Editors Note: McConnell Economics Books, including the 18th edition, are one of many sources of material included in this chapter. Our Current Events Internet Library has more information on today's economics news. I. Business cycles describe the fluctuations in business activity over time.
Graph from Wikipedia	The Dow Jones 1905- 2008 also followed a cycle. Oct. 11; 2008 WSJ
For more read Domestic Income and Recession and Recession Job Losses: 3 Views 9/9/09
Top 10 Financial Crises 10. The Panic of 1907: The fourth so-called ”panic” in 34 years. 9. The Mexican Peso Crisis 1994 aka “The December Mistake” Punta ! 8. Argentine economic crisis - 1999 If you have no money, is it a good idea to print more? 7. German hyperinflation - 1918-24 If you have to print a 1,000-billion Mark note, you probably have too much inflation. 6. Souk Al-Manakh - 1982 Try not to use post dated to buy stocks 5. Black Monday - 1987 Can we call a 23% drop in a single day a black swan? 4. Russian financial crisis - 1998 devaluation of the ruble and cancellation of debt is never     good for a local stock market. 3. East Asian financial crisis - 1997 aka the Asian Contagion 2. Black Tuesday - 1929 — Really? One day, and not the entire Great Depression? 1. 1973 Oil Crisis — Big energy increases cause recessions Top 10 Financial Crises | The Big Picture Interesting Video American-Experience Crash of 1929 Series

A. Recession: commonly accepted definition is two consecutive quarters of negative growth in Real GDP.       The (F)utility of GDP? argues that his is not a good definition.-The Becker-Posner Blog 12/17/09  B. Why business activity fluctuates          1. Inventory Recession: Excessive optimism causes inventories to over expand and              eventually they must be worked down causing a recession. Computers have made              easier to track inventory and made this type of  recessions less likely.           2. Rolling Recessions: Economic downturn is limited to areas or sectors of the economy.               a. Economic activity eventually increases but by then other areas and sectors are in recession.               b. International competition has increased the occurrence of this type of recession as sectors                   such as steel, autos, and recently computers have been affected.         3. Innovation Cycle: railroads, computers, bio-technology         4. Political Events: wars, international trade         5. Misuse of Monetary and Fiscal Policy: government creates and/or borrows an incorrect            amount of money         6. Non-cyclical Fluctuations             a. Seasonal variation: Christmas buying rush, spring construction              b. Long-Term Secular Trends: the expansion or contraction in the level of economic activity                over a long period of years (the dark ages, the industrial revolution) For more visit                1) Long Waves Theories of Development from the Kunter Krumme, U. of Washington.                2) Call this a Recession, At Least It is Not the Drk Ages By Bryan Ward-Perkins 12/22/09 FT.com         7. Durable Goods have a long useful life (houses, equipment, etc.) Sale of durable goods             contract substantially during a recession as their purchase may be easily postponed.             For how other goods are affected visit U.S. Economic Cycles from Wikincest.         8. “Business Cycles, Recessions and Economic Booms” Download has an interesting list of causes.         9. Current Business-Cycle Conditions from American Institute for Economic Research (AIER)    C. Leading, coincidental, and lagging indicators are measures such as the unemployment rate which         respectively change before, with or after general economic activity. Economists use these indicators         to predict future economic activity.    D. History         1. Visit Business Cycle data since 1854 from the National Bureau of Economic Research.         2. Visit  Business Cycle Business Cycles Empirical Issues from The History of Economic Thought             Website for more information on business cycles         3. Boettke podcast on the Austrian Austrian Perspective on Business Cycles and Monetary Policy         4. Great Depression by Robert J. Samuelson, the Concise Encyclopedia of Economics             a. Amity Shales on the Great Depression, On EconTalk, Russ Roberts interviews Amity Shlaes,                Bloomberg columnist and visiting senior fellow at the Council on Foreign Relations. She talks                about her new book, The Forgotten Man: A New History of the Great Depression.                The podcast discusses Herbert Hoover, Franklin Delano Roosevelt, the economics of the                New Deal and the class warfare of the 1930s            b. The Great Depression, On EconLog and in his column at TCS Daily, Arnold Kling also                focuses on some of Shlaes's observations adding thoughtful insights.      E. Recent History           1. On the Economy CNBC Video, April 10., 2008v An overview of the economy with Joseph Stiglitz,               a Nobel Prize-winning economist, and Mohamed El-Erian, co-CEO of PIMCO          2. Slide Show: A Business Cycle Ends, and Many U.S. Workers Lose Ground Business Week                  reviews the latest business expansion ending in early 2008.        3. Recession of 2007- Fed Watch: Turning Which Corner? 05/11/09 by Tim Duy                           See Understanding Contrary Indicators for more information.

