Economic Conditions Change Intro to Business 2-2

Goal Describe the four phases of the business cycle

The Business Cycle All nations experiences economic good times and economic bad times This movement of the economy from one condition to another and back again is called a Business Cycle

ProsperityRecession DepressionRecovery

Prosperity Peek of the cycle People who want to work are working, wages are good, GDP increases Demand for goods and services is high Cannot last forever

Recession Period where demand begins to decrease, businesses lower production, unemployment begins to rise GDP growth slows for two or more quarters of a calendar year Trouble is to come for some groups of workers Production weakens, output declines

Depression Recession is really bad it becomes a depression Marked by prolonged period of high unemployment, weak consumer sales, and business failure GDP falls rapidly No depression for over 60 years – (The Great Depression) – Around 25% of the US Labor Force was unemployed – Basic needs couldn’t be met

Recovery The phase where unemployment begins to decrease Demand for goods and services begins to increase GDP rises again People get employment People start buying again

2-2 Quiz T/F: The last depression in the US was during the 1980s. A period of economic recovery a)is characterized by a rise in GDP b)usually causes businesses to lowering production c)is marked by widespread unemployment d)is considered the high point of the business cycle

1.The movement of the economy from one condition to another and back again is called the 2.A period in the business cycle when demand begins to decrease, unemployment begins to rise, and GDP growth slows for at least 2 quarters in a calendar year. 3.A period in the business cycle marked by a long period of high unemployment, weak consumer sales, and business failure. 4.A period in the business cycle when most people who want to work are working, wages are good and GDP growth increases. A.Depression B.Prosperity C.Business Cycle D.Recession

Goal Explain causes of inflation and deflation

Consumer Prices Noticed: Packages get smaller but prices stay the same!!! Bought a newer technology product for cheaper than the earlier one?

Inflation An increase in the general level of prices Buying power of a dollar decreases If prices increase 5% during the last year $100 before $105 for the same product Takes more money to buy the same product $1.00 pop now $1.50 for the same pop

Inflation Harmful Most harmful to people living on a fixed income Retired people and other whose incomes do not change are unable to afford goods and services If you only get $5.00 a week for “extras” you’ll not be able to afford as much pop

Causes of Inflation When demand is greater than supply – Everyone get a raise in allowance the price may go up to keep the machines full – During inflation people may get raises; however, prices rise faster INFLATION Harmful? – Pay more but get the same – Earn more to buy the same

Measuring Inflation During the ‘50s and ‘60s inflation was 1-3% During the ’70s and ’80s inflation was 10-12% Mild inflation can stimulate economic growth – Wages rise faster than the prices of products, producer gets higher profits and can hire more workers, more people with jobs means more spending

Measuring Inflation The US has one of the most watched measures of inflation – The Consumer Price Index (CPI) – A price index is a number that compares prices in one year with some earlier base

Deflation Means a decrease in the general level of prices Occurs in periods of recession or depression Prices are lower but people still don’t have money to buy them – Houses now!! During prices declined 25%

Interest Rates Represents the cost of money Influence business activity Higher interest rates = higher cost to a business The interest you receive on savings reflect current interest rates People with poor credit pay a higher interest rate than people with good credit

Types of Interest Rates Prime rate: rate banks give to their best business customers, such as large corporations – Loaning money to Energizer to build on Discount rate: rate banks are charged to borrow from the Federal Reserve banks – CBT needs to give money it doesn’t have to Hardware Hank, they pay this rate

Types of Interest Rates T-bill rate: yield on short term (13-week) US government debt obligations – Buy a T-bill from the gvmt for $9,800 at the end of 13-weeks they pay you $10,000 for using your money to run the country for 13-weeks Treasury bond rate: yield on a long term (10 year) US government debt obligation – Buy a T-bond from the gvmt you earn interest 1-4 times a year at the end of 10 years you get your money back

Mortgage rate: amount home buyers pay to borrow for their new house – Pay 6% on money needed to buy a house Corporate bond: the cost of borrowing for large US corporations – Buy a bond from Best Buy, they pay you for using your money in dividends, when you need your money back you sell and also make money (hopefully)

Certificate of Deposit rate: rate for 6-month time deposits at banks – Put your money in the bank for 6 mo/12 months /18 months… and they pay you interest for your money being locked away, you can have your money back after 6 mo/12 months /18 months…

Changing Interest Rates Each day the interest rate changes When borrowing increases, interest rates rise

Remember Even really really good businesses have to borrow money to survive!!