1. Economic Instability Chapter 13
Is the economy getting better or worse?

2. Lesson 1: Business Cycles and Economic Instability
Essential Question:
What are the causes and consequences of instability in the economy?

3. Business Cycle
. The term business cycle refers to the recurrent ups and downs in the level of economic activity, which extend over several years. (Gross Domestic Product)
√ Individual business cycles may vary greatly in duration and intensity.
√ All display a set of phases.

4. Two phases of a Business Cycle
Recession – decline in the real GDP lasting at least two quarters or more
Expansion – period of uninterrupted growth of real GDP, recovery and recession

5. THE BUSINESS CYCLE Phases of the Business Cycle PEAK RECOVERY
Level of business activity
Time
RECESSION
TROUGH
RECOVERY
Expansion
SECULAR
TREND

6. PEAK √ Peak or prosperity phase:
Time
GROWTH
TREND
Level of business activity
√ Peak or prosperity phase:
Real output in the economy is at a high level
Unemployment is low
Domestic output may be at its capacity
Inflation may be high.

7. Level of business activity
Time
RECESSION
SECULAR
TREND
√ Contraction/recession phase ((> 2 quarters of declining GDP):
Real output is decreasing
Unemployment rate is rising.
As contraction continues, inflation pressure fades.
If the recession is prolonged, price may decline (deflation)
The government determinant for a recession is two consecutive quarters of declining output.

8. TROUGH √ Trough or depression phase: Lowest point of real GDP
Level of business activity
Time
TROUGH
SECULAR TREND
√ Trough or depression phase:
Lowest point of real GDP
Output and unemployment “bottom out”
This phase may be short-lived or prolonged
There is no precise decline in output at which a serious recession becomes a depression.

9. RECOVERY √ Expansionary (> 2 quarters of ↑ rGDP):
SECULAR
TREND
Level of business activity
Time
√ Expansionary (> 2 quarters of ↑ rGDP):
Real output in the economy is increasing
Unemployment rate is declining
The upswing part of the cycle.

10. Causes of the Business Cycle
External shocks- such as increases in oil prices and international conflicts, can cause business cycles.
Changes in investment spending-when the economy is expanding, businesses expect future sales to be high, so companies build new plants or buy new equipment to replace old equipment..
Changes in monetary policy- tight money policy of the Federal Reserve System slows down the economy

11. Causes of the Business Cycle (cont)
Fiscal-policy- change in either taxation or spending can affect decisions in the economy.
Speculation and “bubbles”-expectations about the future

12. Business Cycles in the United States
Black Tuesday,” October 29th, 1929, marked the beginning of the Great Depression.
Between 1929 and 1933, real GDP declined nearly 50%.
Unemployment rose nearly 800%.
Average wage plunged from 55 cents/hour to 5 cents
one-quarter of all banks failed.
Depression scrip used because official paper currency was in short supply

13. Causes of the Great Depression
Enormous gap in the distribution of income
Easy credit
Global economic conditions
International trade

14. Recovery and Legislative Reform
Laws passed and government agencies were established to prevent another depression.
Social Security Act of 1935
Minimum Wage
Unemployment programs
Securities and Exchange Commission
Federal Deposit Insurance Corporation
After World War II, business cycles had shorter recessions and longer periods of expansion.

15. Forecasting Business Cycles
Economists use statistics and models to predict business cycles.
The Statistical series Is known as the Leading economic indicator (LEI) monthly statistical series that uses a combination of ten individual indicators to forecast changes in real GDP
Others use a tool called econometric modeling - a mathematical model that uses algebraic equations to describe how the economy behaves.

