Business Cycles & Banking Chapter 4

Business Cycle Period of time when the economy grows followed by a period of time when the economy shrinks

U.S. Economy U.S. Department of Commerce keeps track of our economy U.S. Department of Commerce keeps track of our economy Collect and measure data Collect and measure data –Gross Domestic Product –Gross National Product Tells how healthy the economy is Tells how healthy the economy is

Gross Domestic Product GDP GDP Total dollar value of all goods & services that are produced by a country in one year Total dollar value of all goods & services that are produced by a country in one year Looks at final product & price Looks at final product & price –Ex: Making of Bread & selling for $2.00

Gross Domestic Product Increase in GDP means production is up Increase in GDP means production is up Increase in production, business are doing well Increase in production, business are doing well Businesses doing well, more jobs Businesses doing well, more jobs More jobs, more money to spend More jobs, more money to spend Economy is better Economy is better

Gross National Product Amount of income earned by a country’s companies & citizens in one year

Phases of Business Cycle 4 phases 4 phases –Expansion –Peak –Recession –Trough

Expansion Measured by rise in GDP Measured by rise in GDP Economy is in good shape Economy is in good shape Plenty of jobs Plenty of jobs People willing to spend money People willing to spend money Businesses make a profit & grow Businesses make a profit & grow

Peak Production is at a high point Production is at a high point When GDP reaches a high point When GDP reaches a high point GDP stops rising GDP stops rising Second phase of business cycle Second phase of business cycle Marks turning point of business cycle Marks turning point of business cycle

Recession 3 rd phase of business cycle 3 rd phase of business cycle GDP falls GDP falls Business activity slows down Business activity slows down People spend less money People spend less money Unemployment rises Unemployment rises

Trough 4 th phase of business cycle 4 th phase of business cycle Economy reaches the lowest level Economy reaches the lowest level GDP stops falling & starts to rise again GDP stops falling & starts to rise again Economy begins to recover Economy begins to recover People are hired People are hired People spend money again People spend money again

Recession GDP falls for at least 6 months in a row GDP falls for at least 6 months in a row Usually last 6 to 18 months Usually last 6 to 18 months If especially long becomes a depression If especially long becomes a depression

Depression 1930’s 1930’s Great Depression Great Depression Lasted 10 years Lasted 10 years WWII helped bring U.S. out of Great Depression WWII helped bring U.S. out of Great Depression

Money Anything that serves as a medium of exchange, a measure of value, and a store of value

Money Medium of Exchange Medium of Exchange Measure of Value Measure of Value Store of Value Store of Value

Medium of Exchange Accepted as payment for goods & services by everyone Accepted as payment for goods & services by everyone Ex: gold, silver & salt Ex: gold, silver & salt Barter System Barter System –Buy goods & services without money –Exchange one set of goods or services for another –Ex: trade loaf of bread for farmer’s vegetables

Measure of Value Expresses the worth of something Expresses the worth of something Able to compare products according to their value Able to compare products according to their value Bargain shopping Bargain shopping –Ex: Pair of shoes

Store of Value Money keeps its value if you store it or keep it Money keeps its value if you store it or keep it Is the same value today as it will be in 3 months Is the same value today as it will be in 3 months One exception -- Inflation One exception -- Inflation

Inflation Economy goes through a fast, general increase in prices Economy goes through a fast, general increase in prices Inflation occurs, value of dollar decreases Inflation occurs, value of dollar decreases Average person will pay more for goods & services than before Average person will pay more for goods & services than before If wages stay same & prices go up, people can’t afford things they need If wages stay same & prices go up, people can’t afford things they need

Money Past Currency Past Currency –Used gold, silver, precious stones, salt & cattle –Do not meet the needs of all the characteristics of money Today Today –Use coins & paper bills –Meet needs of all the characteristics of money

Characteristics of Money Be portable Be portable Be durable Be durable Be divisible Be divisible Limited availability Limited availability

Banking Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation –FDIC –Guarantees and insures money in banks –Provides safe and convenient place to store money

Beginning of Banking People asked goldsmiths to store their gold People asked goldsmiths to store their gold A receipt would be written A receipt would be written Charged people a fee to store their gold Charged people a fee to store their gold Goldsmiths then started lending out some of the gold Goldsmiths then started lending out some of the gold Charged a fee to borrow gold Charged a fee to borrow gold 1 st banks 1 st banks

Banking Today Savings Accounts Savings Accounts –Store money for a long time –Earn interest –More money the more interest earned Checking Accounts Checking Accounts –Used for day-to-day expenses –Withdraw money anytime

Banking Banks Loaning Money Banks Loaning Money –People borrow money –Pay back amount borrow plus interest –Pay back more than he/she borrowed –Borrow money for  Improving homes  Paying tuition  businesses

Banking Default Default –Borrowers do not pay loan back Bank loses money Bank loses money Need to apply for loan Need to apply for loan –Bank makes decision

Stock Market Stocks Stocks –Certificates of ownership in a corporation Shares Shares –Corporations sell portions of stock –Help raise money for corporations Equities Equities –Same as stocks

Stock Market Stockholders make profit by Stockholders make profit by –Dividends  Paid 4 times a year  Profit high dividends are high; profit low dividends are low –Capital gains/capital loss  Stockholder selling stock  Sell stock for more or less than original amount  More = gain; less = loss

Stock Market Stockbroker Stockbroker –Person who buys & sells stock for a company –Specializes in trading stocks Stock Market/Stock Exchange Stock Market/Stock Exchange –Market for buying & selling stock

Major Stock Market New York Stock Exchange (NYSE) New York Stock Exchange (NYSE) National Association of Securities Dealers Automated Quotation System (NASDAQ) National Association of Securities Dealers Automated Quotation System (NASDAQ)

New York Stock Exchange Largest & most powerful in U.S Largest & most powerful in U.S Started in 1972 Started in 1972 Trading on floor Trading on floor List only largest & best-known companies in U.S. List only largest & best-known companies in U.S. Blue-chip companies Blue-chip companies –Have very good reputations

NASDAQ OTC Market OTC Market Over-the-counter Over-the-counter No trading floor No trading floor Trading through computers Trading through computers

Stock Market Buy stocks & keep for a long time Buy stocks & keep for a long time Expect value will increase over time Expect value will increase over time Dow Jones Industrial Average Dow Jones Industrial Average –Shows how certain stocks are traded each day –Show how market is doing

Bull Market Stock Market rises steadily over a period of time Stock Market rises steadily over a period of time Expect increase in profits Expect increase in profits Buy more stocks Buy more stocks

Bear Market Stock market falls steadily over a period of time Stock market falls steadily over a period of time Sell stocks Sell stocks Expect lower profits Expect lower profits