The Business Cycle

The Business Cycle

• Expansion - a period of economic growth as measured by a rise in real GDP

• Contraction - an economic decline marked by falling real GDP

• Peak - the height of an economic expansion

• Trough - the lowest point in an economic contraction

• Recession - prolonged economic contraction. GDP falls for two consecutive quarters (6 months)

GDPGross Domestic Product

What is GDP?We can use GDP to help determine the health and

progress of a country’s economy

• Gross Domestic Product (GDP) - the dollar value of all final goods and services produced within a country’s borders in a given year.

• Final Goods and Services - products in the form sold to consumers

• Intermediate Goods - used in the production of final goods

remember the factors of production pizza

shop?

When Calculating GDP...

We would include the dollar value of the Dresser

Not the dollar value of the wood, hardware, and glue it is made of

We would include the dollar value of the Pizza

Not the dollar value of the tomatoes, cheese, flour,

pepperonis, and sauce it is made of

•Analyzing the GDP of a country from year to year will help in determining the health and progress of a nation’s economy.

•United States GDP:

2009 - $13.9 Trillion

2010 - $14.4 Trillion

2011 - $14.9 Trillion

U.S. GDP 1960-2011What other concept does this graph show?

GDP in current U.S. dollars. Not adjusted for

inflation

InflationInflation - a general increase in prices

What would cause the price of a burger to

increase from 15 cents to just over $1?

Causes of Inflation - changes in prices, income, and money supply

•Wages and Prices

•Purchasing Power - the ability to purchase goods and services. As prices rise, the purchasing power of money declines.

•Money Supply - the amount of money in the economy. This is the primary tool the government uses to regulate inflation in the U.S. economy.

The Wage-Price Spiral

The Process by which rising wages cause higher prices, and

higher prices cause higher wages.

•The Wage-Price Spiral

The Wage-Price Spiral

Inflation Demonstration

Inflation Activity Questions

• Based on our definition of inflation, Why is this activity a demonstration of inflation?

• What type of money were we using in this activity?

• Explain how the money in this activity was used as a “unit of account”

• Did the value of the goods change?

• Did the value of the money change?

• How might inflation affect investments?