Chapter 14 Business Cycles & Fluctuations -...

Business Cycles & Fluctuations Business cycles are largely

systematic ups and downs of real GDP

Business fluctuations is the rise and fall of real GDP over time in a nonsystematic manner.

Phases of the Business Cycle Expansion – a productive and increasing period in

business activity.

Recession – a period where business activity declines and GDP actually decreases for two consecutive quarters (6 months)

Depression – acute shortages, high unemployment, excess capacity, GDP decreases four or more quarters.

W - marks the spot

where the

expansion stops

increasing. Also

known as a peak.

Y – marks the spot

where the contraction

stops decreasing.

Also known as a

trough.

What causes cycles? Capital Expenditures – business

invest in capital goods (machinery & buildings) when the economy is expanding. When they pull back business activity declines.

Inventory Adjustments –business either expands or contracts their inventory in anticipation of increasing or decreasing sales.

What causes cycles? (continued)

Monetary Factors – interest rate policies, initiated by the Federal Reserve, increase or decrease the demand for money (borrowing).

External Shocks – wars, natural disasters, and disruptions in energy sources can cause cycles.

Timing a Recession

How long is a Recession?

Unemployment Section II

Who is considered unemployed?

Unemployment is the condition of those who are willing and able to work and are actively seeking work but who do not currently work.

How do we measure unemployment?

Unemployment is calculated by dividing the number of unemployed by the number in the civilian labor force.

Who is counted?

Civilian Labor Force is the total number of people in the working age group (16 years or older) who are either employed or actively seeking work.

Note! Slightly less than half of the total labor force belong in this class, or about 150 million people.

Frictional Unemployment

People who are temporarily between jobs, they suffer little economic hardship from their lack of employment.

Structural UnemploymentA serious type of unemployment!

A reduction in demand for workers due to a fundamental change in the operations of the economy.

Skills that do not match the employer’s needs.

Geographical separation from employment.

Note! Many times the jobs are lost forever and many will not come back.

Cyclical Unemployment

Unemployment from a low level of aggregate demand caused by swings in the business cycle.

Seasonable Unemployment

This type of unemployment is associated with time of year or seasons. This occurs every year regardless to the health of the economy.

Technological Unemployment Technological unemployment is caused through

automation, when mechanical or other processes cause workers with less skills, talent, or education to be replaced by technology.

Where are the Jobs?

What is considered full employment?

When approximately 95% of the civilian workforce is employed, or 5% is unemployed, is considered full employment.

Note! Some unemployment is needed to maintain balance in the labor force. Excess employment will lead to wage price inflation.

Section III

InflationWhat is inflation?

A sustained rise in the general level of prices.

How do we measure inflation?

We start with the price level at one point in time and compare it to another.

Measuring Inflation

Inflation rate = change in the price level x 100beginning price level

Example = (115 – 111) x 100 = 3.6%

111

Degrees of Inflation - Severity Creeping Inflation – Inflation in

the range of 1% to 3%

Galloping Inflation – Inflation in the range of 100% to 300%

Hyperinflation – Inflation in the range of 500% or more.

Types of Inflation

Demand-pull inflation – is a rise in the general level of

prices caused by too high a level of aggregate demand in

relation to aggregate supply.

Government Deficit – is caused by the government

spending beyond tax revenues.

No single group – but a general spiral of wage and

price inflation which is difficult to stop.

Cost-Push Inflation – is a rise in the general level of

prices that is caused by increasing costs of making and

selling goods.

Excessive monetary growth – the most popular and

occurs when the money supply grows faster than GDP

Consequences?1. Decreasing Purchase Power

2. Changes Spending Habits

3. Speculation

4. Paying Back with Cheaper Dollars

Poverty and Income DistributionSection IV

Income is never distributed equally among households. There are a number of reasons that can be used to explain why.

Education – normally those with higher education have higher incomes

Wealth – normally accumulated by past family generations can be used to create more wealth. This allows wealth to stay in the hands of a small percentage of the population.

Income Distribution (continued)

Discrimination – many times women and minorities are not promoted or kept out of certain professions.

Ability – some individuals have unique talents that allow them to earn more income. (i.e. professional athletes)

Monopoly Power – professional groups like the AMA or Pilots Associations can demand and receive higher incomes.

Understanding the Lorenz Curve

The Lorenz Curve

shows how much the

actual income varies

from and equal

distribution of income

based on households

Poverty Families and individuals are defined as living in

poverty if their incomes fall below certain levels.

Anti-Poverty Programs Over the years, the federal government has

instituted a number of programs to help the needy. Most come under the general heading of welfare.

Income Assistance – (TANF) Temporary Assistance for Needy Families (1997), (SSI), Supplemental Security Income

General Assistance – Food Stamps, WIC

Tax Credits – Earned Income Tax Credit (1975)