rates are likely to rise.likely to rise.

See assignment in G:drive (Banks)See assignment in G:drive (Banks)