Chapter Seven: Economic Growth and Fluctuations

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Presentation transcript:

Chapter Seven: Economic Growth and Fluctuations The Business Cycle and Unemployment

The Big Ideas of the Chapter… The definition and causes of economic growth. The nature and cause of the business cycle. The nature of unemployment and its measurement. The definition of inflation and how it is measured. The overall effects of inflation on wealth and output.

Reviewing the Business Cycle Business cycles are alternating rises and declines in the level of economic activity.

The Peak of the Business Cycle When business activity reaches maximum (temporary) Economy near or at full employment Price level likely to rise Level of real output at or very close to economy's capacity (on production possibilities curve) Recession needs to take place to identify the peak.

The Recession in the Business Cycle Period of decline in total output, income, and employment Widespread contraction of business activity Lasts 6 months or more Decrease in real GDP

The Trough of the Business Cycle The bottom curve of the recession where output and employment are at their lowest level Can be either short-lived or long Example of long trough: The Great Depression Represented by an area inside the Production Possibilities Curve

The Expansion / Recovery in the Business Cycle Period where real GDP, income, and employment rises (approaching full employment). Inflation will occur if spending expands more rapidly than does productive capacity. Prices of nearly all goods and services will rise.

What Causes the Business Cycle? Changes in productivity and tech. innovations. When productivity expands, the economy booms; when productivity falls, the economy recedes. Changes in the level of total spending. Peaks are temporary because at full employment, real output can hardly rise anymore so if spending keeps increasing we get inflation.

The Cyclical Impacts of the Business Cycle Industries producing capital goods and consumer durables are affected most. Firms and households can postpone the purchase of capital goods and consumer durables. When recession occurs budget constraints cause durable purchases to decline. Service industries and industries that produce non-durable consumer goods are more insulated.

Measuring Unemployment Unemployment Rate = (unemployed / labour force) × 100

Who is in the Labour Force? Persons 15 years of age and older who are not in institutions and who are employed or are unemployed and seeking work. Those who are potential workers but are not actively seeking work are not in the labour force. About 50 percent of Canadians are in the labour force.

Test Preparation Answer 178 # 4 and # 6