1 Objectives Give an example that shows how

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Objectives ¾ Give an example that shows how a change in one part of the economy can cause a change in another part. ¾ List the three phases of the business cycle. ¾ Make a graph of a business cycle and label the phases. 2

Objectives ¾ Describe economic conditions during each phase of the business cycle. ¾ Describe the level of GDP and unemployment rate during each phase of the cycle. 3

¾ The status of a market economy goes up and down, like a roller coaster 4

Market Economy Dynamics ¾ A market economy is either ¤ growing or ¤ slowing List some signs of economic growth. List some signs of economic slowdown. 5

Market Economy Dynamics ¾ Expansion ¤ period of economic growth ¤ prosperity ¤ economic good times ¾ Contraction ¤ period of economic slowdown ¤ hardship ¤ economic bad times 6

Market Economy Dynamics ¾ Periods of expansion ¤ alternate with – periods of contraction ¾ This alternation ¤ of economic expansion and contraction ¤ is called the business cycle 7

Economic Spirals ¾ All parts of an economy are interconnected ¾ A change in one part ¤ can cause a change in another part 8

Economic Spirals ¾ Upward spiral Expansion Workers buy more one part of the economy Workers earn more does well Company earns more ¤ it causes other parts of the Sales up economy – to do well Productivity up ¤ When 9

Economic Spirals Productivity down ¾ Downward spiral Sales down Company earns less Workers earn less Workers buy less ¤ When one part of the economy does poorly ¤ it causes other parts of the economy – to do poorly Contraction 10

The Business Cycle ¾ To understand business cycles ¤ economists make graphs ¾ They plot GDP or ¤ percent change in GDP – over time ¾ Even though each business cycle ¤ is different ¤ each has the same basic shape 11

Business Cycle k Pea ion ss Trough ce E n tio a p x ac c e R n o i ns ntr ov Re y r e Co GDP Prosperity Trough Time 12

How is the graph of a business cycle like a roller coaster? 13

The Business Cycle ¾ Every business cycle graph has ¤ one peak (high point) ¤ one trough (low point) ¾ Every business cycle graph has ¤ one period of expansion ¤ one period of contraction 14

The Business Cycle ¾ The high and low points on a graph help identify the three phases in each business cycle ¤ prosperity ¤ recession ¤ recovery 15

Business Cycle ion ss Re v o c ce y r e Re GDP Prosperity Time 16

Prosperity ¾ Prosperity ¤ occurs around the peak of the business cycle ¤ economic good times ¤ people doing well What happens economically during prosperity? 17

Prosperity ¾ During a period of prosperity ¤ consumers buy more ¤ retail sales rise and inventories fall ¤ production increases ¤ businesses hire more workers ¾ Economic indicators ¤ GDP rises ¤ unemployment is low ¤ CPI and inflation rise only a little 18

Recession ¾ Recession ¤ occurs on the down slope of the business cycle ¤ economic hard times ¤ people doing poorly What happens economically during recession? 19

Recession ¾ During a period of recession ¤ consumers buy less ¤ retail sales fall and inventory rises ¤ production slows ¤ businesses fire workers ¾ Economic indicators ¤ GDP falls ¤ unemployment rises 20

Depression ¾ Depression ¤ economic contraction ¤ severe ¤ long lasting ¤ causes widespread economic hardship ¾ Great Depression ¤ 1929 to 1941 21

Recovery ¾ Recovery ¤ occurs after a recession ¤ occurs on the up slope of a business cycle ¤ economy getting better ¤ people starting to do better 22

Recovery ¾ During a recovery period ¤ consumers start buying more ¤ retail sales rise and inventories fall ¤ businesses start producing more ¤ businesses hire more people ¾ Economic indicators ¤ GDP rises ¤ unemployment starts falling 23

Business Cycle and Economic Indicators ¾ Each phase of the business cycle ¤ has typical economic indicators ¾ Economists and marketers ¤ study economic indicators – to predict what will happen in the economy – to help make good business decisions 24

Business Cycle and Economic Indicators GDP Prosperity before the peak Recession Depression contraction severe contraction Recovery expansion Unemployment Rate CPI/ * Inflation * Sometimes before and during a depression, Stock Market inflation is very, very high. 25

Review ¾ What is the difference between expansion and contraction in the economy? ¾ What is a business cycle? ¾ Describe three phases in a business cycle. ¾ What is the impact of economic interconnectedness? 26