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ECONOMICS LESSON #8: The Business Cycle

ECONOMICS LESSON #8: The Business Cycle. Recession Unemployment Inflation. VIDEO TIME!. DVD Ch. 8: The Roller Coaster Ride – winners and losers. GDP. Definition: The total value of all final goods and services produced in a country in a year

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ECONOMICS LESSON #8: The Business Cycle

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  1. ECONOMICS LESSON #8:The Business Cycle Recession Unemployment Inflation

  2. VIDEO TIME! • DVD Ch. 8: The Roller Coaster Ride – winners and losers

  3. GDP • Definition: The total value of all final goods and services produced in a country in a year • Measured by totaling everyone’s income (wages, interest, rent, profits, etc), OR • Measured by totaling everyone’s expenditures (consumption, government, investment, exports) • Both ways produce the same number, since one person’s spending creates income for someone else (the money doesn’t just disappear!)

  4. What GDP shows • How we’re doing compared to the past • How we’re doing compared to other countries • How we’re doing on average (per capita GDP) • How we’re doing compared to inflation (real GDP)

  5. What GDP does not show • How evenly is our income spread out? • How healthy and happy are our people? • How healthy is the environment? • How large is the underground economy?

  6. The business cycle:Changes in real GDP over time

  7. Unemployment • Definition: People in the labor force who don’t have a job • Labor force: Anyone over 16, who is not in an institution, and who is either working or actively looking for work • Unemployment rate: # of unemployed, as a percentage of the labor force

  8. Movie time!Unemployment Blues http://www.youtube.com/watch?v=LqlJ-wt-4fM

  9. Who’s doesn’t have a job, but yet isn’t counted in the unemployment rate? • Students • Prisoners • Retired folks • Discouraged workers • and then there’s the underemployed (like a guy with a PhD in French who’s working at Mickey Ds, or a woman who’s only working 25 hours a week)

  10. Why’s unemployment a problem? • Okun’s Law: 1% rise in unemployment rate = 2-3% fall in GDP • Less tax revenue for government • Social problems: depression, crime, addiction, homelessness, spousal abuse, suicide, etc • Political problems: Whoever’s in office tends to get voted out, no matter how well they’re doing

  11. Inflation • Definition: A sustained increase in overall prices of goods and services • Measured by the CPI (Consumer Price Index), a “market basket” of typical goods and services that people buy on a regular basis • Base year = 100. So if the current CPI is at 678, and 1967 was the base year, how much have overall prices risen in the last 45 years?

  12. Phillips CurveNormally, if you want lower inflation, you’re gonna get higher unemployment, and vice versa

  13. Other ‘flations • Hyperinflation: When prices go off the heezie - up more than 100% a year (think: Germany in 1923)! • Deflation: When overall prices drop (think: Great Depression) • Disinflation: When prices are basically stable • Stagflation: When inflation is a problem AND the economy is stagnant (think: 1970s oil crises)

  14. Inflation: Winners • Borrowers – pay back with money that’s worth less • Government – spends more now, pays back in worth-less money • Government – inflation pushes us into a higher tax bracket • Young people – typically getting regular promotions & raises • Some businesses – only those who sell inelastic items • Tangible asset owners – real estate, gold, art, timber, etc.

  15. Inflation: Losers • Lenders – get paid back in money that’s worth less • Taxpayers – we have to pay off govt. debt sometime, and by then will be in a higher tax bracket • Retired people – typically on a fixed income, can’t keep up with rising prices • Some businesses – those who sell elastic goods/services

  16. Movie time! • Duck Tales, Inflation • http://www.youtube.com/watch?v=t_LWQQrpSc4

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