agri 2312 chapter 14 consequences of business fluctuations
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AGRICULTURAL ECONOMICSTRANSCRIPT
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Consequences of Business Fluctuations
Chapter 14
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Discussion Topics
Fluctuations in business activityConsequences of business fluctuationsMacroeconomic policy options
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Nature of Business Fluctuations
Expansionary phasePeak of business cycleRecessionary phaseTrough of business cycle
Pages 277-278
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 278
Four Phases of a Business CycleFour Phases of a Business Cycle
Length of cycles variesover time…
Length of cycles variesover time…
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Indicators of Economic Activity
Coincident indicators: current production, current disposable income, current sales
Lagging indicators: business inventories, duration of employment, average interest rate
Leading indicators: new orders for goods, new building permits, new investment in plant and equipment, changes in the money supply
Forecasting models: mathematical methods of forecasting future trends in the economy
Pages 278-279
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 279
Indicatorindex
Indicatorindex
Actual activityseveral monthslater…
Actual activityseveral monthslater…
A classical example of a leading indicator
A classical example of a leading indicator
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Two Consequences of Business Fluctuations
Fluctuations in the civilian unemployment rate and implications for policy
Fluctuations in the rate of inflation and implications for policy
Pages 280-281
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Unemployment Rate
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
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Calculation of Civilian Unemployment Rate
Calculation of Civilian Unemployment Rate
Annual rate
Number of civilians unemployedSize of total civilian labor force
=
where the size of the total civilian labor force is determined by subtracting those not seeking jobs(homemakers, students, etc.) from the total non-institutional population (those not in prison) over 16 years of age as well as those who are in militaryservice.
Page 280
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
An ExampleAssume the following values:Total labor force1 143.8 millionMembers of armed services 1.7 millionEmployed persons 136.2 million
Annual rate
143.8 – 1.7 – 136.2 143.8 – 1.7
=
= .0415 or 4.15 percent
1 The total labor force equals total population minus those notseeking employment over age 16 and those in institutions.
Page 280
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Forms of Unemployment
Frictional: changing jobs and currently unemployed
Cyclical: associated with business cyclesSeasonal: associated with seasonal
business activityStructural: associated with technological
change
Page 280
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 281
Unemployment rateduring the great depression was 25%
Unemployment rateduring the great depression was 25%
Full employmentbarometer?
Full employmentbarometer?
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Inflation Rate
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
What is Inflation?
Sustained rise in the general price levelNot a change in the price of a single
commodityCore rate of inflation excludes fuel and
food price increasesDeflation (prices falling) vs. disinflation
(prices increasing at a slower rate)
Pages 281-282
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Measuring the CPIThe consumer price index is a weighted average ofthe prices consumers pay for goods and services.It is measured by:
CPI =
Or:
CPI = WFB(PFB) + WH(PH) + … + WOTHER(POTHER)
= 14.914(PFB) + 42.427(PH) + … + 3.276(POTHER)
Cost of market basket in current yearCost of market basket in base year
× 100
See Table 14.1 on page 281See Table 14.1 on page 281Page 282
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Rate of Inflation
The rate of inflation can be measured by the percentchange in the CPI, or:
Inflation rate = current CPI – previous CPIprevious CPI
If the CPI was 179.9 in 2007 and 184.0 in 2008, theannual rate of inflation in 2000 would be:
Inflation rate = (184.0 – 179.9) ÷ 179.9 = .0228 or 2.28%
Page 283
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Inflation thought to be“under control” in thisrange
Inflation thought to be“under control” in thisrange Page 284
Brought about a majormonetary policy actiondescribed in Chapter 13
Brought about a majormonetary policy actiondescribed in Chapter 13
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 285
When describing growth in the economy onthe nightly newscast, the newscaster willrefer to the growth in real GDP after adjustmentsfor inflation. In the above example, real GDPgrew over the 1992-1999 period, but not at therate implied by comparisons in nominal terms.
When describing growth in the economy onthe nightly newscast, the newscaster willrefer to the growth in real GDP after adjustmentsfor inflation. In the above example, real GDPgrew over the 1992-1999 period, but not at therate implied by comparisons in nominal terms.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 285Some examples of annual rates ofinflation around the world vs. U.S.
Some examples of annual rates ofinflation around the world vs. U.S.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Trade off between Inflation and
Unemployment
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 288
Phillips curve named afterBritish economist A. W.Phillips…
Phillips curve named afterBritish economist A. W.Phillips…
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 288
Policies that reduceunemployment mayincrease inflation inthe short run, andvice versa…
Policies that reduceunemployment mayincrease inflation inthe short run, andvice versa…
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 286
Demand oriented policiesthat shift the aggregatedemand curve from AD2
to AD3 “pull up” thegeneral price level from P0
to P1.
This small increase in inflation may make sensesince output increasedfrom Y2 to Y3, which wouldlower unemployment.
Demand oriented policiesthat shift the aggregatedemand curve from AD2
to AD3 “pull up” thegeneral price level from P0
to P1.
This small increase in inflation may make sensesince output increasedfrom Y2 to Y3, which wouldlower unemployment.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 286
Demand oriented policiesto maximize output at theeconomy’s potential orYPOT may bring about asubstantial increase in the general price level (and hence rate of inflation) fora relatively small gain in output and employment.
Demand oriented policiesto maximize output at theeconomy’s potential orYPOT may bring about asubstantial increase in the general price level (and hence rate of inflation) fora relatively small gain in output and employment.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 289
Both demand and supplyoriented policies stimulate aggregate output.
Both demand and supplyoriented policies stimulate aggregate output.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 289
But demand expansion policy“pulls up” the general price level….
But demand expansion policy“pulls up” the general price level….
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 289
…while supply oriented policiesthat enhance productivity reduce the general price level.
…while supply oriented policiesthat enhance productivity reduce the general price level.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Page 289
In reality, both forms of policy are typically carried out at the same time.
In reality, both forms of policy are typically carried out at the same time.
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
SummaryA business cycle has four phases: peak, recession,
trough and expansion The two major consequences of business fluctuations
are unemployment and inflationKnow how to calculate the civilian unemployment
rate and the rate of inflation facing consumersUnderstand the nature of the index of leading
economic indicatorsUnderstand the concept graphing of demand pull
inflationUnderstand the Phillips curve and demand and
supply policy impacts
Introduction to Agricultural Economics, 5th edPenson, Capps, Rosson, and Woodward
© 2010 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights
Reserved.
Chapter 15 focuses on how macroeconomic policy affects agriculture….