1. The Business Cycle

2. What is the business cycle? Periodic fluctuation in the rate of economic activity, as measured by levels of employment, prices, and production. Economists have long debated why periods of prosperity are eventually followed by economic crises (stock-market crashes, bankruptcies, unemployment, etc.). Periodic fluctuation in the rate of economic activity, as measured by levels of employment, prices, and production. Economists have long debated why periods of prosperity are eventually followed by economic crises (stock-market crashes, bankruptcies, unemployment, etc.).

3. b.c.=peak to peak of equal value The only real constraint in the definition is that if you define a business cycle, say, from peak to peak, you should not be able to find another cycle of equal between those two peaks. If so, you did it wrong. The only real constraint in the definition is that if you define a business cycle, say, from peak to peak, you should not be able to find another cycle of equal amplitude between those two peaks. If so, you did it wrong.

4. 4 Phases of the Cycle Expansion Expansion –Consumer demand forces producers to use plant capacity more fully & hire more workers Recovery Recovery –When an economy goes from a negative to a positive rate of growth, it is said to have reached a "trough" and entered a "recovery.“ It is in recovery until it reaches the previous peak (at that point it becomes expansion again). Recession Recession –Decline in real GDP for 2 consecutive quarters (6 months). Contraction Contraction –Decline in GDP. Loss of jobs, less consumer spending, & less production

5. Time From one peak to another, is considered “1 business cycle”. Contraction Contraction of 6 months or longer

6. Factors that cause fluctuations Business Investment Business Investment –High investment = expansion (creates demand which encourages production). –Low investment = contraction How does this relate to Pres. Obama’s view of corporations & the taxes that they pay? Money & Credit Money & Credit –People & businesses borrow $ when IR are low, thus, total output changes as the availability & affordability of credit rise & fall. Think about the housing & car industry & the amounts of jobs they supply.

8. Public Expectations Public Expectations –If people believe a recession is coming, they will spend less External Factors External Factors –War: a lot of government $ goes to fight it –OPEC decisions: low oil prices = expansion

9. Predicting the Cycle Business & the government need to predict the business cycle for various reasons. Business & the government need to predict the business cycle for various reasons. Business Business –Build/expand/modernize plants, hiring practices, production goals, etc. Government Government –Develop taxation & spending policies

10. Indicators Leading Leading –Changes in the # of building permits, # of orders for new capital & consumer goods, & price of stock prices Coincident Coincident –Personal income, sales volume, & industrial production levels Lagging (how long will the phase last?) Lagging (how long will the phase last?) –Consumer installment credit & size of business incomes What do these 3 have in common? What do these 3 have in common? –It involves…. CALCULATED GUESSING!

11. Gross Domestic Product GDP = C + I + G + (X-M)

12. Total $ value of all goods and services produced, within a country, during a given year. Total $ value of all goods and services produced, within a country, during a given year.

13. Personal Consumption The purchase of a good or service; rent for an apartment. The purchase of a good or service; rent for an apartment. C

14. Business Investment Capital goods Capital goods The purchase of residential houses The purchase of residential houses Inventory Inventory

15. Investment If Ford builds a $50,000 car in 2008 this counts towards “I” in 2008. If Ford builds a $50,000 car in 2008 this counts towards “I” in 2008. Once they sell the car in 2009, “C” goes up by $50,000, and “I” decreases by $50k. Once they sell the car in 2009, “C” goes up by $50,000, and “I” decreases by $50k. Reason: Reason: –The car adds to GDP during the year it’s produced, not during the year it is sold.

16. Government spending Total $ value of all goods and services that the government buys. Total $ value of all goods and services that the government buys.

17. X-m Exports - imports Exports - imports

18. GDP Exclusions Used goods Used goods Financial Assets (Stocks/Bonds) Financial Assets (Stocks/Bonds) Double Counting Double Counting –(final good vs. intermediate good) Non-market activities Non-market activities Transfer payments Transfer payments –(Nothing is being produced)

19. All About GDP 1. A monthly check received by an economics student who has been granted a government scholarship. Excluded, Transfer payment from government to student

