Economic Instability Chapter 14 Economic Cycles The economy
Economic Instability Chapter 14
Economic Cycles The economy is up and down throughout our history � A good economy always comes to a halt before it takes off again � The GDP is the most important factor in determining if the economy is good or bad �
Phases of the Business Cycle � Two phases of the business cycle: › 1) recession = period during which the real GDP declines for two quarters/6 months �It begins when the economy reaches a peak (high point of GDP) �It ends when the economy reaches a trough (low point of GDP)
› 2) expansion = period of recovery from a recession �It begins when the GDP reaches its low point and begins to turn around � If a recession becomes very severe, it could become a depression = state of the economy with large numbers of people out of work, acute shortages and excess capacity in manufacturing plants › The Great Depression in the 1930’s was the only depression in the 20 th century
Causes of the Great Depression � Several factors brought on the Depression: › 1) big gap between rich and poor �Poor couldn’t help economy because they had no money to spend �Rich didn’t help economy because they often used it in the stock market › 2) Too much credit (borrowing)
› 3) Too many European countries not repaying loans or getting loans › 4) High tariffs on imports hurt world trade › 5) too many consumer goods produced › 6) overproduction of agriculture = falling prices
The Great Depression � Stock Market crashed on Oct. 29, 1929 › Many went from rich to poor in days Even people with no stocks were hurt because their savings were in banks that failed � Between 1929 and 1933, GDP fell from $103 billion to $55 billion � Employment rose to 25% � Money supply fell by 1/3 �
At first gov’t did nothing, expecting the crisis would solve itself � When FDR was elected, he instituted the New Deal which put millions to work in public works projects � › This provided relief for people but did NOT end the Depression � The massive amount of gov’t spending during WWII ended the Depression
Unemployment Unemployed = people who try to find work, and worked less than one hour for pay � Unemployment rate = the # of unemployed divided by the total number of civilian laborers � › Unemployment rates rise dramatically in recessions and drop slowly afterwards
Kinds of Unemployment � Frictional unemployment = workers who are between jobs for some reason › These workers don’t suffer much economic hardship � Structural unemployment = occurs when a big change in the operations of the economy reduces the demand for workers › Changes in technology or consumer demand can bring this about › Industries may change the way they do business
� Cyclical Unemployment = unemployment directly related to swings in the business cycle. › Example: during a recession, people don’t buy as many consumer goods › As a result, some industries lay off workers until the economy recovers � Seasonal Unemployment = unemployment resulting from changes in the weather or changes in demand for certain products. › Example: home builders don’t work as much in cold weather
� Technological Unemployment = unemployment caused when workers with less skills, talents or education are replaced by machines › Example: numbers of bank tellers reduced because of automated teller machines � Full Employment = the lowest possible unemployment rate – reached when it drops below 4. 5% › Hard to maintain because of business cycles
Inflation = rise in prices related to an increase in the supply of money, resulting in a loss in the value of currency � Terms that describe the severity of inflation: � › Creeping inflation = in the range of 1 to 3% per year › Galloping inflation = as high as 100 to 300% �Many Latin American and former communist countries experience this › Hyperinflation = in the range of 500% or more �Very rare and signals a total monetary collapse �Record set by Hungary during WWII � 828 octillion (27 zeros) pengos equaled 1 prewar pengo
Causes of Inflation 1) when all sectors of the economy try to buy more goods and services than the economy can produce � 2) huge deficit spending on the part of the government � 3) rising input costs, especially labor, drive up cost of products for manufacturers � 4) increase in cost of nonlabor inputs � › Example: rise in prices of a barrel of oil
� 5)self-perpetuating spiral of wages and prices › Example: higher prices force workers to ask for higher wages �In turn, producers try to recover that cost with higher prices �It creates a spiral � 6) most popular explanation is excessive monetary growth › Occurs when the money supply grows faster than the GDP › Extra money created by the Fed will increase some groups purchasing power › Spending that money drives up prices
Consequences of Inflation � 1) most obvious effect is the dollar buys less › The purchasing power of the dollar falls as prices rise so the dollar loses value over time 2) inflation cause people to change their spending habits which disrupts the economy � 3) it tempts some people to speculate heavily in an attempt to take advantage of a higher price level � › Example: buying luxury items like diamonds and gemstones because they may increase in price
� 4) it alters the distribution of income › During long periods of inflation, lenders are hurt more than borrowers › Loans made earlier are repaid in inflated dollars › Example: �A person borrows money from you to buy bread at. 50 cents a loaf �They borrow $100 dollars so they can buy 200 loafs �If inflation sets in and the price of a loaf rises to $1 by the time the loan is repaid to you �Then when you get your money back, you could only buy 100 loaves for the same amount
Reasons for Income Inequality � There are several reasons the incomes of various groups may be different › 1) Education: �Usually people with higher education make more income because they have a higher level of skill › 2) Wealth: �Income varies because some people have more wealth than others
› 3) Discrimination: �It is illegal, but still takes place �Women may not be promoted to executive positions �Unions may deny ethnic minorities membership �When this occurs, women and men are driven into other labor markets where oversupply drives down wages
› 4) Ability: �Some people have a natural ability �Like athletes and movie stars who make millions › 5) Monopoly Power: �The monopoly power that some groups hold �Unions get higher wages for members �American Medical Association limits enrollment in med schools to limit amount of doctors
� Poverty = relative measure that depends on prices, the standard of living and a low measure of income › In US, income must be below $23, 550 for a family of four › Poverty rate was 12. 5% when Obama took office �It has been 15% for 3 years now › In 2013, almost 50 million Americans lived in poverty �More than 2/3 are white and almost ¼ are African American Poverty
� A major reason for the continued high poverty level is the growing gap in the distribution of income › There are several causes: � 1) change in the economy as industry changes from producing goods to services �Wages are lower in grocery stores and amusement parks � 2) gap between well-educated and poorly educated workers � 1990’s wages for highly skilled workers soared while less skilled wages stayed the same
› 3) decline of unions (especially among low-skilled workers) �Many now have to work elsewhere for less pay › 4) changing structure of the American family �There has been a shift from two-parent families to single-parent families �This usually lowers incomes
Antipoverty Programs The government has created welfare programs to help the needy � Welfare = economic and social programs that provide regular help from the gov’t or private agencies because of need � › Temporary Assistance for Needy Families – 1997 – families get cash payments because of death, continued absence or permanent disability of a parent › Supplemental Security Income – cash payments to blind or disabled over 65
� General assistance programs do not give cash › Food Stamps = gov’t issued coupons that can be redeemed for food › Medicaid = federal-state medical insurance program for low-income people � Social service programs: › Child abuse prevention › Foster care › Job training
� Enterprise Zones: › These areas where companies can locate free from some local, state and federal tax laws and other operating restrictions › Usually in run down or very low income areas � Workfare Programs: › Many state and local gov’ts require people who receive welfare to provide labor in exchange for benefits �Sanitation crews �Highway crews
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