ECONOMICS

Grade 12

1
Course Outline
Class work 20%

Quizzes 10%

Project/HW 10%

Test 20%

Exam 40 %
Learning about the past helps
us understand the present
and make decisions about
the future.
Section Preview
In this section, you will learn that business cycles
are the alternating increases and decreases in the
level of economic activity.
• Learning Objectives:
• Explain the phases of the Business Cycle.
• Identify the five cause of the Business Cycle.

Question: What is a Business Cycle?

https://www.youtube.com/watch?
v=T5seDnLO6M4
https://www.youtube.com/watch?
v=T5seDnLO6M4 : The Business Cycle has four
phases
Business Cycles: Characteristics
and Causes
Business cycles are marked
by alternating periods of
expansion and recession.
Business Cycles: Characteristics
and Causes (cont.)
• Phases of the business cycle
– Recession
• Begins when the economy reaches a peak
• Ends when the economy reaches a trough
 Business Cycles: Characteristics
and Causes (cont.)
– Expansion
• Is the recovery of the recession
• If the recession becomes very severe, it
can turn into a depression
• Continues until economy reaches a
new peak
 Business Cycles: Characteristics
and Causes (cont.)
• The economy would follow a steady
growth path, trend line, if periods of
recession and expansion did not occur.
Business Cycles: Characteristics
and Causes (cont.)
• 5 Causes of business cycles
1. External shocks such as the financial crisis and the
pandemic create much instability and can lead to
persistent periods of weaker economic growth, higher
unemployment, falling real incomes and rising poverty.
2. Changes in investment spending. For example,
Increased consumer spending, increased international
trade, and businesses that increase their investment in
capital spending can all impact the level of production of
goods and services in an economy. For example,
as consumers buy more homes, home construction and
contractors
3. Changes in monetary policy. For instance , monetary policy refers
to the steps taken by a country's central bank to control the money
supply for economic stability. For example, policymakers manipulate
money circulation for increasing employment, GDP, price stability by
using tools such as interest rates.
4. Fiscal policy shocks. The two main tools of fiscal policy are taxes
and spending. Taxes influence the economy by determining how much
money the government has to spend in certain areas and how much
money individuals should spend. For example, if the government is
trying to encourage consumer spending, it can decrease taxes.
5. Speculations & bubbles.
Speculations refer to a risky action in which a person or organization
tries to predict what will happen to the price of an asset and buys /
sells accordingly in order to try and make a profit.
An economic bubble is a financial situation in which the price of a
good rises far above its real value. For example, commodity types of
bubbles involve an increase in the price of traded commodities.
Business Cycles in the United States
Business cycles have
become much more
moderate since the Great
Depression of the 1930s.
Business Cycles in the United States
(cont.)

• “Black Tuesday,” October 29th, 1929,

marked the beginning of the Great
Depression - The stock market crash of
1929.
– Between 1929 and 1933, real GDP
declined nearly 50%.
– Unemployment rose nearly 800%.
 Business Cycles in the United States
(cont.)

– Average wage dropped from 55

cents/hour to 5 cents/hour.
– One-quarter of all banks failed.
– Depression scrip used because official
paper currency was in short supply
depression scrip
currency issued by towns,
chambers of commerce, and other
civic bodies during the Great
Depression of the 1930s
Business Cycles in the United States
(cont.)

• Causes of the Great Depression

– The stock market crash
– Enormous gap in the distribution of
income
– Easy credit
– Global economic conditions
Business Cycles in the United States
(cont.)

• Increased government spending and

World War II spending drove the economy
forward.
• Mobilizing the economy for World War II
finally cured the depression. Millions of
men and women joined the armed
forces, and even larger numbers went
to work in well-paying defense jobs.
Business Cycles in the United States
(cont.)

• Laws passed and government agencies

were established to prevent another
depression:
– Social Security Act of 1935; pay retired
workers age 65 or older a continuing
income after retirement.
– Minimum Wage
– Unemployment programs
 Business Cycles in the United States
(cont.)

– Securities and Exchange Commission

Act :to provide for the regulation of
securities exchanges.

– Federal Deposit Insurance Corporation ;

The FDIC insures deposits; examines
and supervises financial institutions for
safety, soundness, and consumer
protection
• After World War II, business cycles had
shorter recessions and longer periods of
expansion.
Forecasting Business Cycles
Economists use statistics and
models to predict business
cycles.
Forecasting Business Cycles (cont.)
• Methods used to predict business cycles
– Statistical series
• Leading economic indicator ; set of economic data
that may correspond with a future movement or
change in the economy
• For example ,a change in one of the components of
GDP may lead to a shift in the economy.
• Composite index of leading economic indicators
(LEI): a data series compiled monthly and uses a
mixture of ten separate indicators to anticipate
changes in real GDP.

