ECONOMIC INSTABILITYChevalier

Spring 2015

Economic Instability

There are four (4) major causes of economic instability in the American economy.

Business Cycles and Fluctuations Unemployment Inflation Poverty and distribution of income

I. BUSINESS CYCLES and FLUCTUATIONS

BUSINESS CYCLES- Systematic ups and downs of real GDP

BUSINESS FLUCTUATIONS- Non-systematic rise and fall of real GDP; this interrupts economic growth

Phases of the Business Cycle RECESSION- GDP declines for 6

consecutive mos. PEAK TROUGH- where real GDP stops going

down EXPANSION- period of recovery from

recession TREND LINE

The Great Depression- severe recession

Causes:

1. disparity between rich and poor; poor couldn’t stimulate the economy (poor distribution of income)

2. stock speculation by rich

3. drop of American exports due to tariffs

The Business Cycle

Business cycles since WWII have been pretty regular Avg. recession lasts 11 mos. Avg. expansion lasts 43 mos. Page 379 graph

Causes of Business cycles

1. Capital Expenditures 2. Inventory Adjustments 3. Innovation and Imitation 4. Monetary factors

Credit and loan policies Lower IR increase demand which pushes IR’s up

5. Increase in oil prices, war, WTC attacks

Can we predict business cycles? Of course…

Econometric model-macroeconomic model that describes how economy behaves

Index of leading economic indicators (10 areas that closely resemble GDP) Turns down before real GDP turns down Turns up before real GDP turns up

Avg. work week Order for durable goods

II. Unemployment

Unemployment rate- the number of unemployed individuals divided by the total number of persons in the civilian work force Unemployed=people available for work

who made an effort to find a job in the past month.

Goes up during recessions and down during expansions

Unemployment

Limitations-doesn’t account for people who haven’t tried to find a job in the last 4 weeks Too discouraged during recession to do so

Employed doesn’t mean employed full-time Could be part time

Kinds of Unemployment

Frictional unemployment-people between jobs(short term)

Structural unemployment-change in consumer tastes Military base closures, mergers, technology changes Happens when there is a fundamental change in an economy

Cyclical unemployment-related to swings in business cycle

Season unemployment Weather related

Technological unemployment-automation

Concept of full employment

Some pros and cons

Numerically when U.R. drops below 4.5%

2000=3.9%

Healthy is 4-6%

III. Inflation

Measure by using the CPI 100K goods in over 400 categories; spits

out a number

Inflation rate = change in price level/beginning price levelX100

Rate of inflation graph p. 390

Inflation

Deflation, and degrees of inflation

Creeping, galloping, and hyper 1-3% 100-300% 500% a year

Hungary during WWII 828,000,000,000,000,000,000,000,000,000

pengos=1 prewar pengo

Causes of Inflation

1. demand-pull theory 2. blames inflation on federal gov’t

deficit spending 3. rising input costs (costs of labor) tied

to unemployment; could be non-labor too (oil)

4. spiral of prices and wages 5. excessive monetary growth

Money supply grows faster than GDP Increases purchasing power

Consequences of inflation

Less purchasing power Hard on retirees; people with fixed

income Causes people to change spending

habits, disrupting the economy

Alters distribution of income(lenders and borrowers) Hurts lenders

Poverty and Distribution of Income The distribution of income p. 395

Reasons for income inequality Education Wealth- distribution of wealth

Top 5th of Americans have 75% of the wealth in this country

Discrimination-gender .72 to every dollar a man makes

Ability

The income gap in America

Some reasons- Unequal distribution of income

Structural change in economy-goods to service production

Growing gap in education Shift of the family structure

Poverty graph on page 397 Per capita graph per state on p. 399