Interesting Links Leading Indicaters US LADING ECONOMIC INDICATORS  AND RELATED COMPOSITE INDEXES FOR APRIL 2008 Conference Board U.S. Business Cycle Indicators Leading Indicaters from conference-board.org/pdf Index of Leading Indicators – Premature to Rule out Recession Asha G. Bangalore Northern Trust, May 19, 2008 http://tinyurl.com/4gma4w LEI and KRWI - It's Different This Time? Paul KasrielNorthern Trust, April 21, 2007http://www.safehaven.com/article-7404.htm RECESSION IMMINENT? BOTH THE LEI AND KRWI ARE FLASHING WARNING Paul L. KasrielNorthern Trust, March 22, 2007    http://www.financialsense.com/economy/northern/kasriel/2007/0322.html http://www.nytimes.com/aponline/business/AP-Economy.html Leading Economic Indicators 2007/01/leading-economic

Will the US, like Japan, have two lost decades?

The Panic of 1907 An Audio Summary from Get Abstract

Business Cycle Indicators Handbook is less speculative and free!

Want to know why President Bush is acting as he is, read Generations, it predicts everything, and the author of this site's Book Summary of American Dynasty Aristocracy, Fortune, and the Politics of Deceit in the House of Bush

II. Three types of unemployment      A. Frictional is caused by time lags in the operation of labor markets.           1. Workers are between employment because they have been fired, are changing               careers, are seasonal workers,                have been temporarily laid off, etc.           2. Short-term, inevitable, temporary, and is eliminated with time.      B. Structural is caused by changes in consumer demand and technology.          1. Result is an oversupply of workers with a particular skill.           2. This unemployment is often concentrated in a particular area, associated with a              particular industry, and is often permanent.           3. Increased economic activity will not decrease this type of unemployment as training              and/or relocation are required.          4. Happened in the 1970's and early 1980's as consumers decided to buy small foreign              built cars and other products              produced in the Rust Belt. Now it is happening on each coast because of defense              cutbacks, throughout industry as restructuring is needed because of foreign competition.      C. Cyclical          1. Caused by a lack of total demand at the end of an economic expansion           2. Temporary          3. Recession of the early 1990's was due to a drop in demand caused by a              debt buildup in the 1980's by individuals, businesses, and the federal              government. Apprehension caused by high structural unemployment of both              blue and white collar workers slowed the recovery.          4. Recession of 2001 was caused by debt build up of individuals resulting from              the long period of prosperity and the stock market bubble, excess capital              investment caused by Y2K and internet optimism, and September 11.            5. Recent unemployment data  provided by the federal Reserve Bank of Saint Louis.           6. U.S. Unemployment, 1960-Present from Bradford DeLong's( USC Berkley) is              a dynamic presentation.           7. Broad Unemployment Across the U.S. Interactive map from the July 14, 2009 NYT.             8. Unemployment: The Harder You Look, The Uglier It Appears 09/02/09             9. Long Term Unemployment Rate has almost doubled . 9/9/09

charts courtesy of Gluskin Sheff

III. Other unemployment topics         A. Natural unemployment (frictional + structural unemployment)             is usually 4% to 6% of the labor force         B. Full employment is when cyclical unemployment equals zero         C. Okun's Law: a 1% increase in cyclical unemployment will cause a 2.5% annual drop in GNP.            1. GNP change = 2.5 (unemployment rate change)            2. If unemployment goes up 2% as it did in the 1990-91 recession                then the drop in GNP would be 2.5 X 2% or 5%.            3. Cost to a 6 trillion dollar economy of 250 million people                (5% X $6,000,000,000,000) / 250,000,000 = $1200/person/year.       D. Labor Force Participation Rate from The Big Picture blog.       E. Noneconomic costs of unemployment include loss of skills,            self-esteem, and social-political unrest.       F. Discouraged workers leaving the workforce lowers unemployment.

