Measuring Health, Unemployment, Inflation
4 Phases of a Business Cycle
 Business cycles are made up of major changes in real
GDP above or below
normal levels.
 The business cycle
consists of four
phases:




Expansion
Peak
Contraction
Trough
Contractions
 There are three types of contractions, each with different
characteristics.
 A recession is a prolonged economic contraction that
generally lasts from 6 to 18 months and is marked by a
high unemployment rate.
 A depression is a recession that is especially long and
severe characterized by high unemployment and low
economic output.
 Stagflation is a decline in real GDP combined with a rise
in price level, or inflation.
Business Cycle Forecasting
 Checkpoint: Why is it difficult to predict business
cycles?
 To predict the next phase of a business cycle, forecasters
must anticipate movements in real GDP before they occur.
 Economists use leading indicators to help them make
these predictions.


The stock market is a leading indicator.
Today, the stock market turns sharply downward before a
recession.
Unhealthy Economy
 When the business cycle is on a downward trending
path, typically the economy sees negative side-effects.
 Two of those side-effects are inflation and
unemployment.
1
2
3
4
5
6
7
8
9
10
Avatar
$737,266,471
Titanic
$600,788,188
The Dark Knight
$533,345,358
Star Wars
$460,998,007
Shrek 2
$441,226,247
E.T.: The Extra-Terrestrial
$435,110,554
Episode I - The Phantom Menace $431,088,301
Pirates: Dead Man's Chest
$423,315,812
Spider-Man
$403,706,375
Transformers: Revenge of the Fallen $402,111,870
2009
1997
2008
1977^
2004
1982^
1999
2006
2002
2009
11 101 Dalmatians
12 The Empire Strikes Back
13 Ben-Hur
14 Avatar (#1)
15 Return of the Jedi
16 The Sting
17 Raiders of the Lost Ark
18 Jurassic Park
19 The Graduate
20 Episode I - Phantom Menace (#7)
$760,370,300
$747,154,600
$745,780,000
$737,266,500
$715,792,100
$678,377,100
$670,759,500
$656,026,500
$651,198,300
$645,524,400
$144,880,014
$290,475,067
$74,000,000
$737,266,500
$309,306,177
$156,000,000
$242,374,454
$357,067,947
$104,901,839
$431,088,301
1961^
1980^
1959
2009
1983^
1973
1981^
1993
1967^
1999
1 Gone with the Wind
2 Star Wars (#4)
3 The Sound of Music
4 ET: The Extra-Terrestrial(#6)
5 The Ten Commandments
6 Titanic (#2)
7 Jaws
8 Doctor Zhivago
9 The Exorcist
10 Snow White & the Seven Dwarfs
$1,537,559,600
$198,676,459
$1,355,490,100
$460,998,007
$1,083,781,000
$158,671,368
$1,079,511,500 $435,110,554
$996,910,000 $65,500,000
$976,712,200 $600,788,188
$974,679,800 $260,000,000
$944,670,800 $111,721,910
$841,427,600 $232,671,011
$829,490,000 $184,925,486
1939^
1977^
1965
1982^
1956
1997
1975
1965
1973^
1937^
What is Inflation?
• Inflation is rising general
level of prices
• Inflation reduces the
“purchasing power” of money
• Examples:
It takes $2 to buy what $1
bought in 1982
It takes $6 to buy what $1
bought in 1961
•When inflation occurs, each
dollar of income will buy fewer
goods than before.
How is Inflation measured?
• The government tracks the prices of the same goods and services
each year.
•
This “market basket” is made up of about 300 commonly purchased
goods
•
The Inflation Rate - % change in prices in 1 year
•
They also compare changes in prices to a given base year
• (usually 1982)
•
Prices of subsequent years are then expressed as a percentage of the
base year
•
Examples:
• 2005 inflation rate was 3.4%
• U.S. prices have increase 98.3% since 1982 (base year).
• The inflation rate in Bolivia in 1985 was 50,000%
•This is called Hyperinflation
•A $25 meal today would cost $12,525 a year later
Causes of Inflation
The Quantity Theory
 The quantity theory of
inflation states that too much
money in the economy leads to
inflation.
 Too much money in the system
causes purchasing power
boom, thus leading to price
increases (inflation!).
Causes of Inflation

The Demand-Pull
Theory
Changes to aggregate
demand can cause
inflation to occur
when demand for
goods and services
exceeds existing
supplies.

“Too much money spent
chasing too few goods.”
Caused by a decrease in
unemployment.
Causes of Inflation
The Cost-Push Theory
 According to the cost-push theory, inflation occurs when producers raise
prices in order to meet increased costs, or changes in aggregate supply.
 Cost-push inflation can lead to a wage-price spiral — the process by which
rising wages cause higher prices, and higher prices cause higher wages.
Effects of Inflation
 High inflation is a major economic problem, especially
when inflation rates change greatly from year to year.
Purchasing Power
 In an inflationary economy, a dollar loses value. It will not buy the same
amount of goods that it did in years past.
Interest Rates
 When a bank's interest rate matches the inflation rate, savers break even.
When a bank's interest rate is lower than the inflation rate, savers lose
money.
Income
 If wage increases match the inflation rate, a worker's real income stays the
same. If income is fixed income, or income that does not increase even
when prices go up, the economic effects of inflation can be harmful.
Exit Question  What effects does inflation have on an economy, on
individuals, and on businesses?
 Are these issues always harmful? Explain.
 How can inflation be prevented?
Hurt by Inflation
•
Lenders-People who
lend money (at fixed
interest rates)
•
People with fixed
incomes
•
Savers
Helped by Inflation
•
Debtors-People who
borrow money
•
A business where the
price of the product
increases faster than
the price of resources