1. Economic Instability

2. Chapter 13 Vocab Outsourcing Technological unemployment
Cyclical unemployment
Seasonal unemployment
GDP gap
Misery index/ Discomfort index
Inflation
Deflation
Price index
Consumer price index
Market basket
Base year
Creeping inflation
Hyperinflation
Stagflation
Demand-pull inflation
Cost-push inflation
Civilian labor force
Unemployed
Unemployment rate
Frictional unemployment
Structural unemployment

3. Business Cycles vs. Business Fluctuations
Business Cycles: regular increases and decreases in real GDP
Business Fluctuations: irregular increases and decreases in real GDP
They both can interrupt economic growth

4. First phase is recession, a period during which real GDP (GDP measured in constant prices) declines for at least 2 quarters in a row or 6 consecutive months.

5. The recession begins when the economy reaches a peak, the point where real GDP stops going up.

6. The recession ends when the economy reaches a trough, the turnaround point where real GDP stops going down.

7. As soon as the declining real GDP bottoms out, the economy moves into the second phase, expansion – a period of recovery until the economy reaches a new peak.

8. When it does, the current business cycle ends and a new one begins.

9. Trend line: growth path the economy would follow if it were not interrupted by alternating periods of recession and recovery

10. Causes of Changes in the Business Cycle
Changes in investment spending: When the economy is expanding, businesses expect future sales to be high, so they invest heavily in capital goods.
Innovation and Imitation: Come up with a new product or new way of doing things; copying what other companies may be doing
Monetary Policy Decisions: Change of interest rates causing incentives to invest or not
External Shocks: oil prices, wars, international conflict, natural disasters

11. What Happens if a recession becomes very severe?
Depression: a state of the economy with large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants.

12. The Great Depression Causes Effects Unequal distribution of income
Easy Credit
Global economic conditions
GDP fell almost 50 percent
Unemployment rose nearly 800 percent
Average manufacturing wage fell from 55 cents an hour to 5 cents an hour
Banks failed
Money supply contracted

13. What’s the difference between inflation and deflation?
Inflation: increase in the general level of prices of goods and services
Deflation: decrease in the general level of prices for goods and services

14. Market Basket: commonly purchased goods and services
Total of approx. 354 determined items

15. Constructing the Consumer Price Index
Consumer Price Index (CPI): series used to measure prices changes for a representative sample of frequently used consumer items
Select a Market Basket
Find the average price of each item in the market basket. Then add up the total for the basket.
Have a base year: a year that serves as a comparison for all other years
Convert the dollar cost of a market basket to an index value so that it is easier to interpret.

16. (current year CPI – previous year CPI) Previous year CPI
Measuring Inflation
(current year CPI – previous year CPI) Previous year CPI

17. Types of Inflation
Creeping Inflation: 1-3% inflation per year; not much of a problem
Hyperinflation: 500% and above inflation per year; very very rare
Stagflation: period of slow economic growth coupled with inflation

18. Causes of Inflation
Causes of inflation include strong demand, rising costs, and wage-price spirals, along with a growing supply of money.
Demand-pull inflation: prices rise because all sectors try to buy more goods and services than the economy can produce; cause shortages, which drive up prices
Cost-push inflation: rising costs drive up prices of products

19. Consequences of Inflation
Inflation can reduce purchasing power, distort spending, and affect the distribution of income.
Reduce Purchasing Power: dollar buys less as prices rise
Distort Spending Patterns:
Encourage Speculation: Spend money on luxury items if the prices are expected to increase
Distorted Distribution of Income:

20. Unemployment

22. Measuring Unemployment
Civilian Labor Force: sum of all people age 16 and above who are either employed or actively seeking employment
Who is classified as unemployed?
People available to work who made a specific effort to find a job during the past month AND worked less than 1 hour for pay in a week
Work 15 hours or less in a week in a family business for no pay

23. How to Calculate the Unemployment Rate
Number of unemployed persons Civilian Labor Force 7,015,000 = = 4.6% 150,991,000

24. Unemployment Rate
Bedford Co.
10.8%
Tennessee
9.5%
All U.S.
9.2%

25. Limitations of the Unemployment Rate
Doesn’t measure people too frustrated or discouraged to look for work
People are considered employed even if they only have part-time jobs

26. Sources of Unemployment
Frictional: workers are between jobs; short-term condition
Structural: fundamental change in the economy; more serious type of unemployment, also includes Technological: workers are replaced by machines or automated systems
Cyclical: related to changes in the business cycle, also includes Seasonal: annual changes in the weather or other conditions that reduce the demand for jobs