Business Cycles  Economic Growth is a major goal  Measured by – increase in real GDP or increase in real GDP per capita  Sources of growth: 1) increase resources and 2 ) increase the productivity of the resource inputs  Productivity = real output per unit of input  Results from Health, training, education & motivation of workers

Business Cycles  Fluctuations of economic activity levels  Cycles are:  Peak – maximum production level is reached temporarily (full employment)  Recession – period of decline in business activity for 6 months or longer  Depression - long, severe period of economic decline  Trough – lowest point of recession/depression  Recovery – expansion of economic activity leading to improved conditions

Business Cycles  Causes –  Characteristic of the market system  Changes in spending leads to production changes  Innovations lead to major economic adjustments (“creative destruction”)  Productivity (expands = booms; contracts = recessions)  Monetary issue (too much or too little in circulation)

Business Cycles  Major problems from economic instability: unemployment & inflation  Unemployment – results from economic downturn  Measured by: % of labor force that is unemployed  Currently 8% unemployment

Unemployment  Labor force = over 16 yrs old, able & willing to work & actively seeking work  Labor force does not count:  under 16 or unable to work (institutionalized)  Potential workers who are not seeking work (homemakers, students, retirees )  Discouraged workers – no longer looking

Unemployment  Frictional – workers who are “between jobs” (voluntarily changing, laid off, fired, or new workers just starting to look)  Structural – workers whose skills are no longer in demand; they will need to be re- trained or move to a new location  Cyclical – workers who lose jobs due to economic recession & lack of spending

Inflation  Inflation – a rise in the level of prices  Measured by CPI comparisons (year to year; month to month)  Normal economic growth = 2-3% change  Annual inflation Rate is 1.5% – “double digit” is very serious for U.S.  Hyperinflation can be devastating to output and employment

Inflation’s Negative Effects  Fixed income receivers (elderly retirees, government workers, minimum wage earners, landlords, etc.)  Savers (paper assets lose value over time when interest rate is lower than inflation rate)  Creditors (lenders are paid back in “cheaper” dollars & have a loss of “real” income)

Inflation’s Positive Effects  Flexible-Income receivers are unaffected (COLA like SS, businesses with prices rising faster than costs, commission sales positions, any business that anticipates inflation, etc.)  Debtors (borrowers pay back loans with “cheap” dollars – lower interest than inflation %)

Types of Inflation  Demand – Pull Inflation  Caused by changes in spending beyond the production capacity  i.e. failure to produce more drives up price  “too much money chasing too few goods”  In long run, wages will go up as workers are in demand & cost of living increases

Types of Inflation  Cost – Push Inflation  Caused by increase in factors of production costs  Per unit production costs rise  Business must raise prices to make profits  “wage price spirals” as wages are the largest single production cost  Also caused by “supply shocks” (raw materials or energy costs rise abruptly)