Business Cycles & Fluctuations

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Business Cycle Business cycles are alternating periods of rising and falling real GDP. Can interrupt the nation’s economic growth The economy follows the Business Cycle regularly.

RECESSION A period during which GDP declines for at least two quarters in a row [6 months] Can have widespread effects on production, income, employment, and sales across the economy

PEAK When an expansion is ending and the economy will proceed to a contraction, the peak occurs. A recession begins when the economy reaches a peak: the point where GDP stops going up. A peak is at the highest level of real GDP. Challenge students to discuss the reasons why a peak cannot be sustained. Incomes are at their highest and spending is high. Some resources are pushed beyond their best use.

Peak When the economic cycle peaks: The economy stops growing (reached the top) Wages are at their highest GDP reaches maximum Businesses can’t produce any more or hire more people Business maximize profits Unemployment is at its lowest Cycle begins to contract

TROUGH [“Trawf”] The end of a recession. The point where GDP stops rising and begins to decline. When a contraction ends and the economy will proceed to an expansionary phase, the trough occurs. A trough is at the lowest level of real GDP. What conditions would be present to move the economy from a trough into an expansion? When an expansion is ending and the economy will proceed into a contraction, the business cycle is at a peak.   The lowest point in a cycle, where a contraction ends and expansion begins is a trough. An expansion starts at a trough and continues until the next peak; while a contraction starts at a peak and ends at the next trough. Since WWII, the average contraction has lasted about 11 months, while the average expansion has continued for 5 years. The recession of 2007-2008 lasted an unusually long 18 months

Trough When the economic cycle reaches a trough: Economy “bottoms-out” (reaches lowest point) Wages are at their lowest Borrowing is at its lowest High unemployment and low spending Stock prices drop

EXPANSION A period of recovery from recession. Continues until the economy reaches a new peak. An expansion is a phase of the business cycle during which real GDP rises . Business cycles and the reason for them has been argued for years. Some people blame interest rate changes others say it’s human nature.

Expansion During a period of expansion: Wages increase Low unemployment People are optimistic and spend more money High demand for goods New businesses start Easy to get a bank loan Businesses make profits and stock prices increase

Contraction A contraction is a phase of the business cycle during which real GDP falls. They refer to the ups and downs in total output observed over relatively short periods of time: Example: several months or even a few years. Between: 1945-2010 the US experienced 12 distinct business cycles. PHASES of the BUSINESS CYCLE Characterized by the same two phases: Expansions and Contractions. Expansion: real GDP rises. Generally, rising real GDP is accompanied by a number of favorable conditions: income levels on the rise and firms hire more employees, making it easier to find jobs.   Contraction: real GDP falls. Economic contractions make life more difficult: less money to spend; firms higher fewer workers; more firms go out of business.

Contraction During a period of contraction: Businesses cut back production and layoff people Wages decrease Unemployment increases Number of jobs decline People are pessimistic (negative) and stop spending money Banks stop lending money

Depression If a recession is very severe, it could lead to a depression: A state of the economy with: Large numbers of people out of work Major shortages and Low production [excess capacity in manufacturing plants]

UNEMPLOYMENT

Civilian Labor Force The sum of all people 16 years and older who are either employed or actively seeking employment. Excluded: military, imprisoned, institutionalized.

The number of people who are not working but are actively seeking work Unemployed People available for and looking for work during the last 4 weeks. The number of people who are not working but are actively seeking work

Unemployment rate The number of unemployed divided by the total number of people in the civilian labor force. Number of unemployed =unemployment rate Civilian labor force 15,100,000 = 9.8% unemployment rate 154, 082,000 U.S. on average= 6 %

Underemployment Discouraged workers: people who give up and stop looking for work. [not included in the unemployment rate] Underemployed workers who would like to work more hours or prefer a job that better matches their skills.

Frictional Unemployment Workers changing jobs or waiting to go to a new job Short-term unemployment that occurs while workers search for the jobs best suited for their skills and interests.

Structural Unemployment Fundamental changes in the economy that reduces the demand for some workers. Arises from a mismatch of skills between job seekers and the types of jobs available.

Technological Unemployment Occurs when workers are replaced by machines or automated systems that make their skills obsolete. ATMS/Bank Tellers

Cyclical Unemployment Relates to a change in the business cycle. Joblessness caused by economic contraction. During contraction, production [measured as GDP] declines. Business stop hiring or lay workers off. Recession/Depression

Seasonal Unemployment Results from seasonal changes in the weather or in demand for certain season-related jobs. landscaping, agricultural jobs, beach resorts.

Our Unemployment Rates Philadelphia: 4.9% (Feb 2016) Pennsylvania: 5.3% (Feb 2016) United States: 4.7% (May, 2016) Detroit, Michigan: 9.1% (Feb 2016) *Bureau of Labor Statistics, United States Department of Labor

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