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1. ThirdTerm – Economics 4.1 and 4.2 1.Grade for ENGLISH AND PARTICIPATION (15%, 15%) x Eliminated - Not appropriate for a class that meets only once a week, I still do not know all of you, for example. This could change for Term 4. 2. GRADE, 3RD TERM 50% of grade - 1st Asssessment, week 4 (August 26) – multiple choice, fill-in, matching, T/F ------ (I will provide a study guide week 3) 50% of grade - 2nd Assessment, week 6 (Sep 9) - multiple choice, fill-in, matching, T/F -------- (I will provide a study guide in week 5) 3.EXTRA CREDIT OPPORTUNITY One time only, due in week 4. There will be 6to 10 extra points possible. Send me an email by Wednesday August 14th at 3:00pm, saying that you are interested. If I do not get an email, no extra credit assignment for you.
2. Economics – 3rd Term 4. Video of the dog, why did we see that? 5. Hand-out on your desks, listen for the parts you are not responsible for, the rest you need to know for week 6 assessment 6. Today´s worksheet, work on it in pairs or groups the rest of class, it is not for an assessment but it is highly recomended to finish it at home and bring it to class next Monday
3. 4.3 Economics – 3rd Term FINAL CHANCE – ECONOMIC SUPPLY AND DEMAND MODEL, NEXT THURSDAY (week 2), 20 MARK ASSESSMENT 16 MARKS FOR EXAM plus 4 marks for HW question
4. 4.3 Economics Final Exam for the Term (50%) – Monday of week 7 Since we are not using English and Participation then the 2 assessments in weeks 2 and 4 will be 25% each of the grade
5. 4.3 Economics – 3rd Term WEEK 4 ASSESSMENT ON ALL OF THE MATERIAL WE COVERED AFTER THE ECONOMIC SUPPLY AND DEMAND MODEL THE SLIDES WILL BE ON WIKISPACES AT THE END OF THIS WEEK It will be necessary to study the slides on Wikispaces and ask the teacher about topics you do not understand
6. 4.3 Economics - Week 4 Assessment Multiple choice, fill-in, matching and True/False
7. 4.1 and 4.2 Today - Review of answerstohandout and continuingwithMacroeconomicslecture Assessment – Week 4
8. Peruvian Central Bank What are thefunctions of the BCRP? The BCRP functions, as definedbytheConstitution, includethefollowing: -toregulatemoney and credit in thefinancialsystem - manageinternational reserves - issue notes and coins - periodicallyreportonthe country’ finances
9. Autonomy of a central bank WhatdoestheBCRP’sautonomyconsist of? In ordertofulfillitsmission, the BCRP mustenjoyautonomy (independent, notcontrolledbythegovernment)
10. Printsthemoney
11. Printsthemoney
12. Printsthemoney
13. More aboutthe BCRP (Peruvian Central Bank) Whatisthemission of the BCRP? ---To preserve monetarystability. The Central Bank has establishedaninflation target of 2.0% BCRP actions are orientedtowardsmaintainingthislevel of inflation in thePeruvianeconomy.
14. Fromitswebsite…..Peruvian Central Bank Inflation is detrimental to economic development because it prevents money from adequately fulfilling its functions as a medium of exchange, as a unit of account, and as a store of value. Inflation discourages investment. The devaluation of money resulting from continuous rises in the prices of goods and services affects interest rates and thus both consumers and businesses Thus, by maintaining low inflation, the BCRP creates the necessary conditions for normal economic activity which, in turn, contributes to achieve higher levels of sustained economic growth.
15. Exports/Imports - Introduction Exports are goodsthat are made (manufactured, produced) in a country, and soldto a companyorperson in another country Example of a Peruvianexport: copper
16. Imports Imports – a country buys a goodorservicefromanother country Example: Kia (Korea) sells 10,000 Optima model cars to a Lima car dealer Has anyoneeverseenallthe cars sitting in car lots in Callao, whenyouflyinto Lima?
