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Section 1

Business Cycles and Fluctuations

• Business cycles and business fluctuations can interrupt economic growth.

• Economists predict where economy is headed so forecasting models and statistical tools are key to predicting these changes.

Section 1

Business Cycles: Characteristics and Causes (cont.)

• Phases of the business cycle

– Recession

• Begins when the economy reaches a peak

• Ends when the economy reaches a trough

Business Cycles

Figure 1

Section 1

Business Cycles: Characteristics and Causes (cont.)

– Expansion

• Begins after the declining real GDP bottoms out

• Continues until economy reaches a new peak

Section 1

Business Cycles: Characteristics and Causes (cont.)

• The economy would follow a steady growth path, trend line, if periods of recession and expansion did not occur.

• Severe recessions can turn into a depression.

Section 1

Business Cycles: Characteristics and Causes (cont.)

• Causes of business cycles

– Changes in capital expenditures

– Innovation and imitation

– Monetary policy decisions

– External shocks

Section 1

• Causes of the Great Depression

– Enormous gap in the distribution of income

– Easy credit

– Global economic conditions

Business Cycles in the United States(cont.)

The Great DepressionThe Great Depression

The Great Depression [continued]The Great Depression [continued]

Great Depression StatsGreat Depression Stats

Ave. Unemployment Rate, 1925-1928Ave. Unemployment Rate, 1925-1928

Ave. Unemployment Rate, 1929-1933Ave. Unemployment Rate, 1929-1933

Percent Decrease in Prices, 1929-1932Percent Decrease in Prices, 1929-1932

Global Depression, 1929-1932Global Depression, 1929-1932

Six Million “Rosie the Riveters”Six Million “Rosie the Riveters”

World War II Production of these items brought us out World War II Production of these items brought us out of the Great Depression.of the Great Depression.300,000 warplanes300,000 warplanes124,000 ships124,000 ships289,000 combat vehicles and tanks289,000 combat vehicles and tanks36 billion yards of cotton goods36 billion yards of cotton goods41 billion rounds of ammunition41 billion rounds of ammunition2.4 million military trucks2.4 million military trucks111,527 tank guns and howitzers111,527 tank guns and howitzers

•$288 billion$288 billion was spent on the war, was spent on the war, •$100$100 billion in the first six months. billion in the first six months.

Unemployment hit an all-time low of Unemployment hit an all-time low of 1.2%1.2% and personal savings were 25.5%. and personal savings were 25.5%.

Section 1

• Laws passed and government agencies were established to prevent another depression.

– Social Security Act of 1935

– Minimum Wage

– Unemployment programs

Business Cycles in the United States(cont.)

Section 1

– Securities and Exchange Commission

– Federal Deposit Insurance Corporation

Business Cycles in the United States(cont.)

• After World War II, business cycles had shorter recessions and longer periods of expansion.

Section 1

• Methods used to predict business cycles

– Statistical series

Forecasting Business Cycles (cont.)

• Leading economic indicator

• Composite index of leading economic indicators (LEI)

The Index of Leading Economic Indicators

Figure 2

Section 2

Inflation

• Inflation—increase in the general level of prices

• Deflation—decline in the general level of prices

• Both are harmful to the economy and should be avoided whenever possible.

Section 2

Measuring Prices and Inflation

Several price indexes are used to measure inflation.

Section 2

Measuring Prices and Inflation (cont.)

• Measuring inflation

– Price index for a range of items is constructed

– Consumer price index (CPI)

• Select a market basket and add up prices to determine value

• Base year is selected forcomparison.

Constructing the Consumer Price Index

Figure 3

Section 2

Measuring Prices and Inflation (cont.)

• Dollar cost of market basket is converted to a price index.

• Percentage change of price index from one period to another is inflation.

Measuring Prices and Inflation

Figure 4

Section 2

Measuring Prices and Inflation (cont.)

• Inflationary changes

– Creeping inflation

– Hyperinflation

– Stagflation

Section 2

Causes of Inflation

Causes of inflation include strong demand, rising costs, and wage-price spirals, along with a growing supply of money.

Cost-push Inflation

• Cost-push inflation is resulting from rising costs during periods of high unemployment.

• Cost-push inflation is a new phenomenon of modern industrial economies.

Demand –Pull Inflation• Demand-pull inflation occurs when Demand

rises more rapidly than the economy’s productive potential.

• Demand-pull inflation can arise from:– High supply of money– Excessive fiscal deficits

Section 2

• Effects of inflation

– Reduced purchasing power

– Distorted spending patterns

Consequences of Inflation

Section 2

– Encourages speculation

– Distorted distribution of income

Consequences of Inflation (cont.)

• Creditors are hurt more than debtors generally.

Section 3

Measuring Unemployment (cont.)

• The civilian labor force or labor force is the sum of all persons aged 16 and above who are either employed or actively seeking employment.

• Unemployed—individuals who are willing, able, and available to work and actively seeking employment

The Labor Force

The labor-force participation rate is the percentage of the working-age population working or seeking employment.

Since 1960, the labor-force participation rate has increased by 100%. The increase in the rate has come from the increased participation of women in the workforce.

Participation rates for men have fallen from 86.4% in 1950 to 73.5% in 2004. Participation rates for women have increased from 33.9% in 1950 to 59.5% in 2004.

Section 3

Sources of Unemployment

Unemployment is often caused by circumstances outside an individual’s control and is therefore very difficult to remedy.

Section 3

Sources of Unemployment (cont.)

– Technological unemployment

– Cyclical unemployment

– Seasonal unemployment

Section 3

Sources of Unemployment (cont.)

• Kinds of unemployment

– Frictional unemployment

– Structural unemployment

• Outsourcing

Types Of Unemployment

Seasonal unemployment is unemployment due to seasonal changes in employment or labor supply.

Examples include students employed during the summer at Mackinaw Island in northern Michigan, employment in the construction industry, and people employed at Cedar Point Amusement Park in Ohio.

Types of Unemployment

Frictional unemployment is a brief period of unemployment experienced by people moving between jobs or into the labor market. People have the skills and knowledge necessary to get a job, and the jobs are available.

Examples of frictionally unemployed people include new college graduates and people quitting a job and looking for something different or better.

Types of Unemployment

Structural unemployment is unemployment caused by a mismatch between the skills or location of job seekers and the requirements or location of available jobs.

Jobs may be available in other geographic areas or for individuals with specific skills and abilities.

Examples include laid off steelworkers in the 1980s and defense contractors in the 1990s. Also teenagers and others with a lack of job skills are included.

Types of Unemployment

Cyclical unemployment is unemployment caused by a lack of job vacancies; an inadequate level of aggregate demand.

Cyclical unemployment commonly occurs during recessions. Companies cut back on workers due to reduced sales, fears of an economic recession, and insufficient consumer demand.

Concept 2: Unemployment

Underemployment includes those individuals who are either working part-time and seeking full-time employment, or are employed at jobs below their capacity.

Examples of underemployment include a college graduate with a Bachelor’s degree in business working as a cook at a fast food restaurant, and a teacher who is unable to find a full-time job working as a substitute teacher.

Underemployed people are counted as being employed and not included in the unemployment rate.

Section 3

Measuring Unemployment (cont.)

• The unemployment rate is equal to the number of unemployed persons divided by the civilian labor force.

The Unemployment Rate

Figure 6

Section 3

– Misery index or discomfort index

– Uncertainty leads to fewer consumer purchases.

– Political instability

– Crime, poverty, and family instability

Measuring Consumer Discomfort

Figure 7

End of Custom Shows

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