ECONOMIC INSTABILITY
Chevalier
Fall 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
5th of Americans have 75% of the wealth in this
country
 Top


Discrimination-gender .82 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
 Declining unions
 Poverty
graph on page 397
 Per capita graph per state on p. 399