17. Why do countriesexport and import? No country in the world has all the natural resources, climate or geography to produce all the goods and food required by its population Many countries have more than enough of a specific resource or product and can export some of this "surplus" to other countries
18. Example - Canada Many Canadians like to eat bananas, which can only be cultivated on tropical climates Canada is close to the Arctic circle, no bananas can be grown on its soil and the easiest way to get them is to import them
19. Canada´sExports But Canada has huge reserves of oil, which some countries do not have at all As Canada has more than enough of oil to support its own needs, it can export some of its oil production to countries that require it and are willing to pay for it
20. Examples of Exporting/Importing - Japan Japancosumes more than 5 millionbarrels of oil a day Butitonly produces 138,000 barrels a day So itmustimportalmost ALL of itsoilneeds
21. FromyourGeographytextbook Example: Japan, itsexport and imports…..
22. Example - Russia Produces 11 millionbarrels of oil a day (numberone in theworld) Uses only 2.5 millionbarrels a day So, itexportstheremaining 8.5 million (daily) USA (bigproducer, butbigconsumeralso)
23. Cap`nCrunch Whydoesn´tLaivestartproducingthis cereal toselltoPeruvianconsumers?
24. Top 20 Peruvian Exports 1 Copper Ores 2 RefinedCopper & Alloys 3 Gold 4 Zinc Ores 5 MeatFlourforAnimals 6 Non-CrudeOil 7 CrudeOil 8 Molybdenum Ores 9 Coffee 10 Silver
25. Top 20 Peruvian Exports 11 Lead Ores 12 Iron Ores & Concentrates 13 Knitted Sweaters 14 Fresh Vegetables 15 Tin 16 Zinc 17 CopperWire 18 KnittedMens & BoysShirts 19 Prepared Vegetables 20 FishFats & Oils
26. Top PeruImports - $41 billion in 2012 Agriculture and othermachinery, certainchemicals, plastics, TVs, telecommunicationsequipment, iron, steel, wheat, soybeans, vaccines, cotton, paper Cars ($2-3 billion)
27. Peru´s Major Trade Partners No surprise……United States, China, Brazil, European Union and Chile
28. Exports add to the GDP of Perú The Peruvian company exporting the good counts the exports as sales (all sales of all companies is the GDP of a country)
29. What effect does a change in your country´s currency have on your country´s exports? – Ifan American and wanttobuy a Peruviangood, thepersonorcompany has topayforthegood in Soles – So, the American has totakehis American dollars and buy Soles first -If Soles are more expensive (Sol up to 2.40 forexample = dollardown), thenthePeruviangoodscost more forthe American Ifthishappens… Peruvianexportstothe USA will decline
30. Example I am buying a bottle of fishoilfor S./100 Theexchangerateis 2.50 Soles to 1 US dollar I need 40 US dollarstoobtain S./100 Thenwiththe S./100 I nowhave I buythebottle of fishoil
31. Example So, what if the dollar goes down (Nuevo Sol goes up), how does that affect the American company that is buying a bottle of fish oil from Perú? We need to do a new calculation to find out how many dollars it takes to get S./100 because it is now different
32. New calculation Supposetheexchangerateisnow 2.00 Soles foreach US dollar So now I need 50 dollarstogetthe 100 soles instead of 40 dollars AmericanswillbuylessfishoilfromPeru, thisisbadforthePeruvian GDP,buthaving a strong Sol isgood (forpurchasingpower, interestrates, etc..)…There are alwaystradeoffs
33. Peru in 2012 – Budget Surplus, Trade Surplus Budget Surplus - $2 billion– thisisgood Why? Simple, receipts are higherthanexpenditures Trade Surplus - $5 billion– thisisgood Why? Richminerals are in needaroundtheworld, Peruisbenefitting
34. USA - Budget Deficit, TradeDeficit Budget Deficit $1.2 trillion Why? Taxestoolow, spendingtoomuch (governmentservices, defense, social security) TradeDeficit $487 billion Why a deficit? Oilimports AND productsthat are beingproducedwithcheap labor are cheapertobuythantomakethem in the USA (high labor costs), likeforclothing and electronics
35. Otherstatistics, Perù Top growingeconomy in all of LatinAmericathelast 12 years Real GDP growthnowaround 5-6% Yetinflationisonly in the 2-4% range Unemploymentis in the 7% range
36. Free TradeAgreements
37. FDI
38. Bubbles We spoke of people getting too overconfident and overinvesting, causing a unsustainable growth with an ugly, ending, here is what the Japanese stock market did http://finance.yahoo.com/echarts?s=%5En225+interactive#symbol=^n225;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
39. 1st bimester
40. 1stbimester recap of the Definition of Economics What is the Economic Problem? We (you, me, the people of this school, Peru, the World) have unlimited wants and yet finite resources with which to achieve them. We cannot have everything we want. This is called a scarcity (limit of) resources so we must decide what we will produce/consume
41. 2nd bimester
42. The Demand and Supply Curve Economic Model Objectives: Understand the demand curve Understand the supply curve What happens when supply and demand meet and what causes an increase or decrease in one or the other?
