Chapter 13Economic Instability

Chapter 13Economic Instability

13-1: Business cycles and Fluctuations

• Business Cycles• Recession – period in which real

GDP declines for at least 2 quarters in a row, or six consecutive months.

• If a recession becomes very severe, it may turn into a depression.

• Expansion - period of recovery from a recession

• Forecasting Business cycles• Leading economic indicators – a statistical series that normally turns down before

the economy turns down or turns up before the economy turns up

• The 11 leading economic indicators, composed of both economic and financial variables, are stock price index, exchange rate, money supply, consumer price index, merchandise imports, tourist arrivals, terms of trade new businesses, hotel occupancy, electric energy consumption, and wholesale price index.

13-2: Inflation

• Inflation – a rise in the general level of prices• Deflation – a decline in the general level of

prices• Inflation and Price Indexes• Price Index – measures changes in the level of

prices over time– Consumer Price Index (CPI) tracks monthly changes

in the prices paid by urban consumers for a representative ”basket” of goods and services

– The basket is composed of approximately 364 goods and services scientifically selected to represent the types of purchases most consumers make.

• Creeping inflation – inflation in the range of 1 – 3 percent per year

• Hyperinflation – inflation in the range of 500 percent a year

• Stagflation – a period of stagnant economic growth coupled with inflation

• Civilian Labor Force– Sum of all persons age 16 and above who

are either employed or actively seeking employment• Excludes military personnel, people in jail, people

who are disabled or reside in mental health facilities and people who have opted out of the labor market.

• Unemployment

• The unemployment rate is the number of unemployed people who are actively seeking work divided by the number of people in the civilian work force.

13-3: Unemployment

• Types of Unemployment– Frictional unemployment

• Workers changing jobs or wanting to go to new ones

– Structural unemployment• Caused by a fundamental change in the economy

that reduces the demand for some workers– Technological unemployment

• Caused by technological developments or automation that makes some workers skills obsolete

– Cyclical unemployment• Related to swings in the business cycle

– Seasonal unemployment• Caused by the annual changes in the weather