Unit 13
The Business Cycle and Unemployment
Class preparation
Read chapter 13
Read chapter 13
Lecture outline
The nation's economy doesn't grow steadily in a smooth, straight line. It cycles up and down. When GDP rises, we say the economy is 'expanding' or 'booming'; when GDP falls, we call it a 'recession', and if it falls for 2 consecutive quarters we call it a 'depression'.
Phases of the business cycle
The nation's economy doesn't grow steadily in a smooth, straight line. It cycles up and down. When GDP rises, we say the economy is 'expanding' or 'booming'; when GDP falls, we call it a 'recession', and if it falls for 2 consecutive quarters we call it a 'depression'.
Phases of the business cycle
- expansion - GDP rises, employment rises
- peak
- recession - decreasing production, rising unemployment, GDP falls
- trough
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Causes of the business cycle
If you could figure this out and predict it accurately, you would be the richest person in the world. Investment banks hire armies of professional analysts to try to predict the economy!
Your book gives 5 theories:
If you could figure this out and predict it accurately, you would be the richest person in the world. Investment banks hire armies of professional analysts to try to predict the economy!
Your book gives 5 theories:
- sunspot theory - says that weather patterns affect agriculture, and that's how the economy rises and falls.
- psychological theory - the economy is linked to peoples' confidence. Since people tend towards group-think and mass hysteria (the theory holds) they start panicking at the 'peak' of the cycle. Consumer spending stops, and the economy goes into recession.
- monetary theory - the money supply drives the economy. In periods of "easy money" (the Fed expands the money supply) the economy expands. In periods of "tight money" (the Fed reduces the money supply, or slows its growth), the economy suffers. See Milton Friedman's A Monetary History of the United States.
- technology theory - holds that bursts of innovation and new technology fuel investment spending, efficiencies, and economic growth.
- political theory - the economy is shaped by politics in Washington D.C., and the rivalries between the two political parties.
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The unemployment rate
Total U.S. population
Subtract: military, in school, in prison, and <16 y/o
Subtract: homemakers, discouraged workers, non-participants
Equals: Total persons in the "labor force"
Subtract: Those actually working
Equals: unemployed persons
Review these links:
U.S. civilian labor force https://fred.stlouisfed.org/series/CLF16OV
U.S. current population https://www.census.gov/popclock/
U.S. unemployment rate https://fred.stlouisfed.org/series/UNRATE
Total U.S. population
Subtract: military, in school, in prison, and <16 y/o
Subtract: homemakers, discouraged workers, non-participants
Equals: Total persons in the "labor force"
Subtract: Those actually working
Equals: unemployed persons
- Unemployed / Total labor force = "Unemployment rate"
Review these links:
U.S. civilian labor force https://fred.stlouisfed.org/series/CLF16OV
U.S. current population https://www.census.gov/popclock/
U.S. unemployment rate https://fred.stlouisfed.org/series/UNRATE
Classroom discussion
Developing a roadmap for your future:
Given that we will always have periodic business cycles and periods of high unemployment, what steps can you begin to take to plan for your future? This can be organized into three basic categories:
Classroom experiment: “Decision Making in a Corporation”.
Now that you have launched and financed a for-profit corporation, you have some important decisions to make as a Board of Directors. What will you do with your profits? – pay dividends, pay down your bank loans, or plough-back earnings into the business for expansion. You also need to figure out your income tax due! Finally, you must decide how much, if any, to renovate your properties to increase revenue!
Homework
Developing a roadmap for your future:
Given that we will always have periodic business cycles and periods of high unemployment, what steps can you begin to take to plan for your future? This can be organized into three basic categories:
- Developing your vision and goals. What's important?
- Looking at your alternatives. What's out there?
- Creating a roadmap: How do I get there?
Classroom experiment: “Decision Making in a Corporation”.
Now that you have launched and financed a for-profit corporation, you have some important decisions to make as a Board of Directors. What will you do with your profits? – pay dividends, pay down your bank loans, or plough-back earnings into the business for expansion. You also need to figure out your income tax due! Finally, you must decide how much, if any, to renovate your properties to increase revenue!
Homework
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