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Business Cycle

Business Cycle. Is the economy getting better or worse?. Micro vs. Macro. Microeconomics: The study of personal, or small finances. Individuals, families, or businesses Macroeconomics: The study of economic systems on a large scale National or global economies . Gross Domestic Product.

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Business Cycle

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  1. Business Cycle Is the economy getting better or worse?

  2. Micro vs. Macro • Microeconomics: The study of personal, or small finances. • Individuals, families, or businesses • Macroeconomics:The study of economic systems on a large scale • National or global economies

  3. Gross Domestic Product • Definition: The total value, in dollars, of all final goods and services produced within the nation each year. • Abbreviated as the GDP

  4. What Does the GDP Tell Us? • If the GDP is larger than last year the economy is expanding (getting bigger) • If the GDP is smaller, the economy is shrinking (Getting smaller)

  5. Business Cycle • The Business Cycle allows people to understand the direction the economy (GDP) is going (growing or shrinking) and plan accordingly. • The economy follows the Business Cycle regularly

  6. Phases of the Business Cycle • Expansion (Growing) • Peak (Top) • Contraction (Shrinking) • Trough (Bottom)

  7. Expansion • During a period of expansion: • Wages increase • People are optimistic and spending money • High demand for goods • Businesses start • Easy to get a bank loan • Businesses make profits and stock prices increase

  8. Peak • When the economic cycle peaks: • The economy stops growing (reached the top) • GDP reaches maximum • Cycle begins to contract • Business can’t produce any more or hire more people

  9. Contraction • During a period of contraction: • Businesses cut back production and layoff people • Wages decrease • Unemployment increases/# of jobs decrease • People are pessimistic and stop spending $ • Banks decrease loans given

  10. Do Now • Please answer the following questions in your notes: • 1) What are the differences between microeconomics and macroeconomics? • 2) Describe what the GDP measures • 3) What are the four phases of the business cycle?

  11. Trough • Economy “bottoms-out” (reaches lowest point) • Stocks prices drop • High unemployment and low spending

  12. Recession/Depression • A prolonged contraction is called a recession (contraction for over 6 months) • A recession of more than one year is called a depression

  13. What keeps the business cycle going? • 1) Business Investment -When the economy is expanding, sales and profits keep rising, so companies invest in equipment new plants=more jobs and expansion. In contraction, the opposite is true.

  14. 2) Interest Rates and Credit • Low interest rates, companies make new investments, add more jobs. High interest rates invest dries up and less job growth • 3) Consumer Expectations • Forecasts of expanding economy=more spending • Fear of recession=decrease in consumer spending

  15. 4) External Shocks - Such as disruptions of the oil supply, wars, or natural disasters greatly influence the output of the economy. Ex: 9/11

  16. Who Cares????? • Why should you care about the business cycle and economy?

  17. “Don’t quit that job!” • If the economy is going into a contraction, jobs will become more scarce. If you quit, you may not find another job!

  18. “Should I make a big purchase?” • Only if you know that you won’t lose your job in a contraction. So, buy your house during an expansion. HOWEVER • When the economy starts to slow down (contraction), interest rates will decrease. Wait to buy a house until the rates drop to a low point if you are sure that you won’t lose your job.

  19. Quick Review! • What phase of the business cycle do wages go up? • What phase of the business cycle do wages go down?

  20. Review Cont. • When are wages at their highest? • When are wages at their lowest?

  21. Recessions in U.S. History • Please answer the following questions for each recession (6) in the readings: • 1) Describe what happened • 2)What was the peak unemployment rate (%) • 3) Describe what the Real GDP was during that time • 4) The length and severity of the recession • 5) How did it end? • 6) Any other interesting facts

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