Chapter 3: The Business Cycle & Unemployment POPE- 2015

Private vs. Public Goods  Public Good- (non-excludable) goods available to the people (public)  Private goods- (excludable) owners can prevent those who have not paid for it from using or consuming the good.

The Business Cycle  Business Cycle- The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time.

The Five Stages of the Business Cycle 1. Growth - expansion 2. Peak - the highest point of the cycle, unemployment is at its l owest level 3. Recession - a slow down of the economy 4. Trough - the lowest point of the cycle, unemployment is at it highest level 5. Recovery - productivity increases

Business Cycle Remember the stages of the business cycle: Growth, Peak, Recession, Trough, Recovery

Business Cycle A TROUGH means that the economy is doing poorly and the Unemployment Rate is at its HIGHEST level How does this cycle relate to unemployment rates? A PEAK (or BOOM) means that the economy is doing very well and the Unemployment Rate is at its LOWEST level

Review (Grab a marker board)  What is a public good?  Goods available to the public  What is a private good?  Goods that must be bought and can be prevented from using  Give an example of a public good.  Give an example of a private good.  If unemployment is high, what stage is the economy at?  Trough

Review (Grab a marker board)  If unemployment is low, what stage is the economy at?  Peak  What stage is the economy contracting or slowing down?  Recession  What stage is the economy increasing productivity?  Recovery

Create the Business Cycle Model 1. Take a colored sheet of paper and draw the business cycle 2. Have a title at the top 3. Place your name on the bottom right edge 4. Use different colors for each part 5. Label each part

Business Cycle: What is a Recession  Recession- A significant decline in economic activity spread across the economy.  Characteristics of a Recession: 1. If there are two consecutive quarters of negative economic growth. 2. It effects industrial production, unemployment, income levels, and wholesale-retail trade. 3. Recession is a normal part of the business cycle 4. Generally last from 6 to 18 months

Unemployment Rate  The percentage of people that are not employed  To have high unemployment rate must mean the economy is doing poorly.  To have low unemployment rate must mean the economy is doing well.

US Unemployment History

Unemployment Rate  0% unemployment can never be achieved.  Why?  Scarcity, not enough jobs  Some are not motivated to work  Economists consider between 4% and 5% unemployment to be a healthy rate.

How is Unemployment Measured? Based on the answer to survey questions. 1. Employed 2. Unemployed 3. Not in the labor force

Who are unemployed?  An unemployed worker is: 1. One who is 16 years or older (but not in school or retired), 2. Not currently employed, 3. And is actively seeking employment.  People who are not in the labor force: 1. Not actively seeking a job (wealthy or lazy) 2. Under Institutionalized (prison), retired, or in school.

Not in labor force Young and institution- alized Population Working-age population Labor Force Employed labor force Unemployed Labor Force Population (millions) Who is not counted in the labor force? So the UNEMPLOYMENT RATE is a percentage of the LABOR FORCE that DOES NOT have a job. Those that choose NOT to work

US Historical Unemployment Rate Source: US Census Available at http: What is going on here? What can you assume has happened over the pass 50 years? Unemployment Rate %

Types of Unemployment  Structural - occurs when changes in demand lead to an increased need for particular skills and abilities from workers, and cause other skills and abilities to become unneeded or obsolete.  Frictional - occurs when a person choose to leave their present job to find another job, or is searching for a job for the first time, or after a long period of time.  Cyclical - occurs when market demand for a certain good or service decreases, and results in a decreased production until market demand increases, causing fewer workers to be needed until demand increases.

Unemployment Review  How many negative quarters must there be to have a recession? 22  High unemployment means the economy is doing…?  poorly  Why can 0% unemployment never be achieved?  Scarcity or not motivated to work  What is a healthy unemployment rate?  4%-5%  Give me an example of one of the types of unemployment?

Why and How do we stabilize the business cycle and unemployment?  Why 1. The economy cannot take care of itself 2. A recession can cause high unemployment and business failure 3. A peak can be a bad thing if not controlled 1. How 1. Monetary Policy : The method of controlling the economy through changes in the supply of money, interest rates, and bank regulations 2. Fiscal Policy : Using taxation and government spending to control the economy

INTEREST RATES need to DECREASE during a recession to stimulate the economy by offering cheap rates at which to borrow money. MONEY SUPPLY needs to INCREASE during a recession to stimulate the economy by supplying money to businesses and people. So, fiscal and monetary policy are used to regulate the economy throughout the business cycle. How to Stabilize the Business Cycle using: Monetary Policy An Example of MONETARY POLICY

How to Stabilize the Business Cycle using Fiscal Policy An Example of FISCAL POLICY During a TROUGH and RECESSION the government will DECREASE TAXES (more money in) and INCREASE SPENDING (more money in) During a PEAK the government will INCREASE TAXES (more money out) and DECREASE SPENDING (more money out)

An Example of FISCAL POLICY How to Stabilize the Business Cycle using Fiscal Policy An Example of FISCAL POLICY  John Keynes: His belief was:  Did not believe in “ Laissez Faire economics” (No government regulation of the economy, like capitalism)  Instead, Keynes stated that the government should use spending and taxation to stabilize the market. ( Fiscal Policy ) “ is the driving force in an economy and that has a responsibility to fight economic slowdowns (recessions/depressions)”. “AGGREGATE DEMAND (household demand) is the driving force in an economy and that GOVERNMENT has a responsibility to fight economic slowdowns (recessions/depressions)”.

Positive and Negative Externalities (by-products of economic decisions made by individuals, businesses, and governments)

What are Externalities?  A decision that causes costs or benefits to other people. The person making the decision or buying the good is not affected. The effects are “ external ” or outside of them.  In other words, the decision-maker (buyer, producer, or government) does not bear all of the costs or reap all of the benefits from his/her/its actions  These externalities cause either Positive or Negative results

Negative Externality  By-products of consumption/production that impose costs on 3 rd parities, neither buyers nor sellers.  Examples of Negative Externalities:  The government does not cut taxes or increase spending during a recession. (business failures, high unemployment rates, job loses, etc.)  The Federal Reserve Bank does not lower interest rate when people’s salaries and wages are lowered. (less loans given out by banks, business failures, high unemployment rates, etc.)  Pollution by a firm in the course of production which causes a nuisance or harm to others. (global warming, chicken houses, etc.)

Positive Externality  By products of consumption/ production that benefit 3 rd parties, not buyers or sellers.  Examples of Positive Externalities:  Government lowers taxes during a recession. (increases our standard of living, encourages spending, people get to keep their jobs, etc.)  An individual planting an attractive garden in front of his house may benefit others living in the area. (car pooling, conserving energy, etc.)  My decision to come to school today and teach.

Review Questions  What does the business cycle show?  What are the 5 stages of the business cycle?  At what stage is unemployment the lowest?  At what stage is unemployment the highest?  What economist encourage private ownership AND government regulation of businesses?  What two monetary policy “tools” are used to regulate the economy?  What two fiscal policy “tools” are used to regulate the economy?