16. Indicators that make-up the LEI
Average weekly hours for production workers in manufacturing
Weekly initial claims for unemployment insurance
New orders for consumer goods
Speed with which companies make deliveries (the busier a company, the longer it will take to fill orders)
Number of contracts and orders for plants and equipment

17. Cont. Number of building permits issued for private housing units
Stock prices as measured by the S&P index
Changes in money supply in circulation
Changes in interest rates
Changes in consumer expectations

18. Chapter 13, lesson 1
Read lesson one and complete questions

19. Lesson 2: Inflation Essential Question:
What are the causes and consequences of instability in the economy?

20. How is Inflation Tracked?
By comparing prices from one year to the next
These numbers are then reported through the CPI
CPI = Consumer Price Index – used to measure price changes for a market basket of frequently used consumer items

21. Consumer Price Index (CPI)
The Labor Department surveyed the purchasing patterns of consumers to determine a group of about 400 items that buyers typically use.
These 400 items makes up a “Market Basket”
Each month surveyors check on the prices of these items in cities across America.
Results are used to compute what the market basket costs compared to what it cost in a base period.

22. CAUSES OF INFLATION Demand-pull:
All sectors of the economy try to buy more than the economy can produce
Causes shortages
Excess demand for goods and services causes businesses to raise prices; this can result when there is also a increase in the money supply
Wage-price spiral-does not blame any particular group or event for rising prices

23. CAUSES OF INFLATION(cont)
Cost-push -labor negotiations as well as an increase in the cost of inputs causes businesses to raise prices
Excessive monetary growth-occurs when the money supply grows faster than real GDP

25. Consequences of Inflation (cont.)
Reduced purchasing power
Distorted spending patterns
Encourages speculation
Distorted distribution of income
Creditors are hurt more than debtors
generally.

26. Chapter 13, lesson 2
Complete lesson 2 questions

27. Lesson 3: Unemployment Essential Question:
What are the causes and consequences of instability in the economy?

28. Measuring Unemployment
The Census Bureau surveys 50,000 homes each month.
Each household must answer a series of questions.
Broken down into:
Non-institutional Population
Not in Labor Force
Labor Force
Employed
Unemployed

29. What is an Unemployed Person?
People available for work who:
Made a specific effort to find a job during the past month
Worked less than 1 hour for pay or profit
Worked in a family business without pay for less than 15 hours a week

30. Unemployment Rate
The number of unemployed individuals divided by the total number of persons in the civilian labor force( sum of all persons aged 16 and above who are either employed or actively seeking employment)
Unemployment rate rises during recessions and comes down slowly afterwards
Affected by downturns in real GDP – cost of a recession.

31. People NOT Counted
People who have stopped looking for work. “Dropouts”
People who have no interest in finding a job.
Retired persons
Housewives
Students
Disabled persons

32. Kinds of Unemployment Frictional Structural Cyclical Seasonal
Technological

33. Frictional Workers who are between jobs Will always be present.
Examples:
People who get “fired” or “quit” to look for a better one.
2. “Graduates” from high school or college who are looking for a job.

34. Structural
Occurs when a fundamental change in the operations of the economy reduces a demand for workers & their skills
Consumer tastes change and therefore causes certain goods to no longer be demanded.

35. Cyclical Related to swings in the business cycle
Recession: people don’t buy as many durable goods (cars, homes)
May result in lay-offs
People usually get their jobs back when the economy improves
These jobs do come back.”

36. Seasonal
Results from changes in seasons and demand for certain products
Ex: construction
Difference between seasonal and cyclical:
Cyclical follows the business cycle. Can last 3-5 years.
Seasonal can take place every year despite the health of the economy

37. Technological
Workers are replaced because machines can do the work more efficiently

38. Costs of Instability
Recession, inflation, and unemployment hinder economic growth and have human costs.
Opportunity cost like the GDP gap
Misery index or discomfort index (unofficial statistic that is the sum of monthly inflation and the unemployment rate.
Uncertainty leads to fewer consumer purchases
Political instability
Community and domestic matters- crime, poverty and family instability

39. “Should I make a big purchase?”
Only if you know that you won’t lose your job in a contraction. So, buy your house during an expansion.
HOWEVER,
When the economy starts to slow down (contraction), interest rates will decrease. Wait to buy a house until the rates drop to a low point, if you are sure you won’t lose your job.

40. “Don’t quit that job!”
If the economy is going into a contraction, jobs will become more scarce. If you quit, you may not find another job!
But, if the economy is in a period of expansion, jobs are readily available. It may be a good time to switch careers.