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Business Cycle

Business Cycle. Is the economy getting better or worse?. Micro vs. Macro. Microeconomics: The study of personal, or small finances. Individuals, families, or businesses Macroeconomics: The study of economic systems on a large scale National or global economies . Gross Domestic Product.

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Business Cycle

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  1. Business Cycle Is the economy getting better or worse?

  2. Micro vs. Macro • Microeconomics: The study of personal, or small finances. • Individuals, families, or businesses • Macroeconomics:The study of economic systems on a large scale • National or global economies

  3. Gross Domestic Product • Definition: The total value, in dollars, of all final goods and services produced within the nation each year. • Abbreviated as the GDP

  4. Goods • Intermediate goods- Goods used to create final goods (rubber, steel and wood) • These are not counted because economists do not want double count. • So GDP calculates the final goods

  5. Exclusions • Purely financial transactions- buying or selling stocks • Secondhand sales- ex: selling a used car

  6. Two approaches • Income approach- calculates GDP by examining all the money spent on final goods and services. Four categories: • Wages to employees- (largest share) • Rents (property) • Interest-households receive on CDS savings accounts • Profits0both households and corportions

  7. Expenditures Approach (monetary amount to buy goods/services) Adding all the spending on goods and services in 1 year C+I+G+X=GDP expenditures C- Personal Consumption-spending by households I- Gross Investments- capital investments G- Government- spending by govt X- All money spent on exports minus imports

  8. What Does the GDP Tell Us? • If the GDP is larger than last year the economy is expanding (getting bigger) • If the GDP is smaller, the economy is shrinking (Getting smaller)

  9. GDP Shortcomings • Nonmarket transactions- transactions with no paper trails ex: working on your home • Underground economy- Black market or illegal or unreported activities

  10. Business Cycle • The Business Cycle allows people to understand the direction the economy (GDP) is going (growing or shrinking) and plan accordingly. • The economy follows the Business Cycle regularly

  11. Phases of the Business Cycle • Expansion (Growing) • Peak (Top) • Contraction (Shrinking) • Trough (Bottom)

  12. Expansion • During a period of expansion: • Wages increase • People are optimistic and spending money • High demand for goods • Businesses start • Easy to get a bank loan • Businesses make profits and stock prices increase

  13. Peak • When the economic cycle peaks: • The economy stops growing (reached the top) • GDP reaches maximum • Cycle begins to contract • Business can’t produce any more or hire more people

  14. Contraction • During a period of contraction: • Businesses cut back production and layoff people • Wages decrease • Unemployment increases/# of jobs decrease • People are pessimistic and stop spending $ • Banks decrease loans given

  15. Do Now • Please answer the following questions in your notes: • 1) What are the differences between microeconomics and macroeconomics? • 2) Describe what the GDP measures • 3) What are the four phases of the business cycle?

  16. Trough • Economy “bottoms-out” (reaches lowest point) • Stocks prices drop • High unemployment and low spending

  17. Recession/Depression • A prolonged contraction is called a recession (contraction for over 6 months) • A recession of more than one year is called a depression

  18. What keeps the business cycle going? • 1) Business Investment -When the economy is expanding, sales and profits keep rising, so companies invest in equipment new plants=more jobs and expansion. In contraction, the opposite is true.

  19. 2) Interest Rates and Credit • Low interest rates, companies make new investments, add more jobs. High interest rates invest dries up and less job growth • 3) Consumer Expectations • Forecasts of expanding economy=more spending • Fear of recession=decrease in consumer spending

  20. 4) External Shocks - Such as disruptions of the oil supply, wars, or natural disasters greatly influence the output of the economy. Ex: 9/11

  21. Who Cares????? • Why should you care about the business cycle and economy?

  22. “Don’t quit that job!” • If the economy is going into a contraction, jobs will become more scarce. If you quit, you may not find another job!

  23. “Should I make a big purchase?” • Only if you know that you won’t lose your job in a contraction. So, buy your house during an expansion. HOWEVER • When the economy starts to slow down (contraction), interest rates will decrease. Wait to buy a house until the rates drop to a low point if you are sure that you won’t lose your job.

  24. Quick Review! • What phase of the business cycle do wages go up? • What phase of the business cycle do wages go down?

  25. Review Cont. • When are wages at their highest? • When are wages at their lowest?

  26. Recessions in U.S. History • Please answer the following questions for each recession (6) in the readings: • 1) Describe what happened • 2)What was the peak unemployment rate (%) • 3) Describe what the Real GDP was during that time • 4) The length and severity of the recession • 5) How did it end? • 6) Any other interesting facts

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