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Intro to Business
2-2
The Business Cycle
All economies experience good and bad economic periods
This economic shift between good and bad economic
conditions is called the business cycle.
Business cycles have four phases
1.
2.
3.
4.
Prosperity
Recession
Depression
Recovery
Business Cycles
Prosperity / Expansion is a period in which
most people who want to work are working,
wages are high, and the rate of GDP growth
increases.
Demand for goods and services is high.
Prosperity is usually the high point of the
business cycle.
The Business Cycles
During a time of contraction the economy slows
down, unemployment goes up, and consumer
demand lessons.
Business Cycles
Depending on the severity of a contraction it may be
referred to as a recession of a depression.
A recession is a period of economic slowdown.
Demand begins to decrease as production decreases
Unemployment rate begins to rise
GDP growth slows for two or more quarters
May not be serious, but often signals trouble for workers
in related businesses.
Eventually weakens economy and total output declines in
the next quarter.
The Business Cycles
The trough is the low point of a contraction just
before recovery begins.
Business Cycles
Depression is a phase marked by a prolonged period of
high unemployment, weak consumer sales, and business
failures.
Occurs when a recession deepens and spreads throughout
the entire economy.
GDP falls rapidly.
Has not occurred in the US since the 1930’s.
Business Cycles
Recovery occurs when the economy shows signs of
improvement.
s the phase in which unemployment begins to decrease, demand
increases, and GDP begins to rise.
Can occur quickly or slowly
Consumer confidence increases
Returns the country to the prosperity phase.
Consumer Prices
Buying power of money changes over time.
Technology becomes less expensive over time
Amounts of an time may be sold for the same
price in smaller quantities.
Changes may occur as either inflation or
deflation.
Inflation
An economic issue that all developed nations
must deal with.
Inflation is an increase in the general level of
prices
Occurs when prices rise faster than consumer
income. Lower rate = more stable econ.
Decreases buying power of the nation’s
currency.
Most harmful to families living on fixed incomes.
Retirees and others on fixed income cannot
afford as many goods or services.
Causes of Inflation
When demand for goods or services in greater than supply.
Wages tend to rise during inflation, but prices usually rise
faster.
Typically considered harmful, as consumers must earn
more money to maintain the same standard of living.
If wages increase too quickly, business tend to hire fewer
workers, raising unemployment.
Measuring Inflation
Inflation rates vary.
Mild inflation (around 2 – 3%) can stimulate economic growth as
prices increase faster than wages, allowing the producer to hire
more workers.
The most watched measure of inflation in the US is the Consumer
Price Index (CPI).
A price index is a number that compares prices in one year with
prices in some earlier base year.
Cost of living inflation may change differently than the products
used to calculate inflation with the CPI.
Deflation
Deflation is the opposite of inflation.
Deflation means a decrease in the general level of prices.
Usually occurs in recession and depression.
Even though prices drop, people tend to have less money to
afford them.
Occurred most significantly during the Great Depression
Many technological products are deflating in price as
technology advances.
Cool Web Resources
http://www.westegg.com/inflation/
http://www.aier.org/research/worksheets-and-tools/cost-of-
living-calculator
http://inflationdata.com/Inflation/Consumer_Price_Index/Historic
alCPI.aspx
http://www.homefair.com/real-estate/salarycalculator.asp?type=to
http://www.foodtimeline.org/foodfaq5.html#cocacola
http://www.msnbc.msn.com/id/19332035/ns/us_newssummer_of_love_40/
Interest Rates
Interest rates represent the “cost of money.”
Interest rates have a strong influence on business
activities.
Companies and governments that borrow money are
affected by interest rates.
Consumers are affected by interest rates.
Interest on loans reflects current interest rates, as to
earnings from savings and investments.
Types of Interest Rates
There are many different types of interest rates that
represent the cost of money in different settings.
The prime rate is the rate banks make available for their best
customers, such as large corporations
The discount rate is the rate financial institutions are charged
to borrow funds from Federal Reserve banks.
The T-bill rate is the yield on short-term
(13 week) U.S. government debt obligations.
Types of Interest Rates (cont.)
The treasury bond rate is the yield on long-term (20 year) U.S.
government debt obligations.
The mortgage rate is the amount individuals pay to borrow for
the purchase of a new home.
The corporate bond rate is the cost of borrowing for large U.S.
corporations.
The certificate of deposit rate is the rate for
time deposits at savings institutions.
Changing Interest Rates
The cost of money changes every day due to various
factors.
The supply and demand for money is the major influence on
the level of interest rates.
As amounts saved increase, interest rates tend to decline.
When borrowing by consumers, businesses, and
government increases, interest rates are likely to rise.
See assignment in G:drive (Banks)
Now it’s time to……….
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