Download Business Cycle - The Bronx High School of Science

What forces affect the
business cycle?
External forces







weather
wars
foreign trade conflicts
technological innovations
discovery of new resources
population growth
rate of immigration
Internal forces
psychological factors
 wage rate
 total spending
 flow of money and credit

How do we measure
?
Jobless v. Unemployed
Employed persons
 Unemployed persons
 Labor force
 Discourage worker

The unemployment rate rose by 0.4
percentage point to 6.5 percent in October, and the
number of unemployed persons increased by
603,000 to 10.1 million. Over the past 12 months,
the number of unemployed persons has increased
by 2.8 million, and the unemployment rate has risen
by 1.7 percentage points.
The unemployment rates for adult men (6.3
percent), adult women (5.3 percent), whites (5.9
percent), and Hispanics (8.8 percent) rose in
October. The jobless rates for teenagers (20.6
percent) and blacks (11.1 percent) were little
changed. The unemployment rate for Asians in
October was 3.8 percent, not seasonally adjusted.
Types of Unemployment
Frictional
 Structural
 Cyclical

Winners and Losers
minorities tend to have a
higher unemployment rate
than whites
 teenagers tend to have a
higher unemployment rate
than older workers

unmarried persons tend to
have a higher unemployment
rate than married persons
 blue-collar workers tend to
have a higher unemployment
rate than white-collar workers

Broad Economic Goals
full employment
 price stability
 economic growth

Note on unemployment
High or rising unemployment
often creates social and fiscal
problems.
 Unless some actions are
taken to stop the downward
spiral, a severe recession may
result.

Employment Act of 1946 –
established goals of full
employment, price stability &
economic growth
 Full Employment & Balanced
Growth Act of 1978
(Humphrey-Hawkins Act) –
established 2 additional goals
of an unemployment rate of
4% with a 0% inflation rate

An economic contraction
means an irretrievable loss of
real output and wealth in
addition to personal hardships
it places on the unemployed.
 This is the price we pay for
economic freedom.

How do we measure inflation?
Inflation
a significant increase in the
general price level
 increase in the average price
level over time
 too much money chasing too
few goods

Causes of Inflation

Demand-Pull – increase in the
nation’s demand for goods
exceeds its ability to produce
the goods at stable prices

Cost-push (supply-side) –
increase in the cost of raw
materials, or an increase in
wage rates and profit margins
raises the general price level
Year
5%
10%
0
$ 1.00
$ 1.00
1
.95
.90
2
.90
.81
3
.85
.73
4
.81
.66
5
.77
.59
Year
5%
10%
0
$ 100.00
$ 100.00
1
105.00
110.00
2
110.25
121.00
3
115.76
133.10
4
121.55
146.41
5
127.63
161.05
Hyper-inflation

Hyper-inflations
are caused by
extremely rapid
growth in the
supply of “paper”
money.
They occur when the monetary and
fiscal authorities of a nation
regularly issue large quantities of
money to pay for large streams of
government expenditures. In
effect, inflation is a form of taxation
in which the government gains at
the expense of those who hold
money while its value is declining.
Hyper-inflations can be seen as
very large tax schemes.
Stagflation
 an
inflationary
period
accompanied by
rising
unemployment
and lack of growth
in consumer
demand and
business activity
 Sluggish
economic growth coupled
with a high rate of inflation and
unemployment
 when the economy isn't growing
but prices are
Price Indexes
measures the general price
level over time
 basket of goods compared
over time
 base period = 1.00 or 100%
(ratio of base year to itself = 1)

Types of Indexes



Consumer Price Index (CPI)
Producer Price Index (PPI)
GDP Deflator
GDP Deflator = Nominal GDP X 100
Real GDP
Price Index =
Current cost of basket
X 100
Cost of basket in base period
If the CPI was 293 in January of
1983, using 1972 as the base year,
how much did a basket of goods
cost in 1983 as compared to 1972?
2.93 times more or what cost $1
in 1972 now cost approximately
$2.93.
If the PPI had a value of 299.4 in
1981, using 1967 as the base
year, what does this indicate
about the price producers paid for
their inputs between 1967 and
1981?
cost of inputs almost tripled
the rate of inflation is calculated as
the percentage change in a price
index between two time periods
Percentage Change =
Current index value – initial index value X 100
initial index value
The CPI stood at 217 in 1979
and 247 in 1980. What was
the percentage change?
((247 – 217)/217) X 100 = 13.8%
An increase in the money
income received by a family over
time does not always represent
an increase in purchasing
power. Real income increases
only if money income increases
more rapidly than the family’s
own CPI.
Real income = money income X 100
price index
The Adams family earned $20,000
in 1975 when the CPI was 161,
and $30,000 in 1984 when the
CPI was 311. Calculate the
change in their real income.
Real income (1975)
= ($20,000/161 X 100 = $12,422
Real income (1984)
= ($30,000/311) X 100 = $9,646
% change in real income
= ((9,646 - 12,422)/12,422) X 100
= -22.3%
How are people affected by inflation
- inflation reduces real income and
wealth of some individuals and
increase it for others
fixed income – hurt
 people with debts to pay –
helped – dollars for repayment
are less expensive than before

