Business Cycles, Unemployment, Inflation, and Fiscal Policy

1. Business Cycles, Unemployment, Inflation, and Fiscal Policy Our government has an interest in measuring the performance of our economy, and uses a variety of statistics to provide that information. An aggregate of that data, presented as a curve showing the irregular growth of our economy over time is called the “business cycle”.

2. Business Cycles • The Government measures economic growth using a set of statistics known as the Index of Leading Economic Indicators. • These measures include: • Initial unemployment claims • New orders for consumer goods • Plant and equipment orders • Building permits • Stock prices (S&P 500) • Real Money Supply • Index of consumer expectations • Three consecutive quarters of movement in one direction indicates a shift in the business cycle

3. Business Cycles, Unemployment, Inflation, and Fiscal Policy The Business Cycle is a measure of the change in the level of business activity over time. There are four phases in a business cycle.

4. Business Cycles, Unemployment, Inflation, and Fiscal Policy The Business Cycle is a measure of the change in the level of business activity over time. There are four phases in a business cycle. Peak

5. Business Cycles, Unemployment, Inflation, and Fiscal Policy The Business Cycle is a measure of the change in the level of business activity over time. There are four phases in a business cycle. Peak Boom

6. Business Cycles, Unemployment, Inflation, and Fiscal Policy The Business Cycle is a measure of the change in the level of business activity over time. Peak Boom Contraction

7. Business Cycles, Unemployment, Inflation, and Fiscal Policy The Business Cycle is a measure of the change in the level of business activity over time. Peak Boom Contraction Recession

8. Business Cycles, Unemployment, Inflation, and Fiscal Policy The Business Cycle is a measure of the change in the level of business activity over time. Peak Boom Contraction Recession Trough

9. Business Cycles, Unemployment, Inflation, and Fiscal Policy The Business Cycle is a measure of the change in the level of business activity over time. Peak Boom Contraction Recession Trough Depression

10. Business Cycles, Unemployment, Inflation, and Fiscal Policy The Business Cycle is a measure of the change in the level of business activity over time. Peak Boom Contraction Recession Expansion Trough Depression

11. Business Cycles, Unemployment, Inflation, and Fiscal Policy The Business Cycle is a measure of the change in the level of business activity over time. Peak Boom Contraction Recession Expansion Recovery Trough Depression

12. Business Cycles The Government also measures overall economic growth using a measure known as Gross Domestic Product (GDP). GDP is basically a measure of the value of all goods and services produced in the United States within a year. GDP for the year 2010 was $14,590,000,000,000. The basic formula for GDP is: C + I + G + (x-m)

13. Business Cycles The components in the formula: C + I + G + (x-m) C = Consumption (Consumer Spending) Consumption includes only the final purchase of goods and services by individuals.

14. Business Cycles The components in the formula: C + I + G + (x-m) C = Consumption (Consumer Spending) Consumption includes only the final purchase of goods and services by individuals. Consumption is equal to approximately 50% of GDP.

15. Business Cycles • The components in the formula: • C + I + G + (x-m) • I = Investment • Investment includes spending on: • tools, machinery, software, etc. • Land and construction of buildings (factories). • Inventory (goods to be resold). • Investment accounts for approximately 13% of GDP

16. Business Cycles The components in the formula: C + I + G + (x-m) G = Government Spending Government spending is divided into two categories: Government consumption refers to acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community Government Investment refers to acquisition of goods and services intended to create future benefits (infrastructure investment or research spending). Transfer Payments to Individuals are not counted as government spending.

17. Business Cycles Government spending in the US has increased from less than 10% of GDP in 1900 to almost 40% of GDP by 2010.

18. Business Cycles The components in the formula: C + I + G + (x-m) (x-m) = Net Exports X= Exports M = Imports We count the value of goods produced in the US but sold to other countries as part of GDP. We do not count the value of goods produced in other countries, so those items are subtracted from our GDP calculations.

19. Business Cycle There are two main issues associated with changes in the business cycle. Increasing unemployment is the main symptom associated with a Recession. UNEMPLOYMENT

20. Unemployment • The Government reports unemployment weekly. These figures are calculated by the US Bureau of Labor Statistics. • In order to be unemployed, one must be eligible to be employed. The labor force in the US includes everyone 16 or over, employed or actively seeking employment. • It does not include: • Full time students • Retired people • Stay-at-home parents • People in prisons or similar institutions • People employed in jobs with unreported income • Discouraged workers

21. Unemployment Full Employment is one of the goals of the government, but full employment is not 100% employment. Although Full Employment is usually described as “everyone who wants a job has a job”, in reality full employment is 4% to 6% unemployment. There are five different types of unemployment, and in it’s quest for full employment, the government can implement policies that help to relieve some forms of unemployment. Two of these are considered unavoidable, but three forms can be affected by government action.

22. Unemployment • 5 types of unemployment • Seasonal Unemployment • Unemployment due to changes in seasons.

23. Unemployment • 5 types of unemployment • Seasonal Unemployment • Frictional Unemployment • Unemployment caused by normal movement within the economy.

24. Unemployment • 5 types of unemployment • Seasonal Unemployment • Frictional Unemployment • Cyclical Unemployment • Unemployment due to fluctuations in the business cycle.

25. Unemployment • 5 types of unemployment • Seasonal Unemployment • Frictional Unemployment • Cyclical Unemployment • Structural Unemployment • Unemployment caused by flaws in the structure of the economy.

