Intro to Business 2-2

1. Economic Conditions Change Intro to Business 2-2

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 • Prosperity • Recession • Depression • Recovery

3. Prosperity • Prosperity 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.

4. Recession • Occurs when the economy slows down from the prosperity phase. • A recession is a period in which demand begins to decrease as production decreases, unemployment begins to rise, and 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.

5. Depression • Occurs when a recession deepens and spreads throughout the entire economy. • Depression is a phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures. • GDP falls rapidly. • Has not occurred in the US since the 1930’s.

6. Recovery • Recovery is 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.

7. Consumer Prices • Buying power of money changes over time. • Technology becomes less expensive over time • Amounts of an item may be sold for the same price in smaller quantities. • Changes may occur as either inflation or deflation.

8. Inflation • An economic issue that all developed nations must deal with. • Inflation is an increase in the general level of prices • 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.

9. 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.

10. Measuring Inflation • Inflation rates vary. • Mild inflation (around 2 or 3 percent) 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.

11. 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.

12. 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/HistoricalCPI.aspx • http://www.homefair.com/real-estate/salary-calculator.asp?type=to • http://www.foodtimeline.org/foodfaq5.html#cocacola • http://www.msnbc.msn.com/id/19332035/ns/us_news-summer_of_love_40/ • http://www.westegg.com/inflation/ • http://www.aier.org/research/worksheets-and-tools/cost-of-living-calculator • http://inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspx • http://www.homefair.com/real-estate/salary-calculator.asp?type=to • http://www.foodtimeline.org/foodfaq5.html#cocacola

13. 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.

14. 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.

15. 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 bondrateis the cost of borrowing for large U.S. corporations. • The certificate of deposit rate is the rate for time deposits at savings institutions.

16. 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)