Business Cycle & Government interaction in the economy

I. GDPA. Gross Domestic Product

(GDP)1. Dollar value of all final goods and

services produced w/in a country’s borders

1. Intermediate goods- used in the production of final goods

2. Final goods and services- products in the form sold to customers

B. Gross National Product (GNP)- all of the goods and services produced by Americans

C. Consumer Price Index (CPI) measures changes in the price level of consumer goods and services purchased by households not including food and fuel (because it is too volatile)1. The annual percentage change is used to calculate

inflation the rise in the prices of goods and services in an economy over a period of time

2. CPI is used to determine the real value of wages salaries, pensions

http://www.bls.gov/data/inflation_calculator.htm

II. Phases in Business Cycle-Changes in GDP above or below

normal levels. Four Phases:A. Peak- when GDP stops rising,

the height of economic expansion

B. Contraction- an economic decline marked by falling GDP, rising unemployment

1. Recession- prolonged contraction (6-18 months)

2. Depression- long and severe recession with high unemployment, low output

C. Trough- economy at lowest point in economic contraction

D. Expansion1. Period of economic growth as

measured by rise in GDP2. Business prosperity, falling

unemployment

E. Fiscal policy- gov’t economic policy

a. Common fiscal policy in a crisis is lower taxes and increase spending, esp. public transfer payments (entitlements)

III. Unemployment & Poverty1. Cyclical Employment- unemployment

rises during economic downturns and falls when economy improves

2. Full Employment- unemployment rate 4-6%

3. Underemployment- people working at a job in which they are overqualified or part-time

4. Poverty rate- percentage of people who live in households below the poverty threshold (the income a person earns is not sufficient to support a household)1. One person: $10,5902. Two adults w/two children: $21,027 for

dependents

IV. Government Interventions1. Entitlement programs

1. Medicaid, Food Stamps, WIC, FDC payments, federal jobs programs & training

2. Gov’t subsidized loans for college education

3. Federal Reserve 1. lowering interest rates so that companies

can expand businesses & hire more workers

4. Taxation◦ Progressive tax rate & Income tax credit

V. Causes of Great DepressionA. Investing

1. 1925- stocks value $27 billion, 1929- stocks value $87 billion

2. Climb encouraged speculation- making investments with borrowed money in hopes of getting big return

B. Signs of Trouble from (1919-1929)1. Large gap between rich and poor2. Farmers and workers suffering

financially once increased from WWI goes away

3. People going into debt buying consumer goods

4. Overproduction of consumer goods ->Surpluses -> Fall in prices

C. The Crash1. Overpriced stocks hit peak then began

to fall2. Brokers demand repayment from

speculators3. Black Tuesday (Oct 29, 1929), record

16.4 million shares sold

D. Aftermath1. Falling prices -> deflation ->

unemployment2. Inaction from the Federal Reserve Bank

(currency tied to gold)3. FDR’s “New Deal”

a. Major increase in social programs, public works, gov’t spending

b. Stopped contraction but not full recovery4. WWII- economic recovery

VI. Types of InvestmentsA. Buying stock

1. Stock is issued in portions known as shares- portions of the company

2. Corporations sell stock to raise money to start, run, or expand their business

3. Dividends- portion of profits shared with investors (size depends on company profits)

B. Types of corporations and stock1. Closely held corporations- stock

only offered to a few people (ex: family)

2. Publicly held corporations- many shareholders buy or sell stock on the open market

3. Common stock- voting owners of company, one vote per stock

4. Preferred stock- nonvoting members but receive dividends first

5. Mutual funds- collection of various stocks, usually less yield but less risk

6. Bonds- gov’t loans, less flexible and less yield but no risk