2-2 Economic Conditions Change Objectives: Describe the four phases of the business cycle Explain causes of inflation and deflation Identify the importance of interest rates Essential Question: What causes the phases of the business cycle to change?

The Business Cycle Roller Coaster

The Main Idea In a market economy, there is an economic cycle, which includes four stages: prosperity, recession, depression, and recovery. These are also the four stages of the business cycle. In the last few decades, we have experienced the economic cycle a number of times.

Economic Cycle United States history has had patterns of good times to bad times back to good times.

Four Stages of the Business Cycle The business cycle of one country can affect other trading partners. business cycle the rise and fall of economic activity

Business Cycle The business cycle has four parts: Prosperity Recession Depression Recovery

Figure 3.1 Business Cycle Model

Four Stages of the Business Cycle Prosperity is at the peak of the business cycle Demand for goods and services is very high.. Unfortunately, it cools down and activity slows down prosperity a peak of economic activity

Characteristics of Prosperity Graphic Organizer Characteristics of Prosperity Higher wages Greater demand for goods to be produced More people buy houses, which creates work for builders People buy more goods from other countries, which benefits those countries

Four Stages of the Business Cycle Recession is when the economy slows down. May not be too serious or too long, but signals trouble for some people’s jobs. Ripple Effect-drop in related business. Ex – home builder recession when economic activity slows down

Recession A recession in one industry can cause a ripple effect throughout the entire economy.

Characteristics of a Recession Graphic Organizer Characteristics of a Recession Businesses produce less which means they need less workers  Unemployment increases People have less money to spend Fewer goods and services are produced The GDP declines

Depression If a recession deepens and spreads throughout the entire economy, a nation may move into a depression. depression A phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures.

Characteristics of a Depression Graphic Organizer Characteristics of a Depression High unemployment Low production of goods and services Can last for several years Spreads to other countries High number of unused manufacturing facilities Very rare

Depression The stock market crash on October 29, 1929, or “Black Tuesday,” marked the beginning of the Great Depression. Great Depression Video #1 Great Depression Video

Two partner groups Get with a partner In your most creative way possible, using construction paper, markers, color pencils etc Make a diagram of the Business Cycle

Graphic Organizer Many banks around the country failed Unemployment rose nearly 800 percent The Great Depression Many towns and other civic bodies printed their own money The GDP fell nearly 50 percent The average manufacturing wage was 5 cents an hour The money supply fell by one-third

Economic downturn doesn’t go on forever. Recovery Economic downturn doesn’t go on forever. Gradual process Production starts to increase during a recovery. recovery a rise in business activity after a recession or depression

Characteristics of a Recovery People start going back to work People have money to purchase goods and services Demand for goods and services stimulates more production New businesses open Businesses become more innovative

Recovery In 1939, the United States was beginning to recover from the depression when World War II began. The war increased the rate of recovery because of the demand for production. What things were produced?

Consumer Prices Inflation The buying power of the dollar decreases If prices increased 5% during the last year, items that cost $100 then would now cost $105. Ex: “Back when I was a kid…..a candy bar was 45 cents!”

With inflation, one’s buying power decreases. Rate of Inflation With inflation, one’s buying power decreases. inflation An increase in the general level of prices.

Rate of Inflation When demand is greater than supply War Causes of Inflation When demand is greater than supply War Increase in the price of raw materials Increase in expenses Increase in salaries Too much money circulating in the economy

Rate of Inflation Deflation can occur when the supply of goods is greater than the demand. deflation a general decrease in the price of goods and services

Graphic Organizer Deflation Economy produces more goods than people want. Sellers lower prices. Sellers cut production. People have less money to buy goods. Demand continues to go down.

What is the stage that follows a recession or depression? The recovery stage can happen after either a recession or a depression.

What is the difference between a recession and a depression? A recession is a slight downturn; a depression is a major downturn.

Why may innovation play an important role in the recovery stage of a business cycle? Innovation creates demand that leads to more employment and production, which leads to more demand.

Section 2-3. Other measures of Business Activity

Objectives Discuss investment activities that promote economic growth Explain borrowing activities by government. Businesses and consumers Describe future concerns of economic growth Essential Question – how does the government borrow money?

Investment Activities Investing can happen in numerous ways: You are investing in your future right now by being in school Companies invest all the time by buying buildings and equipment

Capital Spending Capital Spending refers to money spent by a business for an item that will be used over a long period. Capital projects Involve spending by businesses for items such as land, buildings and equipment and new products.

Where does the moola come from for all these capital projects!???!? Personal Savings Stock investments Bonds

Personal savings….not much else to explain

-Corporations are a major type of business org. The Stock Market -Corporations are a major type of business org. -Businesses can’t come up with all the money on their own so people invest in them Stock Represents ownership in a corporation

David Choe – graffiti artist Multi-millionaire overnight! Was given the choice for $60,000 or stock to spray paint the walls of Facebook’s office. He chose stock – now worth more than $200,000,000! Video

What causes the value of stocks to change? Affected by many factors, but the main one is SUPPLY and DEMAND If a company has higher earnings, more people will DEMAND it’s stock and want to buy it Causes the value of stock to increase

Stock Market Activity Go to www.yahoofinance.com

Another investment activity involves the sales of bonds. The Bond Market Another investment activity involves the sales of bonds. If you purchase a bond, you are a creditor…it means you lent money to the organization bond A bond represents debt for an organization.

Government Debt If a surplus exists, government may reduce taxes or increase spending on various programs Budget surplus When the government spends LESS than it takes in.

Government Debt Budget deficit When the government spends MORE than it takes in. This happens more often

Government Debt National debt The total amount owed by the federal government www.usdebtclock.org