26. Unemployment • 5 types of unemployment • Seasonal Unemployment • Frictional Unemployment • Cyclical Unemployment • Structural Unemployment • Technological Unemployment • There are two forms of technological unemployment • When changing technology makes your job unnecessary. • When you do not have the technological skills for the job.

27. Unemployment • 5 types of unemployment • Seasonal Unemployment • Frictional Unemployment • Cyclical Unemployment • Structural Unemployment • Technological Unemployment

28. Business Cycle There are two main issues associated with changes in the business cycle. If an expansion (recovery) occurs faster than corresponding growth, inflation can result. INFLATION

29. Inflation Inflation refers to an increase in price without a corresponding increase in value. The Government reports inflation rates monthly. There main measures are calculated by the US Bureau of Labor Statistics and the US Bureau of Economic Analysis. The BEA calculates inflation using the GDP Deflator formula, which essentially calculates the value of GDP, compares it to previous years and adjusts it to determine which part is due to new production (growth) and which part is due to inflation. The GDP Deflator is considered to be more accurate, but is highly complex and takes a long time to calculate and report.

30. Inflation The more commonly used measure of inflation is the Consumer Price Index (CPI), which is calculated by the US Bureau of Labor Statistics. The BLS describes CPI as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.“ It involves actually checking the current prices for a variety of goods, comparing them to past prices, and indexing the average prices. The first time prices were checked, the average (100%) was given an index value of 1. If the average of all prices went up 2% the next month, then the index would be 1.02. The CPI is not as accurate as the GDP deflator, but is more easily understood, and more widely used.

31. Inflation There are two types of inflation. The simpler type is known as Cost-Push Inflation. Cost-Push Inflation results when the cost of producing an item rises, thus pushing the price up. An example would be when the rising price of crude oil causes gasoline prices to rise, even though most other prices remain stable. Cost-Push inflation is usually limited in the number of goods affected, thus it is limited in it’s impact on the economy.

32. Inflation The second type of inflation, which is more widespread and thus more damaging to an economy, is Demand-Pull inflation. Demand-Pull inflation results when consumers wish to buy more products than the economy can currently provide, thus bidding (pulling) prices up. It is sometimes described as “too much money chasing too few goods”.

33. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ

34. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M1). The Treasury department measures the money supply and reports changes monthly. M1 consists of all cash in circulation, plus deposits in checking accounts. For Oct. 2012, M1 is approximately 2,418 Trillion Dollars.

35. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M1). For Oct. 2012, M1 is approximately 2,418 Trillion Dollars.

36. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M2). V = the Velocity of money.

37. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M2). V = the Velocity of money. Velocity is the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time In other words, how many times is a dollar spent (within one year) before another dollars worth of goods are created. Velocity ranges widely, but is currently around 7.7.

38. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M2). V = the Velocity of money. P = the general price level (CPI)

39. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M2). V = the Velocity of money. P = the general price level (CPI) CPI presents the current price level as an indexed average from the previous year. The current CPI rate is approximately 3%, so the value of this variable would be approximately 1.03.

40. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M2). V = the Velocity of money. P = the general price level (CPI). Q = the Quantity of Goods and Services available (GDP).

41. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M2). V = the Velocity of money. P = the general price level (CPI). Q = the Quantity of Goods and Services available (GDP). GDP (Gross Domestic Product) is a measure of the value of all goods and services produced in the US in one year. Current GDP is approximately $15.77 trillion.

42. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M2). V = the Velocity of money. P = the general price level (CPI). Q = the Quantity of Goods and Services available (GDP). V and Q are relatively stable, so change is going to occur in either M or P.

43. Inflation Demand-Pull inflation can be explained using the Equation of Exchange. MV = PQ where M = the current money supply (M2). V = the Velocity of money. P = the general price level (CPI). Q = the Quantity of Goods and Services available (GDP). V and Q are relatively stable, so change is going to occur in either M or P. If the MV side of the equation is greater, then the Price level will rise to keep both sides in balance. If MV is lower, then prices will fall, resulting in Deflation.

44. Inflation Why do we care? Inflation affects everyone in an economy. Some people benefit, while others suffer. Who Suffers from Inflation? Those on Fixed Incomes

45. Inflation Why do we care? Inflation affects everyone in an economy. Some people benefit, while others suffer. Who Suffers from Inflation?

46. Inflation Why do we care? Inflation affects everyone in an economy. Some people benefit, while others suffer. Who Suffers from Inflation? Those on Fixed Incomes Those who Save

47. Inflation Why do we care? Inflation affects everyone in an economy. Some people benefit, while others suffer. Who Suffers from Inflation? Those on Fixed Incomes Those who Save Those who Lend

48. Inflation Why do we care? Inflation affects everyone in an economy. Some people benefit, while others suffer. Who Suffers from Inflation? Those on Fixed Incomes Those who Save Those who Lend Who Benefits from Inflation? Borrowers

49. Inflation Why do we care? Inflation affects everyone in an economy. Some people benefit, while others suffer. Who Suffers from Inflation? Those on Fixed Incomes Those who Save Those who Lend Who Benefits from Inflation? Borrowers Some Investors in Real Property

50. Inflation Why do we care? Inflation affects everyone in an economy. Some people benefit, while others suffer. Who Suffers from Inflation? Those on Fixed Incomes Those who Save Those who Lend Who Benefits from Inflation? Borrowers Some Investors in Real Property The Government