Agri 2312 chapter 14 consequences of business fluctuations
Consequences of Business Fluctuations Chapter 14
Discussion Topics <ul><li>Fluctuations in business activity </li></ul><ul><li>Consequences of business fluctuations </li></ul><ul><li>Macroeconomic policy options </li></ul>
Nature of Business Fluctuations <ul><li>Expansionary phase </li></ul><ul><li>Peak of business cycle </li></ul><ul><li>Recessionary phase </li></ul><ul><li>Trough of business cycle </li></ul>Pages 277-278
Page 278 Four Phases of a Business Cycle Length of cycles varies over time…
Indicators of Economic Activity <ul><li>Coincident indicators : current production, current disposable income, current sales </li></ul><ul><li>Lagging indicators : business inventories, duration of employment, average interest rate </li></ul><ul><li>Leading indicators : new orders for goods, new building permits, new investment in plant and equipment, changes in the money supply </li></ul><ul><li>Forecasting models : mathematical methods of forecasting future trends in the economy </li></ul>Pages 278-279
Page 279 Indicator index Actual activity several months later… A classical example of a leading indicator
Two Consequences of Business Fluctuations <ul><li>Fluctuations in the civilian unemployment rate and implications for policy </li></ul><ul><li>Fluctuations in the rate of inflation and implications for policy </li></ul>Pages 280-281
Calculation of Civilian Unemployment Rate Annual rate Number of civilians unemployed Size of total civilian labor force = where the size of the total civilian labor force is determined by subtracting those not seeking jobs (homemakers, students, etc.) from the total non- institutional population (those not in prison) over 16 years of age as well as those who are in military service. Page 280
An Example Assume the following values: Total labor force 1 143.8 million Members of armed services 1.7 million Employed persons 136.2 million Annual rate 143.8 – 1.7 – 136.2 143.8 – 1.7 = = .0415 or 4.15 percent 1 The total labor force equals total population minus those not seeking employment over age 16 and those in institutions. Page 280
Forms of Unemployment <ul><li>Frictional : changing jobs and currently unemployed </li></ul><ul><li>Cyclical : associated with business cycles </li></ul><ul><li>Seasonal : associated with seasonal business activity </li></ul><ul><li>Structural : associated with technological change </li></ul>Page 280
Page 281 Unemployment rate during the great depression was 25% Full employment barometer?
What is Inflation? <ul><li>Sustained rise in the general price level </li></ul><ul><li>Not a change in the price of a single commodity </li></ul><ul><li>Core rate of inflation excludes fuel and food price increases </li></ul><ul><li>Deflation (prices falling ) vs. disinflation (prices increasing at a slower rate ) </li></ul>Pages 281-282
Measuring the CPI The consumer price index is a weighted average of the prices consumers pay for goods and services. It is measured by: CPI = Or : CPI = W FB (P FB ) + W H (P H ) + … + W OTHER (P OTHER ) = 14.914 (P FB ) + 42.427 (P H ) + … + 3.276 (P OTHER ) Cost of market basket in current year Cost of market basket in base year × 100 See Table 14.1 on page 281 Page 282
Rate of Inflation The rate of inflation can be measured by the percent change in the CPI, or: Inflation rate = current CPI – previous CPI previous CPI If the CPI was 179.9 in 2007 and 184.0 in 2008, the annual rate of inflation in 2000 would be: Inflation rate = (184.0 – 179.9) ÷ 179.9 = .0228 or 2.28% Page 283
Inflation thought to be “ under control” in this range Page 284 Brought about a major monetary policy action described in Chapter 13
Page 285 When describing growth in the economy on the nightly newscast, the newscaster will refer to the growth in real GDP after adjustments for inflation. In the above example, real GDP grew over the 1992-1999 period, but not at the rate implied by comparisons in nominal terms.
Page 285 Some examples of annual rates of inflation around the world vs. U.S.
Page 288 Phillips curve named after British economist A. W. Phillips…
Page 288 Policies that reduce unemployment may increase inflation in the short run, and vice versa…
Page 286 Demand oriented policies that shift the aggregate demand curve from AD 2 to AD 3 “pull up” the general price level from P 0 to P 1 . This small increase in inflation may make sense since output increased from Y 2 to Y 3 , which would lower unemployment.
Page 286 Demand oriented policies to maximize output at the economy’s potential or Y POT may bring about a substantial increase in the general price level (and hence rate of inflation) for a relatively small gain in output and employment.
Page 289 Both demand and supply oriented policies stimulate aggregate output.
Page 289 But demand expansion policy “ pulls up” the general price level….
Page 289 … while supply oriented policies that enhance productivity reduce the general price level.
Page 289 In reality, both forms of policy are typically carried out at the same time.
Summary <ul><li>A business cycle has four phases: peak, recession, trough and expansion </li></ul><ul><li>The two major consequences of business fluctuations are unemployment and inflation </li></ul><ul><li>Know how to calculate the civilian unemployment rate and the rate of inflation facing consumers </li></ul><ul><li>Understand the nature of the index of leading economic indicators </li></ul><ul><li>Understand the concept graphing of demand pull inflation </li></ul><ul><li>Understand the Phillips curve and demand and supply policy impacts </li></ul>
Chapter 15 focuses on how macroeconomic policy affects agriculture ….