43. Can of Coke How much are you willing to pay for an ice cold can of Coca Cola, that I will allow you to drink in class? Let´s graph the result
44. Can of Coke 100 soles? 20 soles? 12 soles? 8 soles? 5 soles? 50 centimos? Whatt do we have? Go to next slide
45. The Demand Curve As the price increases (goes up) the quantity demanded decreases (goes down) = MOVEMENT ALONG THE CURVE However, some things can actually move the curve, examples: Changes in income (how much they people get paid) Changes in consumer preference Competitor prices
46. Movement (increase or decrease) of the demand curve Practice: In which direction (right = increase or left = decrease) does the demand curve move in the following situations: People get a pay rise (or in our example, your parents give you more money to bring to school) A competitor decreases its prices
47. Movement (Increase or decrease) of the demand curve You have a very successful advertisement on TV The government increases income taxes Ther product is found to be harmful to your health
48. The Supply Curve How much you would have to be paid (in soles, by other students) to be make a Mother´s Day Card that you will make yourself (to sell to other students for their moms) For each card, 250 soles, 40 soles, 20 soles, 8 soles, 4 soles, 1 sol What do we have? Go to next slide
49. The Supply Curve As the price increases, supply increases = MOVEMENT ALONG THE CURVE However, some things can actually move the supply curve to the right (= increase)or tothe left (= decrease) Raw materials become cheaper New machinery Labor costs go up Energy costs increase
50. TODAY´S CLASS – 4.1 & 4.2 Objective: Solidify our knowledge of Demand and Supply Curve Economic model And……teach the absent students about the model…..Students absent last week will be tutored by classmates, and will take a 10 minute quiz at the end of the class
51. TODAY´S CLASS – 4.1 & 4.2 Group (Team) Project TOP Team – 3 GoodHouse Marks foreachteammember, and 3 extra pointson mid-termexam 2nd place Team - 2 GHMs, 2 extra points 3rd place Team – 1 GHM, 1 extra point
52. TODAY´S CLASS – 4.1 & 4.2 GROUP PROJECT – TWO PARTS (50% EACH PART) 1) Makethebest poster(s) possible, explainingthedemand and supply curve economicmodel 2) TUTORS…..PLEASE TEACH YOUR STUDENT LAST WEEK´S LESSON…….. SO THAT HE/SHE CAN SUCCESSFULLY COMPLETE THE 10 MINUTE QUIZ at theend of class
53. TODAY´S CLASS – 4.1 & 4.2 HOW WILL THE WINNING TEAMS BE DETERMINED? 50% - YOUR POSTER(s) (0-20 grade) 50% - THE GRADE OF THE STUDENT OF THE GROUP ON THE SHORT QUIZ (0-20 grade)
54. TODAY´S CLASS – 4.1 & 4.2 SCHEDULE FIRST, A VERY BRIEF REVIEW OF LAST WEEK (5 MINUTES) THEN, THE GROUPS ARE ANNOUNCED THEN, IN YOUR GROUPS, DECIDE WHO WILL TUTOR THE STUDENT, WHO WILL DO THE POSTER, ETC.. AND GET STARTED
55. PuttingtheDemand and Supply Curves Together We drew a demand curve We drew a supply curve When we put them together we have a model for a MARKET FOR A PARTICULAR GOOD OR SERVICE, WHERE BUYERS (DEMAND) AND SELLERS (SUPPLY) MEET
56. Demand and Supply Curves meet The point of equilibrium, where the two curves meet, or market clearing price (point A)is where the quantity demanded equals the quantity supplied at a certain price
57. Now, how do thefourdifferentpossibilities look? 1. Increase in demand - DEMAND CURVE SHIFTS TO THE THE RIGHT INCREASE IN INCOME, DECREASE IN TAXES, INCREASE IN THE PRICE OF FANTA, ESPECIALLY HOT WEATHER END UP AT EQUILIBRIUM POINT B, with a higherprice and a higherquantitydemanded
58. Decrease in Demand 2. Decrease in demand - DEMAND CURVE SHIFTS TO THE LEFT INCREASE IN TAXES, DECREASE IN INCOME, A NEW JOB THAT PAYS LESSS, DECREASE IN PRICE OF COMPETITORS PRODUCT (FANTA), COLD WEATHER ALL SUMMER END UP AT EQUILIBRIUM POINT C, with a lowerprice and lowerquantitydemanded
