ECONOMIC CHANGES AND CYCLES

UNEMPLOYMENT Who are the unemployed? Civilians in the labor force who are willing and able to work but are not employed

UNEMPLOYMENT Civilian Labor Force = Unemployed persons + Employed persons The unemployment rate = % of civilian labor force that is unemployed The employment rate = % of noninstitutional adult civilian population employed

INFLATION Inflation is an increase in the price level

INFLATION How do we measure inflation? First we need to know the Consumer Price Index (CPI) CPI = the most widely cited average price level, or price index CPI is calculated by the U.S. Bureau of Labor Statistics, if you really want to know how look at pages of your book.

INFLATION To calculate the inflation rate CPI later year – CPI earlier year Inflation rate =X 100 CPI earlier year

DEMAND-SIDE INFLATION When demand for a good increases and supply remains the same, price increases.

SUPPLY-SIDE INFLATION When supply for a good decreases and demand remains the same, price increases.

INFLATION In simple terms to explain why inflation happens: If the supply of money in an economy increases, the price of goods will increase as well.

INFLATION Effects of inflation Individuals on fixed incomes If someone receives the same amount of income over a period of time and prices rise, the amount of stuff they can buy decreases. Savers If you have money in savings and prices rise, you will be able to buy less with that money when you take it out of savings than when you put it into savings. This decreases your savings’ value. Past decisions If you make a decision based on current prices and inflation occurs, you could find yourself regretting your decisions Hedging against inflation Hedging is when people try to avoid or lessen a loss by taking counter- balancing action, i.e. buying gold, real estate, etc.

DEFLATION Deflation is a decrease in the average level of prices, or price level. The exact opposite of inflation Deflation is caused by either a decline in the money supply (demand-side deflation) or an increase in an industry’s ability to produce (supply-side deflation), like an increase in technology. Most of the time when deflation happens, not all prices fall at the same time. This often leads to firms going out of business and workers being laid off.

THE BUSINESS CYCLE If real GDP is fluctuating, rising and falling and rising and falling, the economy is said to be incurring a business cycle. This occurs in five phases: 1.Peak. real GDP is at a temporary high 2.Contraction. real GDP decreases. If this happens for two consecutive quarters (4 quarters in a year) the economy is in a recession. 3.Trough. A low point in real GDP 4.Recovery. When real GDP is rising – begins at a trough & ends at the initial peak 5.Expansion. Increases in real GDP beyond the recovery

THE BUSINESS CYCLE Real GDP Time Potential Growth Actual Growth Trough Recovery Peak Contraction/recession Expansion

THE BUSINESS CYCLE Business Cycles are caused by Changes in the Money Supply Business investment, residential construction, & government spending Politicians doing political stuff Innovation Supply shocks This is not a business cycle

ECONOMIC GROWTH Absolute real economic growth is an increase in real GDP from one period to the next Per capita real economic growth is an increase from one period to the next in per capita real GDP, or the real GDP divided by population

ECONOMIC GROWTH Causes of Economic Growth More natural resources Increased labor Increased capital investment Increased Human capital – knowledge and skill that people obtain from education, training, work experience – could also be things like honesty, creativity, & perseverance – traits that help people find work Technological advances

Rounds Price

TAXES “IN THIS WORLD NOTHING CAN BE SAID TO BE CERTAIN, EXCEPT DEATH AND TAXES.” -BENJAMIN FRANKLIN

TAXES Three Major Federal Taxes Personal Income Tax The tax a person pays on their income Corporate Income Tax The tax corporations pay on their profits Social Security Tax A tax the federal government placed on income generated from employment Half is paid by the employee, half is paid by the employer

TAXES Three Other Taxes Sales Tax Applied to the purchase of goods Excise Tax Placed on the purchase of certain goods like gasoline & tobacco products Property Tax Tax on the value of property

TAXES Three Different Ways to Tax Income Proportional Income Tax Everyone pays the same rate, no matter what their income level Progressive Income Tax People pay at a higher rate as their income level rises Regressive Income Tax People pay taxes at a lower rate as their income level rises