Presentation Transcript

1. UNIT 3: Let’s briefly look at some Macro concepts. 1. The Business Cycle (recessions & unemployment) 2. Unemployment Rate
2. In Units 1 & 2 we learned the beliefs, systems & problems present in economics…. …how do we go about studying the impacts of all these things?
3. We look at things such as… Supply & Demand Unemployment Government Policies Budgeting GDP & Business Cycles Prices Business Structures Interest Rates
4. The Business Cycle (the good times, the bad times, & how unemployment factors in to the cycle)
5. What is the Business Cycle?        The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stagesof the business cycle are: 1.Growth (expansion) 2. Peak(highest point of cycle, means that the unemployment rate is at its LOWEST level) 3. Recession (contraction - or slow down of the economy) 4. Trough (lowest point of cycle, means that the unemployment rate is at its HIGHEST level) 5. Recovery (productivity increases and the total products produced in a nation increase)
6. Business Cycle Remember the stages of the business cycle: Growth, Peak, Recession, Trough, Recovery
7. Business Cycle How does this cycle relate to unemployment rates? A PEAK(or BOOM) means that the economy is doing very well and the Unemployment Rate is at its LOWEST level A TROUGH means that the economy is doing poorly and the Unemployment Rate is at its HIGHEST level
8. Defined:A significant decline in economic activity spread across the economy Business Cycle:What is a Recession? Characteristics of a RECESSION: We are in a recession if there are twoconsecutive quarters(6-months) of (-)NEGATIVEeconomic growth. Otherwise known as a decline in a country's GDP. It effects many variables, such as industrial production, unemployment, income levels, and wholesale-retail trade. Recession is a normal (yet unpleasant) part of the business cycle. A recession generally lasts from 6 to 18 months.
9. The Business Cycle &Unemployment Graphical Relationship QUESTION:How is production effected by recession and peaks? GDP Remember that unemployment will go up during stages of GDP decline.
10. Do not get Confused!!! Remember the relationship that exist in each graph!!! BUSINESS CYCLE Recession I think my head is going to explode!
11. The Business Cycle & Unemployment Each recession is unique. Causes of 2008-10 Recession: Lack of oversight by the government Lack of personal finance understanding among consumers Sub prime mortgages Excessive use of CODs as an investment Consumer fear
12. Is the business cycle the only measurement tool? NO! Unemployment Rate Interest Rates Personal Saving Rates Government Actions in the Economy Stock Market LINK: Other Economic Indicators Data
13. Next, some basics on one measurement tool…. the unemployment rate. Global Unemployment Rates: Zimbabwe 95% Haiti 40% Spain 20% Iraq 15% USA 8.5% Source: CIA World Fact Book March 2011
14. How isUnemployment Measured?
15. How is Unemployment Measured? Unemployment is measured by the Bureau of Labor Statistics (BLS). It surveys 60,000 randomly selected households every month. The survey is called the Current Population Survey.
16. How is Unemployment Measured? Based on the answers to the survey questions, the BLS places each adult into one of three categories: Employed Unemployed Not in the labor force
17. Unemployment Rate An Unemployed Worker is: One who is 16 years or older (but not retired), not currently employed, AND is actively seeking employment. According to the Bureau of Labor Statistics: People are Not in the Labor Force if they are: not actively seeking (wealthy or lazy), under 16, in the military, institutionalized (prison), retired, or in school.
18. Who is not counted in the labor force? Population Young and institution- alized Working-age population Not in labor force Those that choose NOT to work Labor Force Employed labor force Unemployed Labor Force Population (millions) 0 90 180 300 So the UNEMPLOYMENT RATE is a percentage of the LABOR FORCE that DOES NOT have a job.
19. US Historical Unemployment Rate What is going on here? What can you assume has happened over the pass 50 years? Unemployment Rate % Source: US Census Available at http: www.data.bls.gov
20. Unemployment Rate This is a high unemployment rate 0% unemployment can never be achieved. WHY? Simply, due to scarcity, there are NOT enough jobs for ALL the people in the USA. Also, some people are just not motivated to work.(they try to find a job only to collect benefits) LINK: Google Unemployment Data Economists consider between ___and___unemployment to be a healthy rate. 4% 5%
21. Why and How do we stabilizeunemployment and the business cycle? (time for some medicine)
22. Why and How do we stabilizethis business cycle? We need to stabilize this cycle because … Why? The economy cannot take care of itself. (Adam Smith would disagree) A recession ( if it lasts for a long period of time ) can cause HighUnemployment and business failure. A Peak can be a bad thing if not controlled. ( It is possible for an economy to doTOO WELL ) Normally prices increase (inflation) during an economic boom, which is not good for people on fixedincomes, such retire folks When we get into macroeconomics we will study why prices tend to increase during an economic boom.