59. Increase in Supply 3. Increase in supply - SUPPLY CURVE SHIFTS TO THE RIGHT RAW MATERIALS TO MAKE THE MOTHERS DAY CARD ARE CHEAPER, YOU GET SOME NEW SCISSORS OR MARKERS OR TAKE AN ART CLASS ANY OF WHICH MAKE YOU ABLE TO MAKE THE CARDS QUICKER, YOUR TEACHERS GIVE YOU EXTRA TIME TO MAKE THE CARDS IN CLASS, FOR COKE COULD BE A NEW DISCOVERY THAT MAKES THE PROCESSS TO MAKE COKE CHEAPER, OR THE TAXES THEY HAVE TO PAY TO THE GOVERNMENT DECREASE, OR THEIR WORKERS BECOME MORE EFFICIENT IN MAKING COKE END UP AT EQUILIBRIUM POINT E, with a higherprice and lowerquantitydemanded
60. Decrease in Supply Decrease in supply – SUPPLY CURVE SHIFTS TO THE LEFT THE COST OF THE RAW MATERIALS INCREASE, YOUR SCISSORS BREAK AND YOU HAVE TO USE OLD SCISSORS OR BAD MARKERS, OR YOUR TEACHERS DONT GIVE YOU ANY TIME TO MAKE THE CARDS IN CLASS. FOR COKE, COULD BE INCREASE IN THE TAXES THEY HAVE TO PAY, OR THEIR MACHINERY BREAKS, OR THEIR EMPLOYEES SAY THEY WANT TO BE PAID MORE MONEY.. END UP AT EQUILIBRIUM POINT F, with a lowerprice and lowerquantitydemanded
61. Which means……. Adriana´sgrouphadthehighestoverallpoint total Adriana´sgroup - 3 GHMs, 3 extra points Mariano´sgroup - 2 GHMs, 2 extra points Tilsa´sgroup - 1 GHM, 1 extra point
62. 4.1 and 4.2 - ANSWER KEY AND WIKISPACES Answerkeybeinghandedouttoday Powerpointisonwikispaces Please be readyforanyexamquestion, and asktheteacherifyouneedhelp Wewillhavetwoexamslaterthisterm (2 assessments)
63. 4.1 and 4.2 Economics– Rest of Term 2 Week 4 – Today Week 5 – Holiday, no class Week 6 – 1st Assessment, 35% of Term´s Grade Week 7 – Macroeconomicscontinued Week 8 - 2nd Assessment, 35% of Term´s Grade Week 9 – ChineseWhisperGame, 4 GHMs/4 extra Pointstowinningteam
64. ImportantMacroeconomicLecture – 5 InterrelatedTopics Interest rates and Inflation (closely linked) Unemployment the Business Cycle Leading and Lagging Indicators
65. ThePartyisgoing fine Level of EconomicActivity = amount of spendingbybusinesses and people, and howmanypeople are employed and spendingtheirearningsongoods and services Rate of Inflation Amount of Borrowing bybusinesses and consumers Level of InterestRates
66. Danger! Thingsstill ok, butmaybepartyingtoomuch Level of EconomicActivity = amount of spendingbybusinesses and people, and howmanypeople are employed and spendingtheirearningsongoods and services Rate of Inflation Amount of Borrowing bybusinesses and consumers Level of InterestRates
67. Uh oh, wepartiedtoomuch - Recession Level of EconomicActivity UNEMPLOYMENT GOES UP TOO HIGH CAUSING ECONOMIC ACTIVITY TO START TO REVERSE (RECESSION IN WORST CASE) Inflationis TOO HIGH SO THE Amount of Borrowing DECREASES InterestRates GO UP TOO MUCH
68. Interest Rates Itisthecost of money, itiswhatyoupaytothebankoranotherpersonwholendsyoumoney You are theborrower and get a loan, and youmustpaythemoney back tothelender(thebank) Theterms of your loan (howmanyyearsisthe loan for, and theinterestrate) will be put in a contractcalled a promissary note, whichsaysthatyoupromisetopaythemoney back tothelender
69. Why do you have to pay interest? Anybankorcompanyorpersonthat has money can do somethingthemselfwithitand earnmoney Money is a toolthatallowsustomake more money (likebuying a businessthatthenbecomeprofitable and letsyouearn more moneythanyouhadbefore) So ifyou are goingto use theirmoneyinstead of lettingthem use theirown YOU OF COURSE HAVE TO PAY THEM FOR USING YOUR MONEY
70. Interest rates So borrowing money is like RENTING money, like if you rent a house in Asia (Perú) for the summer, you pay rent because the owner of the house could either: A) spend the summer there themself B) Let a friend of family member stay there B) rent it out to someone else and collect rent
