Economic Instability

Text Correlation:

Chapter 14

Our standard & essential questions

• SSEMA1 The student will illustrate the means by which economic activity is measured.

• EQ: How do the patterns of expansion, recession and depression in the economy affect individual lives?– The students will define the stages of the

business cycle as well as recession and depression

More essential questions

• EQ: How does government measure economic activity?– The students will define Gross Domestic Product

(GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation and aggregate supply and aggregate demand.

– The students will explain how economic growth, inflation and unemployment are calculated.

• EQ: How does economic activity affect individual lives?– The students will identify structural, cyclical and

frictional unemployment.

Terms to look up 1. Gross Domestic Product (GDP)

1. Nominal GDP2. Real GDP3. Per capita GDP

2. economic growth3. unemployment 4. Consumer Price Index (CPI) 5. inflation 6. stagflation7. business cycle8. recession9. depression

Causes and effects of economic instability

• Business cycles– expansions– contractions– recessions– depressions– causes

• Inflation– definition– types– causes

• Unemployment– definition– types– causes– solutions

Business Cycles & Fluctuations

• cycles: systematic ups and downs of the real GDP (which takes inflation into account)

• fluctuations: rise & fall of real GDP in a nonsystematic manner

• GDP refresher: – Real GDP is the value of the total production of

goods and services within a country during a particular period time (usually one year). The number is adjusted for inflation so one year’s production can be compared with another’s.

– Per Capita GDP is the GDP figure divided by the

population of the country

Cycle Phases• As GDP increases,

there is expansion. When expansion reaches a peak, recession begins. Recession ends at the trough, and expansion (and recovery) begin at that point.

The British call the peak a boomWe call the line above the trend line.

Recession & Depression

• Recession: real GDP decreases for 2 quarters (6 months) in a row

• Depression: severe recession w/3 more elements– Very high unemployment– Acute shortages– Excess manufacturing capacity (idle or

partially unused factories)

Business cycle causes

• Capital expenditures• Inventory adjustments• Innovation & imitation• Monetary factors (Fed.

credit/loan policies)• External shocks

The “great” worst depression

• The United States had experienced several previous depressions; things had always improved with time.

• The Great Depression of the 1930s was the first depression that had not been “fixed” automatically by the action of the free market.

• Government interference with the market was a major cause of the Great Depression

The worst depression ever: Why?

• Overproduction • E-Z consumer credit (even for stocks)• Global economic troubles• High tariffs=government interference• Loans to foreign countries dropped

drastically

The Downward Spiral of the Great Depression

• Stock market crashes• Wealth disappears overnight• Banks fail when depositors withdraw all

their savings (No FDIC insurance yet)• More wealth disappears• Sales drop b/c there is no money• Workers lose jobs• Sales drop even more• Money supply shrinks!

Business cycles since WWII

• Depression ends w/return to full production in US industry & agriculture

• Small recessions occur, followed by expansion as Am. spending increase

• Length of expansions increases w/fewer recessions over time

Unemployment

unemployment rate calculation:

Number of unemployed individualsTotal # of persons in civilian labor

force

Who is “Unemployed?”

Three criteria:• Available for work & • made specific effort to find a job in

the past month• Worked for pay < 1 hour in the

past week (people with part-time jobs are considered employed)

Types of unemployment

• Frictional: workers who are between jobs• Structural: fundamental change in

operation of the economy reduces need for workers & their skills

• Cyclical: directly related to swings in the business cycle

• Seasonal: due to changes in weather or change in demand for certain products

• Technological: workers replaced by machines

Inflation etc.

Inflation: rise in general price level change in price level

Inflation rate= beginning price level x 100

Creeping inflation: 1-3% per yearGalloping inflation: intense; 100-300% per yearHyperinflation: 500% per year and above

Deflation: decrease in general price level

Types of inflation & their causes

• Demand-pull: all sectors of economy try to buy more goods & services than the economy can produce (too much money chasing too few goods & services)

• Federal government’s deficit: gov. spends more than it takes in taxes & it must borrow funds

• Cost –push: rising input costs (CELL);esp. labor

• Self-perpetuating spiral of wages & prices• Excessive money supply: money supply grows

faster than real GDP

inflation images• When the price

level rises, this is called inflation; the purchasing power of the dollar goes down

• 1900’s dollar is 2000’s nickel

Interesting to know:

In case anybody asks: All you need to know about the Lorenz

curve• The Lorenz curve

shows how much the actual distribution of income differs from an equal distribution

• Reasons for inequality include education, wealth, discrimination, ability and monopoly power