23. Why and How do we stabilizethis business cycle? How? Through the use of MONETARY and FISCALpolicy Monetary Policy:The method of controlling the economy through changes in the SUPPLY OF MONEY, INTEREST RATES, andBANK REGULATIONS Fiscal Policy:Another method is the use of TAXATION and GOVERNMENT SPENDING to control the economy.
24. How to Stabilize the Business Cycle using:Monetary Policy An Example of MONETARY POLICY INTEREST RATES need to DECREASE during a recession to stimulate the economy by offering cheap rates at which to borrow money. So, our government uses both fiscal and monetarypolicy to regulate the economy throughout the business cycle. MONEY SUPPLY needs to INCREASE during a recession to stimulate the economy by supplying money to businesses and people.
25. How to Stabilize the Business Cycle using Fiscal Policy An Example of FISCAL POLICY During a PEAK the government will INCREASETAXES(more money out)and DECREASESPENDING(more money out) During a TROUGH and RECESSION the government will DECREASETAXES(more money in) and INCREASESPENDING(more money in)
26. How to Stabilize the Business Cycle using Fiscal Policy John Keynes His belief was: Did not believe in“Laissez Faire” economics(Laissez Faire: NO government regulation of the economy, kind of like CAPITALISM) Instead, Keynes stated that the government should use Spending and Taxation to stabilize the market. (Fiscal Policy) In Latin, Fiscal means a “purse” or used her to mean “state treasury” “AGGREGATE DEMAND(household demand)is the driving force in an economy and thatGOVERNMENThas a responsibility to fight economic slowdowns (recessions/depressions)”.
27. How to Stabilize the Business Cycle using Fiscal Policy Recession World War 2 Recession Recession World War 1 9/11 Recession Great Depression Economic Boom Recession & Korean War
28. How to Stabilize the Business Cycle using Monetary Policy QUESTION:How are interest rates effected by recession and peaks?
29. Positive and Negative Externalities (by-products of economic decisions made by individuals, businesses, and governments)
30. EXTERNALITIES OF A DECISION What are externalities? a decision that causes costs or benefits to any person OTHER than the person making the decision or buying the good. In other words, the decision-maker (buyer, producer, or government) does not bear all of the costs or reap all of the benefits from his/her/its actions. These externalities cause either POSITIVE or NEGATIVE results.
31. Negative Externality- byproduct s of consumption/ production that IMPOSE COSTS on 3rd parties, neither buyers nor sellers. Examples of - NEGATIVEexternalities include… …the government does not cut taxes or increase spending during a recession. (business failures, high unemployment rates, you lose your job, etc.) …the Federal Reserve Bank does not lower interest rates when people’s salaries and wages are lowered. (less loans given out by banks, business failures, high unemployment rates, etc.) …pollution by a firm in the course of production which causes a nuisance or harm to others. (global warming, chicken houses, etc.)
32. EXTERNALITIES OF A DECISION Positive Externality- byproducts of consumption/ production that BENEFIT 3rd parties, not buyers or sellers. Examples of +POSITIVEexternalities include… …government lowers taxes during a recession. (increases our standard of living, encourages spending, people get to keep their jobs, etc.) …an individual planting an attractive garden in front of his house may benefit others living in the area. (OTHER EXAMPLES: car pooling, conserving energy, etc.) …my decision to come to school today and teach. (I see it as positive, you might see it as negative)
33. What does the business cycle show? What are the 5 stages of the business cycle? At what stage is unemployment the lowest? At what stage is unemployment the highest? What economist encourage private ownership AND government regulation of businesses? What two monetary policy “tools” are used to regulate the economy? What two fiscal policy “tools” are used to regulate the economy? Review Questions:
34. Quiz Friday! Study Notes, Vocab & Coach Book!