71. Next Definition - Inflation Inflation –istherate of increase in theprices of goods and services in aneconomy (each country takes a basket of approximately 30 goodsandservices) Every country has itsowninflationrate, calculatedmonthly and annually In therare case thatprices are going DOWN, itiscalleddeflation
72. Goods and Services included in the US inflation rate (called the Consumer Price Index) RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions) EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories) OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses)
73. Goods and Services included in the US inflation rate (called the Consumer Price Index) FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture); APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
74. Inflation Question: Iftheinflationrate in 2011 was 3.2% and theinflationrate in 2012 was 2.4%, in 2012 didprices: A) godown in 2012 B) go up at a lesserrate in 2012 than in 2011 C) go up at a fasterrate in 2012 than 2011
75. Answer B) go up at a lesser rate in 2012 than in 2011 Now rising at 2.4% instead of 3.2%
76. What determines interest rates? 1) The amount of time you have the money The longer the amount of time, the higher the interest rate because there is more of a chance that something could go wrong and you cannot pay back the money
77. Interest rates – Length of time Company A borrows for 1 year Interest rate might be 6% Company A borrows for 20 years Interest rate might be 10%
78. Length of time determines interest rate, example IBMs borrowings http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=ibm
79. What determines interest rates? 2) The general level of interestrates in aneconomy, which are determinedbytheinflationrate Ifthereishighinflation, you are losingpurchasingpower of yourmoney, so youdemandto be paid a higherinterestrate so as protectyoufromthatloss in purchasingpower
80. Lost Purchasing Power? Itmeansthatyourmoneyislosingitsvalue (calledlostpurchasingpower) Iftheinflationrateis 2%, yoursame $1.00 has toworth $1.02 tobuythesameamoung of thingsoneyearlater Thatiswhyyoursalarymustgo up by at leastthesameamount as therate of inflation, oryou are worse off
81. And lostpurchasingpoweraffectsthelenders - Why? SO THEY DON´T GET PAID BACK WITH LESS MONEY THAN THEY LENT
82. Example Jan 2014 - borrow $10.00 2014 inflation rate = 8% December 2014, pay back the $10 to the bank, you are only paying the bank about $9.20
83. What determines theinterestrates? 3) Theriskiness of makingthe loan (whotheborroweris) Forexample, Microsoft is a lessriskycompanytomake a loan tothan a smallVenezuelancompanythat has notbeenprofitable (has beenlosingmoney)
84. More on Inflation A high inflation rate is very bad for an economy (hurts growth) Deflation can also be bad Leaving us with the fact that there is an ideal rate of inflation, not too high, not too low, around 2 to 3%
85. Inflation can be caused two ways 1) Demand pull - the economy is growing too fast (so the demand curve keeps shifting up to the right for all products), increasing prices 2) Cost Push - an event that makes the price of some important goods in the economy go up (and supply curve of many products shifts to the left)
86. Example of Cost Push Inflation If there were a war in the middle east between Iraq and Iran, the price of oil would go way up, and it would affect the inflation rate of almost all countries
87. Inflation Inflation in LEDC´sisalmostalwayshigherthaninflation in MEDC´s TheMEDC´shave more matureeconomies and thereislessgrowth and/orfluctuation in theeconomy, leadingthelower, more stableinflationrates
88. Inflation rates LEDCs - 5.5% average MEDCs - 2.2% average http://www.tradingeconomics.com/country-list/inflation-rate
89. Inflation – is it good for anyone? It is only good for people that have investments, like in real estate (a home or building)
