1 / 41

Business Cycle

Business Cycle. Chapter 12/ Section 2. Phases. Expansion Peak Contraction Trough. Expansion. Expansion in economic growth Long-term growth of the Real GDP. Peak. When real GDP stops rising. Contraction. Economic decline as measured by real GDP. Trough.

amity
Download Presentation

Business Cycle

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Business Cycle Chapter 12/ Section 2

  2. Phases • Expansion • Peak • Contraction • Trough

  3. Expansion • Expansion in economic growth • Long-term growth of the Real GDP

  4. Peak • When real GDP stops rising

  5. Contraction • Economic decline as measured by real GDP

  6. Trough • When economy has bottomed out and real GDP stops falling

  7. Recession • Prolonged economic recession • Typically 6-18 months (2 to 3 quarters) • Unemployment up to 10%

  8. Depression • Long and severe recession • Severe job loss • Loss of credit availability • Large number of bankruptcies • Contracted trade • Currency devaluation • Decline in GDP 0f 10% • A recession lasting 2 or more years

  9. Stagflation • Amalgam of stagnation (unmoving, decayed) and inflation • Decline in real GDP combined with rise in prices (inflation)

  10. So what phase are we in now? • Are we in a recession? • Are we in a depression? • Are we experiencing stagflation?

  11. What is the health of our economy currently?

  12. On what do you base your opinion?

  13. Let’s look at what happens during a recession… • What sort of businesses did you see negatively affected during the last recession?

  14. Ripple Effects • During downturns, there are ripple effects in the economy • One thing happens which then causes all of these events to happen (negative externalities)

  15. Consider the following… • An auto plant that employs 1500 people closes in the town of Skogie, Illinois. Skogie, population 6000, is bound to see some unintended consequences from this. • What will the people of Skogie likely experience?

  16. Consider the Following… • What if the housing market suddenly went “south”? • What if it became difficult to get loans for houses? • What if people began defaulting on mortgages? • What negative externalities would our economy see?

  17. So… • How healthy is our economy? • Is your opinion any different than it was before?

  18. How do we gauge the health of an economy? • GDP! • But what else????

  19. Group time! Excellent! • You and your team will be given an economic indicator that is the GDP. • Your task to fully understand that this indicator can tell us about an economy. • How is this index tabulated? • How often is it measured? • What are its limitations? • How helpful is it really? • Create a few Powerpoint slides to show us

  20. What keeps the Business Cycle Cycling? • Many factors impact the cycle • Often, two or more factors act together to push cycle into next phase • A sharp rise or drop in some economic variable will set off events to push cycle into next phase • There are four main variables

  21. Business Investment • During expansion, businesses will invest heavily in plants and equipment • At some point, the determination will be made that they have expanded enough or demand for product will fall • Production will slow and likely cause layoffs

  22. Interest Rates and Credit • When rates are low, consumers and businesses will purchase more items on credit • As businesses borrow money to expand, jobs will be created and production will likely rise • As rates rise, consumers and business will purchase less; this leads to slower production and layoffs

  23. Consumer expectations • Fears of a weak economy will cause consumers to purchase less • Expectations of good economic conditions will lead to more spending

  24. External Shocks • Most difficult to predict • Negative • Disruption in oil supply • Drought • Wars • Positive • Discovery of oil deposits • Excellent growing season

  25. Notable events in the Business cycle • Great Depression • GDP dropped by a staggering 33% • Unemployment reached 25% • Keynsian Economics became the THANG • Believed that government intervention was necessary to ensure stable growth in the economy • FDR pursued this line of thinking and so created many agencies aimed at creating jobs

  26. Notable events in the Business cycle • 1970s • Organization of Petroleum Exporting Countries (OPEC) launched embargo against US • Quadrupled the price of oil and lessened the supply • Raw material prices and production costs skyrocketed • Immediately sent economy into stagflation

  27. Notable events in the Business cycle • 1980s • High interest rates caused real GDP to fall • Led to high unemployment rates (9%) • 2007-2009 • Low interest rates led to a credit boom • Sub-prime mortgages (mortgages to those who would not qualify for traditional mortgages) were huge • When rates went up, these mortgages increased and the borrowers could not repay • Caused real GDP to fall by 4% in the US in 2009, 8-10% in Eastern Europe

  28. Measuring Economic Growth • Real GDP per capita • Over time, populations grow • To take this into account, economists use the Real GDP per capita • Divides the GDP by the population (each individual’s slice of the GDP) • As long as GDP rises faster than the population, GDP per capita will continue to rise • Limitations • Doesn’t account for distribution of wealth • Excludes things like quality of environment or level of stress

  29. Capital Deepening • The more physical capital that is available, the more productivity there will be per worker (labor productivity) • Process of increasing physical capital per worker is called capital deepening • Important source of growth • Also includes the human capital • Education • Experience • Increases output per worker and wages

  30. Saving and Investment • Income that is not used for consumption is saving • Savings Rate is proportion of disposable income that is saved • US savings rate ranged around 4% in 2012 • Money that is saved using a mutual fund (stocks and bonds) can be used for a company to reinvest • The more that is saved, the more money that is available for reinvestment by companies

  31. Population • What happens to the amount of capital per worker if the population grows but the capital remains the same? • Capital per worker will shrink • This leads to less output per worker and lower wages

  32. Government • Taxes- if taxes are raised, households will have less disposable income • If taxes are raised to support consumption spending (i.e. a war), there will be reduced investment • If taxes are raised to improve public goods (i.e. roads, education, et al.), investment will increase

  33. Foreign Trade • Trade deficit: importing more goods than you export • Can be a positive if imports are Investment goods • Structures and equipment purchased by businesses

  34. Technological Progress • An increase in efficiency gained by producing more output without using more inputs • Could be new scientific knowledge, method of organizing production, or a machine that leads to more efficiency

  35. Causes of Technological Progress • Scientific research • Improve techniques and physical capital • Innovation • New products causing rise in efficiency • Patents • Scale of market • Larger markets provide more incentives for innovation • Larger economies will advance more technologically • Education and experience • Increases efficiency

More Related