Business Cycles and Fluctuations.
Chapter 14.
Phases of the Business Cycle.
 Trough.
 Expansion.
 Peak.
 Contraction.
 Recession: Two back to back quarters declini...
THE BUSINESS CYCLE
Phases of the Business Cycle
PEAK
Levelofbusinessactivity
Time
RECESSION
TROUGH
RECOVERY
GROWTH
TREND
Costs of Unemployment
 Personal Cost
 Loss of paycheck
 Loss of self-esteem
 Increase in stress related psychological ...
Sources of Unemployment
Frictional
Seasonal
Structural
Cyclical
Frictional Unemployment
 Caused by time required to bring together
labor suppliers and labor demanders
 Employers need t...
Seasonal Unemployment
 Caused by seasonal changes in labor demand
during the year
 To eliminate the impact of such chang...
Structural Unemployment
 Exists because unemployed workers often
 Do not have the skills demanded by employers, or
 Do ...
Cyclical Unemployment
 Fluctuates with the business cycle, increasing during contractions and
decreasing during expansion...
UNEMPLOYMENT
Measurement of Unemployment, 2002
Employed
Not in
labor
force
Under 16
and/or
institutionalized
Total
Populat...
Unemployment and the Business
Cycle.
Exhibit 1: The Adult Population Sums the
Employed, the Unemployed, and Those Not in the
Labor Force
12
Trend of Unemployment Rate
 Decline in the unemployment rate over last 20
years
 Overall growth in the economy
 Relativ...
Unemployment Rates for Various Groups
The U.S. Unemployment Rate Since 1900
Unemployment Compensation
 Cash transfers for those who lose their jobs and actively seek employment
 Applies to unemplo...
Full Employment
 Occurs only if there is no cyclical unemployment
 Occurs when the only unemployment is frictional, stru...
INFLATION
Defined and Measurement
• A rising general level of prices
• Rate of inflation calculated
using index numbers
Co...
Inflation
 Inflation: a sustained increase in the average price level
 Hyperinflation: extremely high inflation
 Deflat...
Causes of Inflation:
 Demand-pull inflation is inflation initiated by an
increase in aggregate demand.
• Cost-push, or su...
Demand pull :
Increase in AD
can be due to
a fiscal or
monetary
policy, thus
increasing
prices
Cost push:
Upward shift of
the AS will be
due to increase
in costs due to
increase in price
of inputs.
Combination of both:
Exhibit 6a: Inflation Caused by Shifts of
AD and AS Curves
24
Increase in the AD curve
pulls up the price level.
To genera...
Stagflation:
 Stagflation occurs when output is falling at the same
time that prices are rising.
 One possible cause of ...
Countering inflation:
Demand -pull Reduce demand by higher taxation, lower govt.
expenditure, lower govt borrowing, higher...
Controlling inflation (cont)
Excessive
growth on
money supply
Reduce money supply by cutting down on public
sector borrowi...
Anticipated versus Unanticipated Inflation
 Unanticipated inflation creates more problems
for the economy than does antic...
Inflation Across Metropolitan Areas
 Inflation rates differ across regions mostly because of differences in
housing price...
Exhibit 8: Average Annual Inflation from 1994 to
2004 Differed Across U.S. Metropolitan Areas
30
Inflation and Interest Rates
 Interest is the dollar amount paid by borrowers
to lenders because lenders must be rewarded...
Why is Inflation Unpopular?
 Problems with unanticipated inflation
 Hits those whose incomes are fixed in nominal terms
...
CREDICTS
  Oroville High School on Oct 05, 2009
  Kelly Giles, Contract Specialist at Microsoft on Apr 12,
2011
  Kinna...
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business cycle and fluctuation presentation

  1. 1. Business Cycles and Fluctuations. Chapter 14.
  2. 2. Phases of the Business Cycle.  Trough.  Expansion.  Peak.  Contraction.  Recession: Two back to back quarters declining G.D.P  Depression: Three consecutive declining quarters in a row.
  3. 3. THE BUSINESS CYCLE Phases of the Business Cycle PEAK Levelofbusinessactivity Time RECESSION TROUGH RECOVERY GROWTH TREND
  4. 4. Costs of Unemployment  Personal Cost  Loss of paycheck  Loss of self-esteem  Increase in stress related psychological problems  Increase in incidence of crime, suicide, and mental illness  Economic Cost  Loss in output 4
  5. 5. Sources of Unemployment Frictional Seasonal Structural Cyclical
  6. 6. Frictional Unemployment  Caused by time required to bring together labor suppliers and labor demanders  Employers need time to learn about the talent available  Job seekers need time to learn about employment opportunities  Generally short-term and voluntary
  7. 7. Seasonal Unemployment  Caused by seasonal changes in labor demand during the year  To eliminate the impact of such changes, monthly unemployment statistics are seasonally adjusted, which smoothes out these factors
  8. 8. Structural Unemployment  Exists because unemployed workers often  Do not have the skills demanded by employers, or  Do not live where their skills are in demand  Occurs because changes in tastes, technology, taxes, or competition reduce the demand for certain skills and increase the demand for other skills
  9. 9. Cyclical Unemployment  Fluctuates with the business cycle, increasing during contractions and decreasing during expansions  Government policies to stimulate aggregate demand recessions is aimed at reducing this type of unemployment
  10. 10. UNEMPLOYMENT Measurement of Unemployment, 2002 Employed Not in labor force Under 16 and/or institutionalized Total Population 288,600,000 Labor force 142,500,000 74,700,000 71,400,000 Unemployed 8,300,000 134,200,000
  11. 11. Unemployment and the Business Cycle.