The Last Big Recession 1980-01-01 6.3 1981-01-01 7.5 1982-01-01 8.6 1982-12-01 10.8 Peak 1983-01-01 10.4 1984-01-01 8.0 1985-01-01 7.3 1986-01-01 6.7 1987-01-01 6.6			updated from  Calculated Risk on 2/6/10
IV. Inflation       A. An increase in prices is measured by a price index such as the Consumer Price Index (CPI) and Producer Price  Index (PPI).       B. The PPI measures the change in wholesale prices.       C. The PPI is a leading indicator for CPI as wholesalers can usually pass price changes on to retailers who pass them to            consumer.            1. Recent increases in foreign competition made passing price increases on more difficult.            2. The internet had the same kind of affect in the late 1990's.        D. The inflation rate for a year when a basket of consumer goods increase from $400 to $420 would be calculated as follows.             E. Recent inflation data provided by the Department of Labor.         F. U.S. Inflation, 1960-Present from Bradford DeLong, of USC Berkley, is a dynamic presentation.

V. Causes of inflation
     A. Demand-pull inflation
         1. Increases in C + I + G + X_N will cause GDP to increase.
         2. As the economy nears full employment, the prosperity caused by high employment increases demand and put
             upward pressure on prices.
         3. When this happens, the economy is said to be overheated.
     B. Cost-push inflation
         1. As the economy approaches full employment factor resources become scarce allowing their owners to increase prices.
         2. Supply-side shocks can cause high resource prices even if demand for resources is low, i.e., OPEC's two oil  
             embargoes of the 1970's

VI. Economic effect of inflation
      A. Both income and resource allocations are affected by inflation as the market tries to adjust to the loss in value
           caused by inflation.
          1. High gas prices in the 1970's caused a switch to small cars and many people bought wood stoves.
          2. Low gas prices in the 1990's made RV's less expensive to run.
      B. Debtors (homeowners, businesses, government) are helped by high inflation because they pay back with dollars 
          worth less than those borrowed.
      C. Creditors are hurt by inflation as they are paid back in less valuable dollars. Those on a fixed income are also 
           hurt by the cheaper dollars. 
      D. Cost-of-Living Increases (COLA's) were instituted in the 1970's to negate the severe effects of that period's high inflation.
           For more information visit Cost of living from Wikipedia.
      E. Deflating GDP
          1. Inflation can be taken out of growth in GDP by expressing later year production at earlier year prices. 
          2. In the following chart, letters Q, P and T are quantity, price per unit and total respectively.

	1980			1990			1990 Production  at 1980 Prices			From From Inflationdata.com
Production	Q	P	T	Q	P	T	1990 Q	1980 P	T
Shirts	1	10	10	2	20	40	2	10	20
Movies	2	3	6	3	5	15	3	3	9
GDP			16			55			29
Note : Output more than tripled in "nominal" terms but in real terms output increased by 81.25% (29-16)/16

 VII.  Some question government procedures when calculating inflation and economic growth.
         A. Shadow Government Statistics  
         B. Grossly Distorted Procedures explains how Hedonics is a way of accounting for the changing quality of products when calculating price movements.
            For example, today's computers are 2 to 3 times faster and have more memory than models produced just a few years ago.
            If someone can buy a better computer today than last year for the same price, have not prices really fallen? Here is another example.
            Is it realistic to compare the price of a 1955 Chevy with the price of a 2005 Toyota with air conditioning, DVD player, anti-lock breaks,
            seat belts, air bags, side air bags, power steering, power brakes, etc etc etc?. For a mathematical approach read Price Hedonics: A Critical Review.
            and  A Note on the Impact of Hedonics and Computers on Real GDP.
         C. Financial Sense Online - The Core Rate
       D. Monthly Labor Review counters the Shadow Government Statistics arguments concerning inflation calculations.

VIII. Presidents and the business Cycle

 

Last Chapter	Next Chapter
Chapter 9 Class Discussion Questions	Table of Contents
Chapter 9 Homework Questions	Economics Internet Library

 

Interesting Articles

Turning Which Corner? 05/11/09 -Tim Duy's Fed Watch

The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005

The Paradox of Thrift

Two Important Timelines

America's Great Depression Timeline

Timeline of the Great Depression