creditors – hurt – dollars
received in repayment has lost
some of its initial value
 people with rising incomes –
depends on how rapidly your
is rising
 government usually benefits
because taxes collected rises

How does inflation disrupt the
economy?
reduces the incentive to save
when inflation rates exceed
interest rates
 uncertainty in future prices –
decreases long term investment
– with uncertainty investments
go into precious metals, real
estate and collectibles


hyper inflation can lead to a
failure of the monetary system
– if purchasing power
deteriorates too rapidly, people
would revert to the barter
system
Gross Domestic Product
 Total
value of a country’s output
– final goods and services
U.S. GDP
$13.86 trillion
 per capita GDP = $ 46,000

GDP 2007(millions of US dollars)
1- United States . .. . . . . 13,811,200
2- Japan . . . . . . . . . . . . 4,376,705
3- Germany . . . . . . . . . . 3,297,233
4- China . . . . . . . . . . . . . 3,280,053
5- United Kingdom . . . . . 2,727,806
6- France . . . . . . . . . . . . 2,562,288
7- Italy . . . . . . . . . . . . . . 2,107,481
8- Spain . . . . . . . . . . . . . 1,429,226
9- Canada . . . . . . . . . . . . 1,326,376
10- Brazil . . . . . . . . . . . . .1,314,170
GDP 2007 (growth rate)
United States . . . . . . .
Japan . . . . . . . . . . . .
Germany . . . . . . . . . .
China . . . . . . . . . . . . .
United Kingdom . . . . .
France . . . . . . . . . . . .
Italy . . . . . . . . . . . . . .
Spain . . . . . . . . . . . . .
Canada . . . . . . . . . . . .
Brazil . . . . . . . . . . . . .
2.2
1.9
2.6
11.9
2.9
1.8
1.9
3.8
2.7
5.4
GDP 2007 (growth rate)
1- Azerbajan . . . . . . . . . . .
23.4
2- Bhutan . . . . . . . . . . . . .
22.4
3- Timor-Leste . . . . . . . . . .
19.8
4- Angola . . . . . . . . . . . . . . 16.7
- Macau . . . . . . . . . . . . . . 16.6
6- Armenia . . . . . . . . . . . . .
13.7
7- Equatorial Guinea . . . . . . 12.4
8- Georgia . . . . . . . . . . . . . . 12.0
9- China (PRC) . . . . . . . . . . . 11.9
10 - Afghanistan . . . . . . . . . . . 11.5
- Turkmenistan . . . . . . . . . . . 11.5
What is not in GDP
purchase of a used car
 products produced this year but
not sold
 services to repair a smashed up
car
 illegal activity
 underground economy

bartered items – no real
money changes hands
 used goods
 paper transactions
 transfer payments
 foreign production
 profits earned by foreign
owned companies

Ways to measure GDP
 Income
Approach – measures wages,
rents, interest & profits received by
all factors of production in
producing final goods
GDP = national income + depreciation
+(indirect taxes – subsidies)
+ net
factor payments to the rest of the
world + other
 Expenditure
Approach spending on domestically
produced final goods and
services
GDP = C + I + G + (EX – IM)
Components of GDP
C = Consumption – individuals
buying goods and services
 I = Investment – all goods
produced that are not used for
present consumption – Capital
Goods
 G = Government Purchases
 EX – IM = Net Exports

Limitations on GDP
doesn’t measure social
welfare
 does not measure quality of
life (ie: pollution, commute)
 leaves out the underground
economy (ie: stay at home
moms)

Real v. Nominal GDP
Growth in real GDP =
Real GDP in year 2 – real GDP in year1
Real GDP in year 1