Business Cycle - Stocks

1. Business Cycle - Stocks Ch. 23, Section 2

2. The Business Cycle • The Business Cycle (AKA The Economic Rollercoaster) • The ups & downs of the economy • Alternating periods of growth & decline • 4 Phases • Expansion (Also known as Prosperity or Recovery) • Economy is improving • Businesses produce more needing more employees • Higher employment means higher wages • Higher wages mean higher consumption • Higher consumption means more production

3. 2. Boom Economic activity is at its peak Peak – the highest point of the boom Businesses are working at full capacity Law of Diminishing Returns – as a business adds more resources to production profits will rise until a point where more resources begin reducing profits The Business Cycle

4. Business Cycle Peak Trough Boom Expansion Decline/ Recession Recovery/ Prosperity

5. The Business Cycle 3. Decline (Contraction) • The economy is slowing down • Production is cut down • Workers are laid off 4. Recession • Occurs when Real GDP goes down over 6 months • Real GDP – shows economy’s production after the distortions of price increases have been removed • Eliminates impression that output has gone up when only prices have gone up • Lowest period of production • Unemployment is high • People do not buy as much • Trough: lowest point of a recession • Depression: a severe recession

6. Business Cycle

7. Unemployment • Unemployment Rate • Percentage of labor force without jobs but actively looking • Unemployment reduces living standards, disrupts families & causes a loss of self respect • Reaches its highest during a recession • Types of Unemployment • Cyclical – associated with the ups & downs of the economy • Structural – changes in the economy based on technology • Seasonal – based on the weather • Frictional – based on people being terminated or looking for new jobs • Current Unemployment rate • Videos • Dealing with unemployment • The Pain of Unemployment • Slow Recovery

8. Types of Unemployment Game • Sara, worker at Ford, loses his job because of a machine that can it do his job more efficiently. • Structural • Zach works at the Sugar Mountain Ski Lodge. • Seasonal • Jordan, Tom’s friend at Ford, loses her job because of low car sales. • Cyclical • Tori is tired of working at In-n-Out Burger quits her job. • Frictional • Tyler has just graduated from college and is unemployed. • Frictional • Elizabeth lost her job at the neighborhood swimming pool after Labor Day. • Seasonal • Mr. Cleland is laid off due to the tight budget of ISS for 2012-2013 school year. • Cyclical • Tina loses her job as a cleaning lady because she is replace by the RoboMaid. • Structural

9. Inflation Rate World Wide

10. The Great Depression • The Great Depression • Began in 1929 with a stock market crash • Black Tuesday, October 29, 1929 • Many saw it as the end of capitalism • Bank runs – people tried to get all their cash out of banks, banks ran out of money • Herbert Hoover was president • Hoovervilles – were names of shanties (homeless towns) during the Depression

11. The Great Depression Black Tuesday Hoovervilles Suffering

12. What is the highest point in the business cycle? • Boom • Trough • Expansion • Peak

13. The Great Depression • The New Deal • Franklin D. Roosevelt’s plan to end the depression • First 100 Days • Restored faith in banks – Bank holiday • Fireside Chats • Financial Reform • Glass-Steagall Act – 1933 • Banks could not invest in the stock market • Repealed in 1980. Some believe the reason we are in this financial mess today. (move up) • FDIC created • Guarantees usually $100,000, but from Oct. 3, 2008 to December 31, 2013 up to $250,000 • Federal Securities Act – 1933 • SEC created as a result of this act • No stock market fraud • Splits the nation’s economy • Fiscal policy – the Government • Monetary policy – the Federal Reserve

14. FDR’s Fireside Chat • First Fireside Chat

15. Measuring the Economy • Inflation • Decline in the value of money • Purchasing power – amount the dollar can buy • Measured by the Consumer Price Index & Implicit GDP price deflator • Some Relief at the end of 2008

16. Measuring the Economy • Consumer Price Index (CPI) • Samples prices for 400 products commonly used • CPI Data • Change in price over time of goods & services the average household uses • Base year – 1982-1984 – the average of these years is compared to each year • Implicit GDP Price Deflator • Takes inflation out of GDP for year to year comparisons • Base year – 1987

17. Measuring the Economy • GDP Categories • Consumer goods – bought by consumers for final use • Business (Capital) goods – bought to be used by a business to produce other goods • Government goods – anything bought by the federal, state and local governments • Net Exports • The difference in what the nation buys & sells with other countries • Export – anything sold to another country • Import – anything bought from other countries

18. Trade Deficit

19. Imports vs. Exports

20. Stocks • Corporations sell stock to raise financial capital • People buy stock to make money • Dividends – share of a corporation’s profits • Capital Gain – when stock is sold for more than it originally cost – Rule: Buy low, sell high

21. Stocks • Stock Indexes • Statistical measures that track stock prices over time • The ticker • Ex: Dow Jones Industrial Average (DJIA) or Standard & Poor’s (S&P) • Stock Exchanges • Stock market – where stock is bought & sold • Ex: NYSE – largest & most prestigious • Others: American Stock Exchange, Chicago Mercantile Exchange, Electronic – NASDAQ • Changes in stock prices are based on market forces of supply & demand

22. Stocks • Bull Market • Investors expect growth, profits high & unemployment low • Prices tend to rise • Bear Market • Investors are pessimistic, profits drop & unemployment rises • Prices fall • Changes to Stock Prices • Change in profits • Rumors (externalities) • News • Stockbroker – person who buys & sells stock

23. Struggles in the Economy • http://www.pbs.org/newshour/video/module_byid.html?s=news01n3647q87f