20. All About GDP 2. A farmer’s purchase of a new tractor. Included,I, tractor is a capital good

21. Components of GDP (Expenditure Approach) 16% [I] = $2.57 Consumption e.g., durables and nondurables Consumption e.g., durables and nondurables [C] Investment e.g., business investment in equipment and factories Investment e.g., business investment in equipment and factories [I] Government Spending e.g., government purchases of goods and services Government Spending e.g., government purchases of goods and services [G ] Net Exports e.g., U.S. exports to other countries, less imports Net Exports e.g., U.S. exports to other countries, less imports [X] -3% [X] = $-0.41 18% [G] = $2.90 Sources: Bureau of Economic Analysis & FRBSF Calculations DataPost http://www.frbsf.org/education/teachers/datapost/index.html FRBSF Economic Education Group

22. U.S. Real GDP by major spending category Source: Bureau of Economic Analysis DataPost http://www.frbsf.org/education/teachers/datapost/index.html FRBSF Economic Education Group

23. Source: Bureau of Economic Analysis DataPost http://www.frbsf.org/education/teachers/datapost/index.html FRBSF Economic Education Group U.S. Real GDP by Quarter (Trillions of chained 2009 dollars, SAAR)

24. Source: Bureau of Economic Analysis DataPost http://www.frbsf.org/education/teachers/datapost/index.html FRBSF Economic Education Group 2013:Q 4 $15.97 2013:Q 4 $15.97 Grey bars indicate periods of economic recession according to the NBER Business Cycle Dating Committee Seasonally adjusted annual rate An inflation-adjustment method using 2005 dollars as the base year of comparison Annotated Chart Notes U.S. Real GDP by Quarter (Trillions of chained 2009 dollars, SAAR) 2009: Q2 $14.36 2009: Q2 $14.36 2001:Q4 $12.71 2001:Q4 $12.71

25. Real Gross Domestic Product (GDP) Q4/Q4 Percent Change DataPost http://www.frbsf.org/education/teachers/datapost/index.html FRBSF Economic Education Group Source: Bureau of Economic Analysis & FRBSF Calculations Note: Values are percent change using trillions of chained 2009 dollars (SAAR) Measuring Changes in GDP: Yearly % Change

26. Real Gross Domestic Product (GDP) Q4/Q4 Percent Change DataPost http://www.frbsf.org/education/teachers/datapost/index.html FRBSF Economic Education Group Source: Bureau of Economic Analysis & FRBSF Calculations Note: Values are percent change using trillions of chained 2009 dollars (SAAR) % change from 2001:Q4 to 2002:Q4 % change from 2001:Q4 to 2002:Q4 Real GDP dropped nearly 3% between 2007:Q4 and 2008:Q4 The “Great Recession” is the 18-month period between Dec 2007 to June 2009, according to the NBER Annotated Chart Notes Measuring Changes in GDP: Yearly % Change

27. What do you think? 1. How has consumer spending changed since 1950? How have net exports changed since 1980? (See slide 4) 2. What was the lowest level of real GDP during the Great Recession? (See slide 5) 3. How does real GDP growth in the Great Recession compare to early 2000s recession? (See slide 6) 4. Why is GDP considered a good measure of the “health” of the economy? DataPost http://www.frbsf.org/education/teachers/datapost/index.html FRBSF Economic Education Group

28. Top World GDP leaders Entire World: 72,689,734,000,000 USA = 22% 1.USA: (+ $3.5 trillion since ‘07) 2007: 13,961,800,000,000 2008: 14,219,300,000,000 2009: 13,863,600,000,000 2010: 14,447,100,000,000 2011: 15,094,000,000,000 2012: 15,684,800,000,000 2013: 16,244,600,000,000 17,418,925,000,000 2014: 17,418,925,000,000

29. 2. 2. China: (+6.9 trillion since ‘07) 11% of the world’s economy 2007: 3,494,055,944,791 2008: 4,521,827,288,304 2009: 4,991,256,406,735 2010: 5,930,529,470,799 2011: 7,298,096,609,545 2012: 8,227,103,000,000 2013: 8,358,400,000,000 10,380,380,000,000 2014: 10,380,380,000,000

30. Comparing 2013 to 2014 1. 1. USA = $17,000,000,000,000 (1.2) 2. 2. China = $10,300,000,000,000 (2.0) 3. 3. Japan 4,600,000,000,000 (-1.3) 4. 4. Germany 3,400,000,000,000 5. 5. France 2,600,000,000,000 11. 11. Canada 1,800,000,000,000 15. Mexico 1,200,000,000,000 21. Iran551,588,000,000 (billions) 39. Egypt 254,286,000,000 (257) 65. Cuba71,017,000,000

35. In 2011-12 In 2011-12