Why does Macroeconomics matter? Businesses: Understanding macroeconomic trends helps businesses be responsive to the environment in which they compete Households/ Consumers: Understanding macroeconomic trends helps people make informed decisions about personal finance and voting. –Is this a good time to buy a car? –Refinance your home? –Change to a new job? –Go to college? –How candidates and their policies affect my economic well-being

Economics The Business Cycle Unit 3, Lesson 2

What is the Business Cycle? The business cycle is a period of economic expansion followed by a period of contraction

Phase 1 - Expansion Expansion of economy People buying more g&s General prosperity

Phase 2 - Peak Boom Period – economic activity at peak Businesses working and selling at full capacity

Phase 3 - Contraction Contraction of economy People buying fewer g&s Businesses cut back production and lay off

Phase 4 - Trough Trough – a recession when the GDP drops for 6 consecutive months High Unemployment Significant reduction of consumer spending Production at lowest point

Annual Percentage Change in U.S. Real GDP (economic Growth) Since 1929

It’s a Recession, but is it a Depression? Recession– This is an economic term meaning 2 consecutive quarters (6 months of negative growth rates) Depression– This is an historical term used to characterize a period in history of an extended and deep recession.

Different Impact on States –Intensity of the business cycle varies from region to region across the U.S. –Economically diverse regions usually do better in a recession – m/geographyofarecession.htmlhttp:// m/geographyofarecession.html

Business Cycles in a Global Economy Market economies around the world often move together because of so much trade and interdependence.

Measuring the Business Cycle: Economic Indicators A set of key economic variables that economists use to predict a new phase of the business cycle and identify trends in the economy (economic statistics)

Three Attributes of Economic Indicators 1. Relation to the Business Cycle: –Cyclical – economic indicator that moves in the same direction as the economy. If economy is doing well, the number will increase (gdp). –Countercyclical – economic indicator that moves in the opposite direction of the economy. Ex: unemployment rate gets larger as the economy gets worse.

Three Attributes of Economic Indicators 2. Frequency of the Data: –GDP – quarterly –Unemployment – monthly –Dow Jones - immediately 3. Timing: –Can be leading, lagging, or coincident. Indicates the timing of their changes relative to how the economy as a whole changes.

Types of Economic Indicators Leading Indicators: predict or show an upcoming contraction or expansion –Stock Market –Building Permits –Housing and Auto Sales –Earnings –Personal Savings –Consumer Expectations –Lending –Energy Costs

Types of Economic Indicators Lagging Indicators follow or trail changes in overall economic activity –Consumer Prices –Unpaid loans or indebtedness –Unemployment –Interest Rates –Retail Sales

Leading Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future. Other leading indicators include business production, manufacturing orders, and building permits.

Lagging A lagging economic indicator is one that does not change direction until a few quarters after the economy does. The unemployment rate is a lagging economic indicator as unemployment tends to increase for 2 or 3 quarters after the economy starts to improve. Other lagging indicators include consumer prices, interests rates, overall retail sales, and wages.

Identify the type of economic indicator activity 1.Sales for a major automobile company have been slow this year. 2.Total employment rate increases in May More people are saving money in banks. 4.Average price of gas and electricity increase this summer. 5.Company investment in capital resources dramatically increases. 6.A larger proportion of homeowners have been late on their mortgages. 7.The Dow Jones Market grows by 500 points. 8.Trade Exports climb significantly.

Answers: Identify the type of economic indicator activity 1. Sales for a major automobile company have been slow this year.Coincident 2. Total employment rate increases in May 2010 Lagging 3. More people are saving money in banks Coincident 4. Average price of gas and electricity increase this summer. Lagging 5. Company investment in capital resources dramatically increases Leading 6. A larger proportion of homeowners have been late on their mortgages Lagging 7. The Dow Jones Market grows by 500 points Leading 8. Trade Exports climb significantly Coincident

Citations Business Cycle Graph citations: "Google Image Result for " Google Images. Web. 24 Aug duksyon/images/ duksyon/images Business_cycle_01.png&imgrefurl= 2/02/&usg=__H2Hn_LnBpPLsN_mBuuN5uTEU6Mg=&h=394&w=579&sz=1 5&hl=en&start=4&tbnid=ESUhQUy9pDjZ4M:&tbnh=91&tbnw=134&prev=/im ages%3Fq%3Dbusiness%2Bcycle%26gbv%3D2%26hl%3Den US Census Bureau

Economic Indicators n.action?collectionCode=ECONI&browseP ath=2013%2F01%2F1&isCollapsed=true& leafLevelBrowse=false&isDocumentResult s=true&ycord=0http:// n.action?collectionCode=ECONI&browseP ath=2013%2F01%2F1&isCollapsed=true& leafLevelBrowse=false&isDocumentResult s=true&ycord=0 conomy/index.html?src=busfnhttp:// conomy/index.html?src=busfn