90. AND NOTE -- There are goodsthat are havelimitedsupply, and theywill be immunetoinflation The 1913 Liberty nickle (5 cents in USA) is worth $3 million dollars because there are so few of the coins that exist
91. Why is an increase in inflation bad? It makes interest rates go up (lenders need to charge higher rates to protect themselves from inflation)
92. Why is an increase in interest rates bad? If interest rates rise too much, businesses stop borrowing money for projects and expanding (which is what leads to the growth in an economy), and consumers stop borrowing also That makes the economy grow at a slower rate, or, when interest rates become really high, it causes a recession
93. It causes a recession in theworst case! A recession is a DECLINE in economic activity for at least six months (two consecutive 3-month quarters)
94. Recession A recession causes people to lose jobs and have hard times
95. So why do you think deflation is also bad? Think about a company that would like to charge more for its product in 2014 than it is charging in 2013 to make more profit……..
96. ANSWER If there is deflation, then the company will have a hard time increasing its prices And will make less money, and that can affect many companies and the whole economy
97. ANSWER And if many companies are not making as much money then they cannot emply as many people and we have higher unemployment
98. Unemployment Rate It is the % of workers (over the age of 18) in an economy that do not have a job, and are actively looking for a job The government of each country calculates this by taking polls of people and businesses
99. When do weseehighunemployment and lowunemployment? A lowrate of unemployment is GOOD, and we see it when the economy is doing well and inflation is not a problem A highunemployment rate is BAD and happens when we have a recession, and it takes a while for the unemployment rate to start falling again
100. US unemploymentrate, 1965 topresent http://www.tradingeconomics.com/united-states/unemployment-rate THE SPIKES UP REPRESENT THE TIME WE HAD A RECESSION, THEN THE SLOW DECLINE IN UNEMPLOYMENT RATE REPRESENTS GROWTH PHASES Otherstatisticsforfutureclasses http://www.tradingeconomics.com/peru/indicators
101. Types of unemployment Frictional– the normal movement of variousworkersfromonejobtoanother, ithappens in every country Seasonal– Ifthereis a rainyseasonorverycoldwinter, therewill be lesseconomicactivityduringthat time, more unemployment Cyclical – MOST IMPORTANT TYPE - Whenunemploymentincreasesdueto a recession Structural– whenpeople do nothavetheproper training toget a new jobaftertheirjob has beenchangedoreliminateddueto new technology
102. The Business Cycle – 5 Stages
103. The Business Cycle 5 Stages…. Growthphase –economyis in lowtomediumgrowthmode. Itlastslongperiods, about 2 to 10 years
104. The Business Cycle Peak – The highest growth rate, but it lasts a short time. This level of growth cannot be maintained, a recession will follow because the economy is going too fast, there is inflation,and interest rates are too high
105. The Business Cycle Recession –Thisis a decline in economicactivity, thereal GDP goesdownfortwoconsecutivequarters (3 monthperiods) Whatis 1) GDP and 2) real GDP? 1) GrossDomesticProductand 2) GrossDomesticProductadjustedforinflation
106. How long do recessions last? On average, about 11 months only (compare to 2 to 10 years for growth phase)
107. The Business Cycle Trough- Thelargest decline in economicgrowth (theworst performance of theeconomy) Itis a short period (lastmonths) becausebythis time the Central Bank of a country has startedtodecrease short terminterestrates in orderto try to revive theeconomy
108. The Business Cycle Recovery– Theeconomybeginstogrowagain Usuallyitisthehighestgrowthphase of theentirebusinesscycle (maybe as high as 7% for a MEDC), butsoonthatgrowthlevels off to a more sustainablerate of growth (around 2% to 3%)
