LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

THE STOCK MARKETAND THE ECONOMY: CAN YOU

FORECAST THE FUTURE?

LESSON 16

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

A Business Cycle• Expansion: The economy is

growing. GDP, income, and employment increase. Consumption and investment increase. Businesses are expanding. Interest rates may rise. There may be concerns about inflation.

• Peak: The high point of the expansion, and also a turning point. After the peak, an economy begins to contract.

LESSON 16 – THE STOCK MARKET AND THE ECONOMY:

CAN YOU FORECAST THE FUTURE?

SLIDE 16.1

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

A Business Cycle (Cont.)• Contraction: The economy is declining. GDP,

income, and employment decrease. Consumption and investment decrease. Business sales decline. Interest rates and prices my fall.

• Trough: This is the low point of the contraction, and also a turning point. After a trough, the economy begins to expand.

• Recession: A period of significant decline in total output, income, and employment, usually lasting from six months to a year.

LESSON 16 – THE STOCK MARKET AND THE ECONOMY:

CAN YOU FORECAST THE FUTURE?

SLIDE 16.2

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

How Do Stock Prices Affect the Economy?1. Stock prices affect consumption.

Increases in stock prices mean that shareholders are wealthier. Increased wealth leads to increased consumption. Decreases in stock prices means that shareholders are poorer, and this decreases consumption.

2. Stock prices affect investment.Increases in the price of a stock means that the value of the corporation has increased. This increased value leads to increased investment and business expansion. Decreases in the price of a stock mean that the value of the corporation has decreased. This decreased value may discourage investment and business expansion.

LESSON 16 – THE STOCK MARKET AND THE ECONOMY:

CAN YOU FORECAST THE FUTURE?

SLIDE 16.3

LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY

How Do Stock Prices Affect the Economy? (Cont.)3. Stock prices affect expectations.

When stock prices increase, investors feel optimistic about the future of the economy. This optimism may lead to more spending and more production. When stock prices fall, investors may feel pessimistic about the future of the economy. This pessimism may cause them to hold back on spending and production.

4. Stock prices are a leading indicator of economic activity.A leading indicator is a statistic that often changes in advance of real GDP changes. Persistent increases in stock prices often precede increases in GDP and economic expansion by a few months. Persistent decreases in stock prices often precede declining GDP and recession by a few months.

LESSON 16 – THE STOCK MARKET AND THE ECONOMY:

CAN YOU FORECAST THE FUTURE?

SLIDE 16.4