Factors Affecting the U.S. Economy

The Business Cycle Business cycle reflects changes in economic activity A series of upturns and downturns Four Stages: 1. Expansion- economy grows 2. Peak- economy is at its strongest 3. Contraction/Recession- economy starts to slow down (extended periods are called depressions) 4. Trough- demand, production, employment are at their lowest levels After exiting the trough, the economy will start to expand again and start the cycle all over

The Business Cycle

Influences on the Business Cycle Business Investment High levels of business investment promote economic growth in 3 ways: Purchase new capital goods = adding to the demand for such goods Investment in new goods = greater efficiency = lower production costs Investment can be used for research and development New technologies that increase production and lower cost Bottom Line: high levels of business investment can help the economy grow

Influences on the Business Cycle Money & Credit Available money/credit to individuals or businesses is affected greatly by interest rates Individuals and businesses borrow money when interest rates are low Makes it easier and cheaper to repay loans Many individuals and businesses will not borrow money when interest rates are high Less money being borrowed for investments

Influences on the Business Cycle Public Opinion Consumers spend money based on their perceptions of the state of the economy Expectations of businesses also affect the economy Their perceptions affect how much money they will borrow and/or invest Changes in the global economy can also impact the U.S. business cycle Prices for imported goods we depend on can profoundly affect our economy (i.e. gas) In some periods of U.S. history, war has contributed to economic expansion Military spending and increased demand/production for goods = increased demand for labor

Predicting the Business Cycle Predicting changes in the business cycle is a critical job Helps businesses decide if it is a good time to borrow and/or invest Helps governments determine how much money they should spend or expect to make in revenue Three factors: Leading Coincident Lagging

Predicting the Business Cycle Leading Indicators Help economists make predictions about future growth Examples: Building permits issued Stock prices Business orders for consumer goods

Predicting the Business Cycle Coincident Indicators Show economists how the economy is doing at the present time Tell if an upturn or downturn has begun Examples: Personal incomes rising or declining Amount of goods being bought Amount of goods being produced

Predicting the Business Cycle Lagging Indicators Indicators that surface well after an upturn or downturn has start Helps economists determine how long the current phase may last or what caused that phase in the first place

Human and Capital Resources Availability, location, and movement of human and capital resources affects U.S. economy Many American businesses have outsourced their labor to foreign countries, where they can pay workers less and therefore lower their production costs Hundreds of thousands of immigrants also come to the U.S. seeking work U.S. will grant green cards to people who can perform highly-skilled jobs that will benefit the U.S. economy Gives these immigrants “permanent resident” status

Current Events & The Economy War, extreme weather, other catastrophic, unforeseen events can also have huge effects on the economy No formula or prediction can prepare economists, consumers, or producers for these types of events

? List and briefly describe the four stages of the business cycle Explain how business investment, money & credit, and public opinion all affect the business cycle. Explain the difference between leading, coincident, and lagging economic indicators. What other resources affect the U.S. economy? What can economists, consumers, and producers not predict or prepare for?