The Index of Leading Economic Indicators

Forecasting Business Cycles (cont.)
– Macroeconomic modeling
• Econometric model :mathematical
expression used to describe how the
economy is expected to perform in the future
Section Preview
In this section, you will find out that inflation is
a rise in the general level of prices that disrupts
the economy.
Learning Objectives:
•Understand what inflation is and what causes it.
•Differentiate between the different types of
inflation
•Evaluate the consequences of inflation on the
economy.
Inflation
• Inflation—increase in the general level
of prices
• Deflation—decline in the general level
of prices
• Both are harmful to the economy and
should be avoided whenever possible.
Measuring Prices and Inflation
Several price indexes are
used to measure inflation.
Measuring Prices and Inflation (cont.)
• Measuring inflation
– Price index :statistical series used to
measure changes in the price level over
time
– Consumer price index (CPI) : a
comprehensive statistical series that
tracks monthly changes in the prices
paid by consumers for a representative
“basket” of goods and services.
Constructing the Consumer Price Index
The Market Basket

•A market basket is a representative

collection of goods and services used to
compile a price index.
•A base year—a year that serves as the
basis of comparison for all other years—is
then selected.
 Measuring Prices and Inflation (cont.)
The Consumer Price Index
Calculate CPI for the rest of the years.
Measuring Prices and Inflation (cont.)
Measuring Inflation

Calculate
Inflation
rate for the
rest of the
years.
Types of Inflation:
•Creeping inflation or mild inflation occurs when
prices rise slowly inflation in the range of 1 to 3
percent per year.

•Hyperinflation—inflation in the range of 500

percent a year and above does not happen very
often.

•Stagflation, a period of stationary economic growth

coupled with inflation. Stagflation is a period when
slow economic growth and joblessness coincide with
rising inflation
 Causes of Inflation
1. Demand-pull inflation, all sectors in the economy try to buy more goods and services
than the economy can produce. As consumers, businesses, and governments converge
on stores, they cause shortages, which drive up prices. Thus prices are “pulled” up by
excessive demand.
2. The cost-push inflation explanation claims that rising input costs, especially energy
and organized labor, drive up the cost of products for manufacturers and thus cause
inflation. This situation might occur, for example, when a strong national union wins a
large wage contract, forcing manufacturers to raise prices to recover the increase in
labor costs.

Another cause of cost-push inflation could be a sudden rise in the international price of
oil, which can raise the price of everything from plastics and gasoline to shipping costs
and airline fares.

3. Wage-Price Spiral
The spiral might begin when higher prices force workers to ask for higher wages. If they
get the higher wages, producers try to recover that cost with higher prices. As each side
tries to improve its relative position with a larger increase than before, the rate of inflation
keeps rising.
4. Excessive Monetary Growth
•The most popular explanation for inflation is excessive
monetary growth. This occurs when the money supply
grows faster than real GDP. According to this view, any
extra money or additional credit created by the Federal
Reserve System will increase someone’s purchasing
power. When people spend this additional money, they
cause a demand-pull effect that drives up prices.
Consequences of Inflation
1. Reduced Purchasing Power

This happens because the dollar buys less whenever prices rise, and thus it loses
value over time.
2. Distorted(unfair) Spending Patterns
Inflation has a tendency to make people change their spending habits. For example,
when prices went up in the early 1980s, interest rates—the cost of borrowed money—
also went up. This caused spending on durable goods, especially housing and
automobiles, to fall dramatically.

3. Encouraged Speculation
Inflation tempts some people to speculate in an attempt to take advantage of rising
prices.

4. Distorted Distribution of Income

During long inflationary periods, creditors, or people who lend money, are generally
hurt more than debtors, or borrowers, because earlier loans are repaid later with
dollars that buy less.
Section Preview
In this section, you will find out how
unemployment is measured as well as what
causes it.
Learning Objectives:

•Understand who are considered as unemployed and why?

•Differentiate between types of unemployment

•Calculate the rate of unemployment

Measuring Unemployment
The government takes
monthly surveys to measure
the unemployment rate.
Measuring Unemployment (cont.)
• The civilian labor force or labor force is
the sum of all persons aged 16 and above
who are either employed or actively
seeking employment.
• Unemployed—individuals who are willing,
able, and available to work and actively
seeking employment
Measuring Unemployment (cont.)
The unemployment rate formula is
Unemployment rate =
(Number of unemployed individuals /sums of
employed and unemployed individuals) x 100%.
Example:
Assuming the number of unemployed people
is 500 and those employed are 3000, the
unemployment rate will be:
500/3500 x 100% =14.29%.

