2-2 Economic Conditions Change

Objectives:

– Describe the four phases of the business cycle

– Explain causes of inflation and deflation

– Identify the importance of interest rates

Essential Question:

– What causes the phases of the business cycle to change?

The Business Cycle

Roller Coaster

The Main Idea

In a market economy, there is an economic cycle, which includes four stages: prosperity, recession, depression, and recovery. These are also the four stages of the business cycle. In the last few decades, we have experienced the economic cycle a number of times.

Economic Cycle

United States history has had patterns of good times to bad times back to good times.

Four Stages of the Business Cycle

business cyclethe rise and fall of economic activity

The business cycle of one country can affect other trading partners.

Business Cycle

The business cycle has four parts:

Prosperity

Recession

Depression

Recovery

Business Cycle ModelFigure 3.1

Four Stages of the Business Cycle

prosperitya peak of economic activity

Prosperity is at the peak of the business cycle

Demand for goods and services is very high..

Unfortunately, it cools down and activity slows down

Graphic Organizer

Characteristics of Prosperity

Higher wages

Greater demand for goods to be produced

More people buy houses, which creates work for builders

People buy more goods from other countries, which benefits those countries

Four Stages of the Business Cycle

recessionwhen economic activity slows down

Recession is when the economy slows down.

May not be too serious or too long, but signals trouble for some people’s jobs.

Ripple Effect-drop in related business. Ex – home builder

Recession

A recession in one industry can cause a ripple effect throughout the entire economy.

Graphic Organizer

Characteristics of a Recession

Businesses produce less which means they need less workers

Unemployment increases

People have less money to spend

Fewer goods and services are produced

The GDP declines

Depression

If a recession deepens and spreads throughout the entire economy, a nation may move into a depression.

depressionA phase marked by a prolonged period of high unemployment, weak consumer sales, and business failures.

Graphic Organizer

Characteristics of a Depression

High unemployment

Low production of goods and services

Can last for several years

Spreads to other countries

High number of unused manufacturing facilities

Very rare

Depression

The stock market crash on October 29, 1929, or “Black Tuesday,” marked the beginning of the Great Depression.

Great Depression Video

Great Depression Video

Video

Two partner groups

Get with a partner

In your most creative way possible, using construction paper, markers, color pencils and anything around the room –

Make a diagram of the Business Cycle

Graphic Organizer

TheGreat

DepressionThe GDP fell

nearly 50percent

Unemploymentrose nearly800 percent

The averagemanufacturingwage was 5

cents an hour

Many banksaround the

countryfailed

The moneysupply fell

by one-third

Many townsand other civic bodies printed

their own money

Recovery

Economic downturn doesn’t go on forever.

Gradual process

Production starts to increase during a recovery.

recoverya rise in business activity after a recession or depression

Recovery

Characteristics of a Recovery

People start going back to work

People have money to purchase goods and services

Demand for goods and services stimulates more production

New businesses open

Businesses become more innovative

Recovery

In 1939, the United States was beginning to recover from the depression when World War II began.

The war increased the rate of recovery because of the demand for production.

What things were produced?

Consumer Prices

Inflation

– The buying power of the dollar decreases

– If prices increased 5% during the last year, items that cost $100 then would now cost $105.

– Ex: “Back when I was a kid…..a candy bar was 45 cents!”

Rate of Inflation

With inflation, one’s buying power decreases.

inflationAn increase in the general level of prices.

Rate of Inflation

Causes of Inflation

When demand is greater than supply

War

Increase in the price of raw materials

Increase in expenses

Increase in salaries

Too much money circulating in the economy

Measuring Inflation

In the US, one of the most watched measures of inflation is called the Consumer Price Index (CPI)

Price indexa number that compares prices in one year with some earlier base year.

Consumer Price Index (CPI)

CPI – “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services” - Bureau of Labor and Statistics

Consumer Price Index

Activity

Go to www.bls.gov

Complete handout, by yourself

Rate of Inflation

Deflation can occur when the supply of goods is greater than the demand.

deflationa general decrease in the price of goods and services

Graphic Organizer

Economy produces more goods than people want.

Sellers lower prices.

Sellers cut production.

People have less money to buy goods.

Demand continues to go down.

Deflation

Interest Rates

Interest rates represent the “cost of money” – the cost to borrow money

Have a strong influence on business activities

Higher interest rates = higher business costs

Types of Interest Rates

Prime rate – the rate banks make available to their best business customers ex – large corporations

Discount rate – the rate financial institutions are charged to borrow funds from the Fed

T-bill rate – is the yield (money you make) on short term (13 week) U.S. government bonds

Types of Interest Rates (cont’d)Treasury bond rate – yield on long term (20 year) U.S. government debt obligations

Mortgage rate – the amount individuals pay to borrow for the purchase of a new home

Corporate bond rate – the cost of borrowing for large U.S corporations.

Certificate of Deposit (CD) – the rate for six-month time deposits at savings institutions

1. What is the stage that follows a recession or depression?

The recovery stage can happen after either a recession or a depression.

2. What is the difference between a recession and a depression?

A recession is a slight downturn; a depression is a major downturn.

3. Why may innovation play an important role in the recovery stage of a business cycle?

Innovation creates demand that leads to more employment and production, which leads to more demand.

Section 2-3. Other measures of Business Activity

Objectives

Discuss investment activities that promote economic growth

Explain borrowing activities by government. Businesses and consumers

Describe future concerns of economic growth

Essential Question – how does the government borrow money?

Investment Activities

Investing can happen in numerous ways:

– You are investing in your future right now by being in school

– Companies invest all the time by buying buildings and equipment

Capital Spending

Capital Spending refers to money spent by a business for an item that will be used over a long period.

Capital projectsInvolve spending by businesses for items such as land, buildings and equipment and new products.

Where does the moola come from for all these capital projects!???!?

Personal Savings

Stock investments

Bonds

Personal savings….not much else to explain

The Stock Market

-Corporations are a major type of business org.

-Businesses can’t come up with all the money on their own so people invest in them

Stock Represents ownership in a corporation

David Choe – graffiti artist

Multi-millionaire overnight!

Was given the choice for a couple thousand dollars or stock to spray paint the walls of Facebook’s office.

He chose stock – now worth $250,000,000!

Video

What causes the value of stocks to change?

Affected by many factors, but the main one is SUPPLY and DEMAND

– If a company has higher earnings, more people will DEMAND it’s stock and want to buy it

– Causes the value of stock to increase

Stock Market Activity

Go to www.yahoofinance.com

The Bond Market

Another investment activity involves the sales of bonds.

If you purchase a bond, you are a creditor…it means you lent money to the organization

bondA bond represents debt for an organization.

Government Debt

If a surplus exists, government may reduce taxes or increase spending on various programs

Budget surplusWhen the government spends LESS than it takes in.

Government Debt

Budget deficitWhen the government spends MORE than it takes in.

This happens more often

Government Debt

National debtThe total amount owed by the federal government

www.usdebtclock.org