1. Economic Instability Chapter 13 Section 1
In this section, you will learn that business cycles are alternating increases and decreases in the level of economic activity
Economic growth is something that is beneficial to almost everyone. However, we cannot take economic growth for granted.
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2. Business Cycles
Regular increases & decreases (business fluctuations) in real GDP
Can interrupt economic growth
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3. Business Cycle Phases Recession – Decline in GDP for at least 6 months
Peak – When GDP stops expanding
Trough – When GDP stops declining
Expansion – Period of growth in GDP
Decline in GDP lasting at least 6 months.
Point in time when GDP stops expanding and begins to decline.
Point in time when GDP stops declining and begins to expand.
Period of uninterrupted growth of GDP.
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4. Trend line
Growth path the economy would follow if it were not interrupted by alternating periods of recession & recovery
Depression- very severe recession
Large # of unemployed people
Decline in income
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5. Business cycle causes Changes in investment spending
Innovation & imitation
Monetary policy decisions
External shocks
There is a direct relationship between bus. Investment & expansion in a cycle
Innovation forces competitors to develop even better products which helps growth
Interest rates impact the amount of borrowing that is done by consumers
I.e. increase in oil prices, wars, and international conflict
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6. Business Cycles in the U.S.
The Great Depression
Causes
Big gap in distribution of income…easy credit made borrowing easier but people went into debt
Recovery & Legislation
Increased gov. spending on WWII…Legislation- FDIC protected investments
1a. Big gap in distribution of income…easy credit made borrowing easier but people went into debt (this is scary!)
1b. Increased gov. spending on WWII…Legislation- FDIC protected investments
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7. Forecasting Business Cycles
Using everyday economic statistics
Leading economic indicator
Composite index of leading economic indicators
GDP=C+I+G+(X-M)
1a. Helps to predict which direction we are heading (ie stock mkt)
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8. Section 2
Inflation
Economic instability is not limited to fluctuations in the level of GDP. Changes in prices can be equally disruptive to the economy.
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9. Inflation Increase in the general level of prices for goods & services
Deflation- decline in price
Both situations are harmful to the economy and should be avoided whenever possible
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10. Measuring Prices & Inflation
Price index
Statistical series used to measure changes in price level over time
Consumer price index (CPI)
Tracks monthly changes in price of a representative sample (market basket) of consumer items
Base year
Year that serves a comparison for all other years
2. Market basket is updated every ten years to account for changes in consumer buying habits
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11. Types of inflation Creeping Hyperinflation Stagflation
Relatively low (1-3%)
Hyperinflation
In excess of 500% per year
Stagflation
Slow economic growth accompanied by inflation
#3…1970’s…high price of oil made gas very expensive but we were going through a recession which led to high levels of unemployment
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12. Causes of inflation Demand-pull Cost-push Wage-price spiral
High demand (shortages) by all sectors leads to price increases
Cost-push
Rising input costs (I.e. energy & organized labor) drive up the cost of products to the consumer
Wage-price spiral
Higher prices force workers to ask for higher wages
Excessive monetary growth
4. Larger supply of money or credit in the economy increases someone’s purchasing power. When people spend this additional money, they cause a demand-pull inflation that drives prices up
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13. Consequences of inflation
Reduced purchasing power
Unable to buy as much as in the past
Distorted spending patterns
May not be able to afford expensive things (ex. House or car)
Unable to buy as much as in the past
May not be able to afford expensive things (I.e. house or car) sound familiar!
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14. Section 3 Unemployment 1/1/2019
Approx. half of the people in the U.S. belong to the labor force, and at any given time millions are without jobs. Sometimes this is because they choose not to work, as when they have quit one job to look for another. In most cases, however, people are out of work for reasons largely out of their control.
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15. Labor force
The sum of all persons age 16 and above who are either employed or actively seeking employment
The following people are excluded
Military
People in jail
People in a mental health facility
First…to understand the severity of joblessness, we need to know how it is measured and what is overlooked. The measure of joblessness is the unemployment rate, one of the most closely watched and politically charged statistics in the economy.
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16. Unemployed Persons
People available for work who made a specific effort to find a job during the past month
Collected by census workers who turn it over to the BLS (Bureau of Labor Statistics) for analysis & publication
Released to the public monthly
First…the process of deciding if someone is able to work, willing to work, or even at work is more complicated than most people realize. In the middle of any given month, about 1,500 specialists from the BLS begin their monthly survey of about 60,000 households in nearly 2,000 counties covering all 50 states.
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17. Unemployment rate # of unemployed persons / Labor Force
Expressed as a percentage of the entire labor force
Does not include:
Underemployed workers
Overqualified workers
Part-time workers who want full time
“discouraged workers”
Gave up looking for work…not unemployed anymore because they’re out of the labor force
3. Some people are considered employed when they only hold part-time jobs…or they may be overqualified for their current job
4. Many people drop out of the labor force and are NOT included as unemployed because they ARE NOT looking for work.
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18. Sources of unemployment
Frictional – in between jobs
Structural – fundamental change in economy
Outsourcing – hiring outside firms to do work for you
Technological – ex. ATM’s replacing bank tellers
Cyclical – Recessions cause layoffs
Seasonal – job is only in demand for part of the year
Workers are in between jobs for one reason or another…usually a short-term condition
Caused by a fundamental change in the economy that reduces the demand for some workers…I.e. change in consumer taste or a fundamental change in the way a company operates
2b. Hiring of outside firms to perform non-core operations to lower operating costs…I.e. moving customer service operations to another country where the labor is cheaper.
3. Caused by technological developments or something where a workers’ skills become obsolete…I.e. reduced demand for bank tellers because people use ATM’s or do their banking on-line.
4. Employment directly related to swings in the business cycle…I.e. layoffs due to a recession
5. Caused by annual changes in the weather that reduce demand for jobs
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19. Costs of instability
GDP gap – difference between actual & potential GDP
Misery index – Inflation + Unemployment
Uncertainty
Political instability
Crime, poverty, & family instability
Difference between the actual GDP & potential GDP that could be produced if all resources were fully employed.
Sum of inflation & unemployment rates…an unofficial statistic
When the economy is unstable, a great deal of uncertainty exists. Workers may not buy something because of concern over their jobs. This uncertainty translates into many consumer purchases that are not made causing unemployment to rise
When times are tough and voters are dissatisfied the incumbent is often voted out of office
Recession, inflation, & unemployment can lead to higher rates of crime and poverty. They can contribute to problems such as fights & divorce when individuals and families face uncertainty because lost jobs and income make it difficult to pay the bills.
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