The Unemployment Rate

Sources of Unemployment
Unemployment is often
caused by circumstances
outside an individual’s control
and is therefore very difficult
to remedy.
 Types of unemployment
1.Frictional unemployment occurs when workers are between jobs; it is a short-term
condition that causes little economic hardship. Ex: when workers remain jobless while
looking for a suitable opportunity.
2.Structural unemployment occurs when changes in the economy reduce the demand
for workers and their skills. Ex: when there are multiple jobs available, but the job
aspirants are underqualified.
3.Technological unemployment occurs when workers are replaced by machines or
automated systems that make their skills obsolete.
4.Cyclical unemployment is directly related to swings in the business cycle , such as
construction workers were laid off during the Great Recession following the financial
crisis of 2008.
5.Seasonal unemployment results from seasonal weather changes or other seasonal
factors.
Full employment would be the situation where everyone willing to work at the going
wage rate is able to get a job. This would imply that unemployment is zero because if
you are not willing to work then you should not be counted as unemployed.
Business Cycles Economic growth is typically
marked by periods of recession followed by periods
of expansion. A business cycle is the period from
the beginning of one recession to the beginning of
the next.
Inflation The economy faces inflation when the
general level of prices increases. If excessive,
inflation can have a disruptive effect on the
economy.
Unemployment The unemployment rate includes
those individuals who are actively looking for a job
but work less than one hour a week for pay or profit.
It does not include people who are underemployed,
working part-time, or have given up the job search.
Milton Friedman
(1912–2006)

• received the Nobel Prize for

economics for his theories
on economic stabilization
policy
• strong proponent of
monetary policy
business cycles
regular increases and decreases in
real GDP
business fluctuation
irregular increases and decreases in
real GDP
recession
decline in real GDP lasting at least
two quarters
peak
point in time when real GDP stops
expanding and begins to decline
trough
point in time when real GDP stops
declining and begins to expand
expansion
period of uninterrupted growth of
real GDP
trend line
growth path the economy would
follow if it were not interrupted by
alternating periods of recession and
recovery
depression
state of the economy with large
numbers of unemployed people,
declining real incomes, overcapacity
in manufacturing plants, and general
economic hardship
depression scrip
currency issued by towns,
chambers of commerce, and other
civic bodies during the Great
Depression of the 1930s
leading economic indicator
statistical series that turns down
before the economy turns down, or up
before the economy turns up
composite index of leading
economic indicators (LEI)
composite index of 10 economic
series that move up and down in
advance of changes in the overall
economy; statistical series used to
predict turning points in the
business cycle
econometric model
mathematical expression used to
describe how the economy is
expected to perform in the future
innovation
the creation of something new or
different
series
a group of related things or events
inflation
increase in the general level of prices
of goods and services
deflation
decrease in the general level of prices
for goods and services
price index
statistical series used to measure
changes in the price level over time
consumer price index (CPI)
series used to measure price
changes for a representative sample
of frequently used consumer items
market basket
representative selection of goods
and services used to compile a
price index
base year
year serving as point of comparison
for other years in a price index or
other statistical measure
creeping inflation
relatively low rate of inflation, usually
1 to 3 percent annually
hyperinflation
inflation in excess of 500 percent
per year
stagflation
period of slow economic growth
coupled with inflation
producer price index (PPI)
index used to measure prices
received by domestic producers
implicit GDP price deflator
index used to measure price changes
in GDP
demand-pull inflation
explanation that prices rise because
all sectors of the economy try to buy
more goods and services than the
economy can produce
cost-push inflation
explanation that rising input costs,
especially energy and organized
labor, drive up the prices of products
creditor
person or institution to whom money
is owed
debtor
person who borrows and therefore
owes money
construction
creation by assembling
individual parts
recover
to get back
civilian labor force
non-institutionalized part of the
population, aged 16 and over, either
working or looking for a job
labor force
non-institutionalized part of the
population, aged 16 and over, either
working or looking for a job
unemployed
working for less than one hour per
week for pay or profit in a non-family-
owned business, while being
available and having made an effort
to find a job during the past month
unemployment rate
percentage of people in the civilian
labor force who are classified as
unemployed
frictional unemployment
unemployment involving workers
changing jobs or waiting to go to
new ones
structural unemployment
unemployment caused by a
fundamental change in the economy
that reduces the demand for some
workers
outsourcing
hiring outside firms to perform
non-core operations to lower
operating costs
technological unemployment
unemployment caused by
technological developments or
automation that makes some workers’
skills obsolete
cyclical unemployment
unemployment directly related to
swings in the business cycle
seasonal unemployment
unemployment caused by annual
changes in the weather or other
conditions that reduce the demand
for jobs
GDP gap
difference between what the economy
can and does produce
misery index
unofficial statistic that is the sum of
the monthly inflation and
unemployment rates
discomfort index
unofficial statistic that is the sum of
the monthly inflation and
unemployment rates
confined
kept within
fundamental
basic; an essential part of
unfounded
not based on fact