CHAPTER 14 ECONOMIC INSTABILITY

Transcription

1 CHAPTER 14 ECONOMIC INSTABILITY

2 Business Cycles Economic growth is something that is beneficial to almost everyone Sometimes though, economic growth is interrupted by business cycles largely systematic ups and downs of real GDP At other times economic growth is interrupted by business fluctuations the rise and fall of real GDP over time in a nonsystematic manner

3 Business Cycle Phases Recession Decline in GDP for at least 6 months Peak When GDP stops expanding Trough When GDP stops declining Expansion Period of growth in GDP

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5 Trend Line Growth path the economy would follow if it were not interrupted by alternating periods of recession & recovery Depression- very severe recession Large # of unemployed people Decline in income

6 Causes of Business Cycle Changes in investment spending Innovation & imitation Monetary policy decisions External shocks

7 The Great Depression Causes Big gap in distribution of income easy credit made borrowing easier but people went into debt Recovery & Legislation Increased gov. spending on WWII Legislation- FDIC protected investments

8 Prediction of Business Cycles Using everyday economic statistics Leading economic indicator= GDP GDP=C+I+G+F(X-M)

9 UNEMPLOYMENT AND INFLATION

10 Unemployment- Labor Force The sum of all persons age 16 and above who are either employed or actively seeking employment The following people are excluded Military People in jail People in a mental health facility

11 Unemployment People available for work who made a specific effort to find a job during the past month Collected by census workers who turn it over to the BLS (Bureau of Labor Statistics) for analysis & publication Released to the public monthly

12 Unemployment Rate # of unemployed persons / Labor Force Expressed as a percentage of the entire labor force Does not include: Underemployed workers Overqualified workers Part-time workers who want full time discouraged workers Gave up looking for work not unemployed anymore because they re out of the labor force

13 Types of Unemployment Frictional in between jobs Structural fundamental change in economy Outsourcing hiring outside firms to do work for you Technological ex. ATM s replacing bank tellers Cyclical Recessions cause layoffs Seasonal job is only in demand for part of the year

14 Inflation Increase in the general level of prices for goods & services Deflation- decline in price Both situations are harmful to the economy and should be avoided whenever possible

15 Measuring Prices and Inflation Price index Statistical series used to measure changes in price level over time Consumer price index (CPI) Tracks monthly changes in price of a representative sample (market basket) of consumer items Base year Year that serves a comparison for all other years

16 Types of Inflation Creeping Relatively low (1-3%) Hyperinflation In excess of 500% per year Stagflation Slow economic growth accompanied by inflation

17 Causes of Inflation Demand-pull High demand (shortages) by all sectors leads to price increases Cost-push Rising input costs (I.e. energy & organized labor) drive up the cost of products to the consumer Wage-price spiral Higher prices force workers to ask for higher wages Excessive monetary growth

18 Consequences of Inflation Reduced purchasing power Unable to buy as much as in the past Distorted spending patterns May not be able to afford expensive things (ex. House or car)

19 POVERTY AND THE DISTRIBUTION OF INCOME

20 Distribution of Income The Lorenz curve shows how the actual distribution of income differs from an equal distribution Since 1980 the distribution of income in the United States has become more unequal

21 Reasons for Income Inequality Education levels Wealth Discrimination Ability Monopoly power

22 Poverty Poverty is defined as having an income below a certain level (poverty guidelines) Poverty is extensive in America- 14.8% in 2014 (46.7 million people) Poverty has increased as a result of the growing gap in the distribution of income (widening of gap between wealthy and poor people)

23 Antipoverty Programs Income Assistance: provide direct cash assistance to those in need (Temporary Assistance for Needy Families, Supplemental Security Income) General Assistance: assist poor people but do not provide direct cash (food stamps, Medicaid) Social Service Programs: state developed programs to help the needy (child abuse prevention, foster care, family planning, job training) Tax Credits: low-income American families qualify for special tax credits (Earned Income Credit) Enterprise Zones: areas where companies can operate free of some local, state, and federal taxes and regulations (created in run-down areas to promote health of the specific depressed area) Workfare Programs: program that requires welfare recipients to exchange labor for benefits