Business Cycle - Stocks Ch. 23, Section 2

The Business Cycle The Business Cycle (AKA The Economic Rollercoaster) The Business Cycle (AKA The Economic Rollercoaster) –The ups & downs of the economy –Alternating periods of growth & decline 4 Phases 4 Phases 1.Expansion (Also known as Prosperity or Recovery)  Economy is improving  Businesses produce more needing more employees  Higher employment means higher wages  Higher wages mean higher consumption  Higher consumption means more production

The Business Cycle 2. Boom  Economic activity is at its peak  Peak – the highest point of the boom  Businesses are working at full capacity –Law of Diminishing Returns – as a business adds more resources to production profits will rise until a point where more resources begin reducing profits

Business Cycle ExpansionDecline/ Recession Boom Recovery/ Prosperity Peak Trough

The Business Cycle 3. Decline (Contraction)  The economy is slowing down  Production is cut down  Workers are laid off 4. Recession  Occurs when Real GDP goes down over 6 months –Real GDP – shows economy’s production after the distortions of price increases have been removed –Eliminates impression that output has gone up when only prices have gone up  Lowest period of production  Unemployment is high  People do not buy as much  Trough: lowest point of a recession  Depression: a severe recession

Business Cycle

Unemployment Unemployment Rate Unemployment Rate Unemployment Rate Unemployment Rate –Percentage of labor force without jobs but actively looking –Unemployment reduces living standards, disrupts families & causes a loss of self respect –Reaches its highest during a recession Types of Unemployment Types of Unemployment –Cyclical – associated with the ups & downs of the economy –Structural – changes in the economy based on technology –Seasonal – based on the weather –Frictional – based on people being terminated or looking for new jobs –Current Unemployment rate Current Unemployment rateCurrent Unemployment rate Videos Videos –Dealing with unemployment Dealing with unemploymentDealing with unemployment –The Pain of Unemployment The Pain of UnemploymentThe Pain of Unemployment –Slow Recovery Slow RecoverySlow Recovery

Types of Unemployment Game Sara, worker at Ford, loses his job because of a machine that can it do his job more efficiently. Sara, worker at Ford, loses his job because of a machine that can it do his job more efficiently. –Structural Zach works at the Sugar Mountain Ski Lodge. Zach works at the Sugar Mountain Ski Lodge. –Seasonal Jordan, Tom’s friend at Ford, loses her job because of low car sales. Jordan, Tom’s friend at Ford, loses her job because of low car sales. –Cyclical Tori is tired of working at In-n-Out Burger quits her job. Tori is tired of working at In-n-Out Burger quits her job. –Frictional Tyler has just graduated from college and is unemployed. Tyler has just graduated from college and is unemployed. –Frictional Elizabeth lost her job at the neighborhood swimming pool after Labor Day. Elizabeth lost her job at the neighborhood swimming pool after Labor Day. –Seasonal Mr. Cleland is laid off due to the tight budget of ISS for school year. Mr. Cleland is laid off due to the tight budget of ISS for school year. –Cyclical Tina loses her job as a cleaning lady because she is replace by the RoboMaid. Tina loses her job as a cleaning lady because she is replace by the RoboMaid. –Structural

Inflation Rate World Wide

The Great Depression The Great Depression The Great Depression –Began in 1929 with a stock market crash  Black Tuesday, October 29, 1929 –Many saw it as the end of capitalism –Bank runs – people tried to get all their cash out of banks, banks ran out of money –Herbert Hoover was president  Hoovervilles – were names of shanties (homeless towns) during the Depression

The Great Depression Black TuesdayHoovervillesSuffering

What is the highest point in the business cycle? 1. Boom 2. Trough 3. Expansion 4. Peak

The Great Depression The New Deal The New Deal –Franklin D. Roosevelt’s plan to end the depression –First 100 Days  Restored faith in banks – Bank holiday  Fireside Chats  Financial Reform –Glass-Steagall Act – 1933  Banks could not invest in the stock market  Repealed in Some believe the reason we are in this financial mess today. (move up)  FDIC created FDIC created FDIC created  Guarantees usually $100,000, but from Oct. 3, 2008 to December 31, 2013 up to $250,000 –Federal Securities Act – 1933  SEC created as a result of this act  No stock market fraud –Splits the nation’s economy  Fiscal policy – the Government  Monetary policy – the Federal Reserve

FDR’s Fireside Chat First Fireside Chat First Fireside Chat First Fireside Chat First Fireside Chat

Measuring the Economy Inflation Inflation Inflation –Decline in the value of money –Purchasing power – amount the dollar can buy –Measured by the Consumer Price Index & Implicit GDP price deflator  Some Relief at the end of 2008 Some Relief at the end of 2008 Some Relief at the end of 2008

Measuring the Economy Consumer Price Index (CPI) Consumer Price Index (CPI) –Samples prices for 400 products commonly used  CPI Data CPI Data CPI Data –Change in price over time of goods & services the average household uses –Base year – – the average of these years is compared to each year Implicit GDP Price Deflator Implicit GDP Price Deflator –Takes inflation out of GDP for year to year comparisons –Base year – 1987

Measuring the Economy GDP Categories GDP Categories –Consumer goods – bought by consumers for final use –Business (Capital) goods – bought to be used by a business to produce other goods –Government goods – anything bought by the federal, state and local governments Net Exports Net Exports –The difference in what the nation buys & sells with other countries –Export – anything sold to another country –Import – anything bought from other countries

Trade Deficit

Imports vs. Exports

Stocks Corporations sell stock to raise financial capital Corporations sell stock to raise financial capital People buy stock to make money People buy stock to make money –Dividends – share of a corporation’s profits –Capital Gain – when stock is sold for more than it originally cost – Rule: Buy low, sell high

Stocks Stock Indexes Stock Indexes –Statistical measures that track stock prices over time –The ticker –Ex: Dow Jones Industrial Average (DJIA) or Standard & Poor’s (S&P) Stock Exchanges Stock Exchanges –Stock market – where stock is bought & sold  Ex: NYSE – largest & most prestigious  Others: American Stock Exchange, Chicago Mercantile Exchange, Electronic – NASDAQ –Changes in stock prices are based on market forces of supply & demand

Stocks Bull Market Bull Market –Investors expect growth, profits high & unemployment low –Prices tend to rise Bear Market Bear Market –Investors are pessimistic, profits drop & unemployment rises –Prices fall Changes to Stock Prices Changes to Stock Prices –Change in profits –Rumors (externalities) –News Stockbroker – person who buys & sells stock Stockbroker – person who buys & sells stock

Struggles in the Economy ule_byid.html?s=news01n3647q87f ule_byid.html?s=news01n3647q87f