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Expansion Phase
GDP rises More jobs are available Unemployment rate falls National income expands People borrow to buy goods
Peak Phase
Expansion halts Causes that prevent continued growth:
› Limited raw materials – overproduction?› Limited labor - price of labor rises› Limited financial capital – rising interest
rates
› Shortages of land, labor, and capital result, creating high prices and cooling demand, beginning the recession phase.
Recession
Consumers slow their spending. First durable goods Sellers reduce inventory by cutting
prices Production orders drop Production drops Workers aren’t needed and are laid off Whirlpool effect! Downward spiral.
Trough Phase
Low prices High unemployment Depressed incomes Over an extended period of time, the
recession becomes a depression.
Causes of the Business Cycle
Sunspot Theory – affects agriculture Psychological Theory – degree of
confidence Monetary Theory – Changes in the
money supply and interest rates Technology/Political Theories
Two problems that come with the business cycle:
1. Unemployment (comes with recession)2. Inflation (comes with expansion)
Employment
One goal of a nation is “full employment.”
Why is employment important? What are some effects of
unemployment?
Unemployment Rate
Definition: the percentage of the LABOR FORCE that is not employed but is LOOKING FOR WORK.
Excluded from Unemployment Statistics
Those under 16 and over 65. Those in the armed forces. Those in school, prison, or asylums.
Who else is NOT counted in the labor force?
Homemakers and others who do not work for money.
Discouraged workers.
Unemployment Rate
Unemployment Rate = # of unemployed/# of people in the labor force.
Why is the unemployment rate important?› It is an indicator of the health of the
economy.
Flaws in Unemployment Statistics
Some workers don’t get counted. Doesn’t include discouraged workers. Doesn’t take into account the
“underemployed.” May count people who are between
jobs as unemployed.
Types of Unemployment
Frictional – those who are between jobs, demonstrates a competitive labor market
Structural – workers’ skills don’t match available jobs
Seasonal – Some jobs are available only at certain times of the year. Ex. Christmas tree farm workers.
Cyclical – result of a downturn in the business cycle, cuts in production
Should the government do something about unemployment?
Texas Workforce Commission Job Training Drawbacks? Can government eliminate
unemployment by controlling the business cycle?
Unemployment & the Market
Free market answer to the cause of unemployment?
Supply and demand Difference between price that sellers of
labor (workers) are asking and the price that buyers of labor (businesses) are willing to pay.