  12. 12. Exhibit 1: The Adult Population Sums the Employed, the Unemployed, and Those Not in the Labor Force 12
  13. 13. Trend of Unemployment Rate  Decline in the unemployment rate over last 20 years  Overall growth in the economy  Relatively fewer teenagers in the work force  Unemployment rate says nothing about who is unemployed or for how long – differs across  Race  Gender  Age  Geographical area  Occupational group 13
  14. 14. Unemployment Rates for Various Groups
  15. 15. The U.S. Unemployment Rate Since 1900
  16. 16. Unemployment Compensation  Cash transfers for those who lose their jobs and actively seek employment  Applies to unemployed workers who meet certain qualifications  Problems with unemployment compensation:  Workers who receive benefits tend to search less actively than those who don’t  May reduce the urgency of finding work 16
  17. 17. Full Employment  Occurs only if there is no cyclical unemployment  Occurs when the only unemployment is frictional, structural, or seasonal  Does not mean zero unemployment  Frictional, seasonal, and structural unemployment can still occur  Occurs when from 4% to 6% of the labor force is unemployed
  18. 18. INFLATION Defined and Measurement • A rising general level of prices • Rate of inflation calculated using index numbers Consumer Price Index = Price of the same market basket in 1982-1984 x 100CPI Price of most recent market basket in the particular year
  19. 19. Inflation  Inflation: a sustained increase in the average price level  Hyperinflation: extremely high inflation  Deflation: a sustained decline in the average price level  Disinflation: a reduction in the rate of inflation
  20. 20. Causes of Inflation:  Demand-pull inflation is inflation initiated by an increase in aggregate demand. • Cost-push, or supply-side, inflation is inflation caused by an increase in costs.
  21. 21. Demand pull : Increase in AD can be due to a fiscal or monetary policy, thus increasing prices
  22. 22. Cost push: Upward shift of the AS will be due to increase in costs due to increase in price of inputs.
  23. 23. Combination of both:
  24. 24. Exhibit 6a: Inflation Caused by Shifts of AD and AS Curves 24 Increase in the AD curve pulls up the price level. To generate continuous demand-pull inflation, the Increase in costs of production push up the price level. To generate continuous cost-push
  25. 25. Stagflation:  Stagflation occurs when output is falling at the same time that prices are rising.  One possible cause of stagflation is an increase in costs.
  26. 26. Countering inflation: Demand -pull Reduce demand by higher taxation, lower govt. expenditure, lower govt borrowing, higher interest rates Cost push Take steps to reduce production costs by deregulating labour markets, encouraging greater productivity, apply control over wages and prices Import factors reduce quantity of imports or their prices via trade policies.
  27. 27. Controlling inflation (cont) Excessive growth on money supply Reduce money supply by cutting down on public sector borrowing Funding Govt borrowing from non bank Reduce bank lending Maintain interest rates Expectations of inflation Pursue policies which indicate Govt’s determination to reduce inflation
  28. 28. Anticipated versus Unanticipated Inflation  Unanticipated inflation creates more problems for the economy than does anticipated inflation  To the extent that inflation is higher or lower than anticipated, it arbitrarily creates winners and losers  If it is higher than expected, the winners are all those who had contracted to pay a price that anticipates lower inflation  The losers are all those who agreed to sell at that price  If inflation is lower is lower than expected, the situation is reversed 28
  29. 29. Inflation Across Metropolitan Areas  Inflation rates differ across regions mostly because of differences in housing prices, which grow faster in some places than in others  Federal government tracks separate CPIs for each of 26 metropolitan areas. 29
  30. 30. Exhibit 8: Average Annual Inflation from 1994 to 2004 Differed Across U.S. Metropolitan Areas 30
  31. 31. Inflation and Interest Rates  Interest is the dollar amount paid by borrowers to lenders because lenders must be rewarded for forgoing present consumption  The interest rate is the interest per year as a percentage of the amount loaned 31
  32. 32. Why is Inflation Unpopular?  Problems with unanticipated inflation  Hits those whose incomes are fixed in nominal terms  Arbitrarily redistributes income and wealth from one group to another  Reduces the ability to make long-term plans  Forces buyers and sellers to pay more attention to prices - less time for production - overall productivity of economy falls 32
  33. 33. CREDICTS   Oroville High School on Oct 05, 2009   Kelly Giles, Contract Specialist at Microsoft on Apr 12, 2011   Kinnar Majithia, Management Trainee at Emerson Network Power on Jan 27, 2012  Baterdene Batchuluun, Teacher at I'm working as a teacher on Sep 02, 2013
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