109. The Business Cycle So after the recovery phase WE ARE BACK AT THE GROWTH PHASE, REPEATING THE CYCLE ALL OVER AGAIN
110. How does an economy get out of a recession? Extreme measures? http://www.youtube.com/watch?v=fuNGh3MC44Y
111. The Central Bank has to take the role of Kevin Bacon and Julia Roberts What do they do?
112. 4.1 and 4.2 – Begin 3rd Term 3rd term…
113. Review, what is the Central Bank? Independent of the government, they set the monetary policy (issue the money, monitor the banks, and control SHORT TERM INTEREST RATES) In the USA, called the Federal Reserve Bank in (¨The Fed¨), in Europe, called the European Central Bank (¨ECB¨), and in Perú, Banco Central de Reserva del Perú (BCRP)
114. FromthePeru Central Bank Website Central Bank tries to contain inflation!
115. So what does the Central Bank do about a recession? Theydecrease short terminterestrates (theratestheyhave control of) This leads to a decrease in mediumtolongterminterestrates (bymarketforces), whichenablescompanies and peopletoborrowagain
116. Central Bank tries to revive theeconomy Sometimes the Central Bank has to cut interest rates several times before hte economy responds, but we eventually get a response AND RECOVERY
117. Central Bank at work http://www.youtube.com/watch?v=xzwZJ0PHe-E http://www.federalreserve.gov/monetarypolicy/openmarket.htm http://money.cnn.com/2008/10/08/news/economy/fed_move/ http://www.moneycafe.com/personal-finance/fed-funds-rate/
118. Whencompanies and peopleborrowagain Consumersstartspending more Companiesdoingprojectsforgrowth (expandingtheirbusiness). Whenthey are spending and building/expanding more, then more workers are needed (unemployment declines)
119. Central Bank to the rescue The new workers, the ones that previously had lost their jobs then have more income They start spending their new money, and that helps the businesses that they purchase from Those businesses, with new customers, then have to hire more workers, etc…..
120. Leading and Lagging Indicators – the Roller Coaster comparison Leading indicators are statistics that Economists look at to measure economic performance, which will start to change BEFORE THE ECONOMY REACHES THE NEXT STAGE OF THE BUSINESS CYCLE
121. Leading Indicators Leadingindicatorsshould be thought of as thefirst car of a rollercoaster car Otherexample of leadingindicators – Consumerconfidenceindex- Ifconsumers are confidentthismonthaboutthingstheywillbespending more forthenext 30 days…..
122. LeadingIndicators– example – new buildingpermits Whenconstructioncompanieswanttobuild new buildings, theyhavetoget a permitto do that, so theygoto a government office togetthepermit Buttheywon´tstarttheconstructionuntiltheyhavethepermit, and once theyhavethepermittheywillbeemployingworkers and orderingmaterialsto do theconstruction
123. Leading Indicators The government keeps track of how many permits have been applied for each month This is an example of a leading incidcator because the number of permits will go up BEFORE the level of economic activity goes up (new jobs, purchasing new materials)
124. Lagging Indicators The opposite of leading indicators, they will change AFTER the economy has started to change Example: Consumer Price Index (inflation)- why? It takes time for the market for a good or service to react to the decrease in demand (to a new, lower equilibrium price)