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Chapter 9 The Business
Cycle To Print from an Internet browser, set type size to Smaller by choosing View, Text Size and Smaller, and choose File and Print. You may also need to set the margins to 0.25 inches. Our Economics Learning Center has information for students, teachers, an professionals. |
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Editors Note: I. Business cycles describe the fluctuations in business activity over time. |
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The Dow Jones 1905- 2008 also followed a cycle. Oct. 11; 2008 WSJ
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Top 10 Financial Crises 10. The Panic of 1907:
The fourth so-called ”panic” in 34 years. Interesting Video |
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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?![]() |
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The Panic of 1907 |
Business Cycle Indicators Handbook is less speculative and free! |
Want to know why President Bush is acting as he is,
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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 |
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charts courtesy of
Gluskin Sheff
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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. |
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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 |
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![]() updated from Calculated Risk on 2/6/10 |
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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.
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V. Causes of inflation
A. Demand-pull inflation
1. Increases in C + I + G + XN 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.
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1980 |
1990 |
1990 Production |
![]() From From Inflationdata.com |
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Production |
Q |
P |
T |
Q |
P |
T |
1990 Q |
1980 P |
T |
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Shirts |
1 |
10 |
10 |
2 |
20 |
40 |
2 |
10 |
20 |
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Movies |
2 |
3 |
6 |
3 |
5 |
15 |
3 |
3 |
9 |
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GDP |
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16 |
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55 |
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29 |
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Note : Output more than tripled in "nominal" terms but in real terms output increased by 81.25% (29-16)/16 |
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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
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