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The Business Cycle
1. Peak Trough Recovery Real GDP per year Peak: real GDP reaches its maximum. Recession: real GDP declines 6 months. Recovery: an upturn - real GDP rises. Trough: real GDP reaches its minimum. Recession Time Peak Four Phases of the Business Cycle One cycle
2. Four Phases of Business Cycle Characteristics of Expansions and Recessions Expansions 1.Low unemployment 2. Increase in real GDP 3. Rapid job growth 4. Increasing prices Recessions 1. High unemployment 2. Decrease in Real GDP 3. Reduced job growth 4. Decreasing prices
3. THE BUSINESS CYCLE Phases of the Business Cycle PEAK Level of business activity Time RECESSION TROUGH RECOVERY GROWTH TREND
6. Business Cycles – upturns and downturns in business activity Expansion – period of growth where the GDP increases . Laid off workers (auto) are called back to work. Car dealers sell more cars. Fed raises interest rates to prevent overheating. Peak – High point of expansion ( where real GDP stops increasing ). Skilled workers become hard to find. Inflation usually at its Highest point .
7. Recession - contraction for 2 quarters There have been 11 recessions since World War II. They have ranged from 6 months to 16 months , averaging 11 months . Expansions average about 4 years . Recessions usually cost the layoff of 1 out of every 20 workers [ 1 out of every 4 or 5 families ]. There has been a recession every decade for over 200 years.
8. Trough – pit of a recession The trough is “ bad news ” and “good news.” It is the bottom of the “ valley” of the downturn and the foot of the “hill” of expansion. Trough ( “ base ” ) – demand, production And unemployment are at their lowest point . Real GDP begins to increase again. A trough marks the “pit of a recession” , but – the start of an expansionary phase of the business cycle. The Fed lowers interest rates.
12. The Great Depression [How Bad?] 100,000 businesses failed. Stock values fell from $89 billion to $15 billion. From 381 to 41. $74 billion was lost. 25% unemployment rate [15 million](125 million in the U.S.) [Unemployment was 3% in 1929.] Unemployment stayed above 14.3% from 1931-1940. Average unemployment was 18% 10,797 banks failed out of over 25,000, taking the life savings of 9 million people.
13. Smoot-Hawley Tariff of 1930 Smoot-Hawley Tariff of 1930 -so high it decreased imports 60% and hurt all international trade. International trade plummeted from $60 billion in 1928 to $25 billion in 1938. Smoot-Hawley Tariffs on over 12,000 products went up. Agricultural tariffs went from 20% to 34%, clocks from 45% to 55%, woolen products from 50% to 60%, wines, spirits, & beverages from 36% to 47%, corn and butter tariffs were doubled, over 800 production items were taxed. By 1933, world trade was about 1/3 of the 1929 level. All nations were losers. This policy put the “Great” in the “Great Depression” . Reed Smoot Willis Hawley
18. Six Million “Rosie the Riveters ” [ when everything came up “Rosies”] World War II Production of these items brought us out of the Great Depression. 300,000 warplanes 124,000 ships 289,000 combat vehicles and tanks 36 billion yards of cotton goods 41 billion rounds of ammunition 2.4 million military trucks 111,527 tank guns and howitzers [I n 1944, war spending was 40 % of GDP ] $288 billion was spent on the war, $100 billion in the first six months. Unemployment hit an all-time low of 1.2% and personal savings were 25.5%
20. Unemployment , Inflation , & Business Cycles Inflation – “too many dollars chasing too few goods.” Deflation – “too few dollars chasing too many goods.”
