Measuring Health, Unemployment, Inflation Economic Health Measuring Health, Unemployment, Inflation

4 Phases of a Business Cycle Business cycles are made up of major changes in real GDP above or below normal levels. The business cycle consists of four phases: Expansion Peak Contraction Trough Checkpoint Answer: Expansion, peak, contraction, and trough

Contractions There are three types of contractions, each with different characteristics. A recession is a prolonged economic contraction that generally lasts from 6 to 18 months and is marked by a high unemployment rate. A depression is a recession that is especially long and severe characterized by high unemployment and low economic output. Stagflation is a decline in real GDP combined with a rise in price level, or inflation.

Business Cycle Forecasting Checkpoint: Why is it difficult to predict business cycles? To predict the next phase of a business cycle, forecasters must anticipate movements in real GDP before they occur. Economists use leading indicators to help them make these predictions. The stock market is a leading indicator. Today, the stock market turns sharply downward before a recession. Checkpoint Answer: Economists must anticipate movements in real GDP before they occur.

Unhealthy Economy When the business cycle is on a downward trending path, typically the economy sees negative side-effects. Two of those side-effects are inflation and unemployment.

Top 10 Movies of All Time (Unadjusted) 1 Avatar $737,266,471 2009 2 Titanic $600,788,188 1997 3 The Dark Knight $533,345,358 2008 4 Star Wars $460,998,007 1977^ 5 Shrek 2 $441,226,247 2004 6 E.T.: The Extra-Terrestrial $435,110,554 1982^ 7 Episode I - The Phantom Menace $431,088,301 1999 8 Pirates: Dead Man's Chest $423,315,812 2006 9 Spider-Man $403,706,375 2002 10 Transformers: Revenge of the Fallen $402,111,870 2009

Top 20 Movies of All Time (Adjusted for Inflation) 11 101 Dalmatians $760,370,300 $144,880,014 1961^ 12 The Empire Strikes Back $747,154,600 $290,475,067 1980^ 13 Ben-Hur $745,780,000 $74,000,000 1959 14 Avatar (#1) $737,266,500 $737,266,500 2009 15 Return of the Jedi $715,792,100 $309,306,177 1983^ 16 The Sting $678,377,100 $156,000,000 1973 17 Raiders of the Lost Ark $670,759,500 $242,374,454 1981^ 18 Jurassic Park $656,026,500 $357,067,947 1993 19 The Graduate $651,198,300 $104,901,839 1967^ 20 Episode I - Phantom Menace (#7) $645,524,400 $431,088,301 1999

Top 20 Movies of All Time (Adjusted for Inflation) 1 Gone with the Wind $1,537,559,600 $198,676,459 1939^ 2 Star Wars (#4) $1,355,490,100 $460,998,007 1977^ 3 The Sound of Music $1,083,781,000 $158,671,368 1965 4 ET: The Extra-Terrestrial(#6) $1,079,511,500 $435,110,554 1982^ 5 The Ten Commandments $996,910,000 $65,500,000 1956 6 Titanic (#2) $976,712,200 $600,788,188 1997 7 Jaws $974,679,800 $260,000,000 1975 8 Doctor Zhivago $944,670,800 $111,721,910 1965 9 The Exorcist $841,427,600 $232,671,011 1973^ 10 Snow White & the Seven Dwarfs $829,490,000 $184,925,486 1937^

What is Inflation? Inflation is rising general level of prices Inflation reduces the “purchasing power” of money Examples: It takes $2 to buy what $1 bought in 1982 It takes $6 to buy what $1 bought in 1961 When inflation occurs, each dollar of income will buy fewer goods than before.

How is Inflation measured? The government tracks the prices of the same goods and services each year. This “market basket” is made up of about 300 commonly purchased goods The Inflation Rate - % change in prices in 1 year They also compare changes in prices to a given base year (usually 1982) Prices of subsequent years are then expressed as a percentage of the base year Examples: 2005 inflation rate was 3.4% U.S. prices have increase 98.3% since 1982 (base year). The inflation rate in Bolivia in 1985 was 50,000% This is called Hyperinflation A $25 meal today would cost $12,525 a year later

Causes of Inflation The Quantity Theory The quantity theory of inflation states that too much money in the economy leads to inflation. Too much money in the system causes purchasing power boom, thus leading to price increases (inflation!).

Causes of Inflation “Too much money spent chasing too few goods.” Caused by a decrease in unemployment. The Demand-Pull Theory Changes to aggregate demand can cause inflation to occur when demand for goods and services exceeds existing supplies.

Causes of Inflation The Cost-Push Theory According to the cost-push theory, inflation occurs when producers raise prices in order to meet increased costs, or changes in aggregate supply. Cost-push inflation can lead to a wage-price spiral — the process by which rising wages cause higher prices, and higher prices cause higher wages.

Effects of Inflation High inflation is a major economic problem, especially when inflation rates change greatly from year to year. Purchasing Power In an inflationary economy, a dollar loses value. It will not buy the same amount of goods that it did in years past. Interest Rates When a bank's interest rate matches the inflation rate, savers break even. When a bank's interest rate is lower than the inflation rate, savers lose money. Income If wage increases match the inflation rate, a worker's real income stays the same. If income is fixed income, or income that does not increase even when prices go up, the economic effects of inflation can be harmful.

Exit Question - What effects does inflation have on an economy, on individuals, and on businesses? Are these issues always harmful? Explain. How can inflation be prevented?

Hurt by Inflation Helped by Inflation Lenders-People who lend money (at fixed interest rates) People with fixed incomes Savers Debtors-People who borrow money A business where the price of the product increases faster than the price of resources