Business Cycles & Business Cycles & BankingBanking

Chapter 4Chapter 4

Business CycleBusiness Cycle

Period of time when the economy Period of time when the economy grows followed by a period of grows followed by a period of

time when the economy shrinkstime when the economy shrinks

U.S. EconomyU.S. Economy

U.S. Department of Commerce keeps U.S. Department of Commerce keeps track of our economytrack of our economy

Collect and measure dataCollect and measure data– Gross Domestic ProductGross Domestic Product– Gross National ProductGross National Product

Tells how healthy the economy isTells how healthy the economy is

Gross Domestic ProductGross Domestic Product

GDPGDP

Total dollar value of all goods & Total dollar value of all goods & services that are produced by a services that are produced by a country in one yearcountry in one year

Looks at final product & priceLooks at final product & price– Ex: Making of Bread & selling for $2.00Ex: Making of Bread & selling for $2.00

Gross Domestic ProductGross Domestic Product

Increase in GDP means production is upIncrease in GDP means production is up

Increase in production, business are doing Increase in production, business are doing wellwell

Businesses doing well, more jobsBusinesses doing well, more jobs

More jobs, more money to spendMore jobs, more money to spend

Economy is betterEconomy is better

Gross National ProductGross National Product

Amount of income earned by a Amount of income earned by a country’s companies & citizens in country’s companies & citizens in

one yearone year

Phases of Business CyclePhases of Business Cycle

4 phases4 phases– ExpansionExpansion– PeakPeak– RecessionRecession– TroughTrough

ExpansionExpansion

Measured by rise in GDPMeasured by rise in GDP

Economy is in good shapeEconomy is in good shape

Plenty of jobsPlenty of jobs

People willing to spend moneyPeople willing to spend money

Businesses make a profit & growBusinesses make a profit & grow

PeakPeak

Production is at a high pointProduction is at a high point

When GDP reaches a high pointWhen GDP reaches a high point

GDP stops risingGDP stops rising

Second phase of business cycleSecond phase of business cycle

Marks turning point of business cycleMarks turning point of business cycle

RecessionRecession

33rdrd phase of business cycle phase of business cycle

GDP fallsGDP falls

Business activity slows downBusiness activity slows down

People spend less moneyPeople spend less money

Unemployment risesUnemployment rises

TroughTrough 44thth phase of business cycle phase of business cycle

Economy reaches the lowest levelEconomy reaches the lowest level

GDP stops falling & starts to rise againGDP stops falling & starts to rise again

Economy begins to recoverEconomy begins to recover

People are hiredPeople are hired

People spend money againPeople spend money again

RecessionRecession

GDP falls for at least 6 months in a GDP falls for at least 6 months in a rowrow

Usually last 6 to 18 monthsUsually last 6 to 18 months

If especially long becomes a If especially long becomes a depressiondepression

DepressionDepression

1930’s1930’s

Great DepressionGreat Depression

Lasted 10 yearsLasted 10 years

WWII helped bring U.S. out of Great WWII helped bring U.S. out of Great DepressionDepression

MoneyMoney

Anything that serves as a Anything that serves as a medium of exchange, a medium of exchange, a

measure of value, and a store measure of value, and a store of valueof value

MoneyMoney

Medium of ExchangeMedium of Exchange

Measure of ValueMeasure of Value

Store of ValueStore of Value

Medium of ExchangeMedium of Exchange

Accepted as payment for goods & Accepted as payment for goods & services by everyoneservices by everyone

Ex: gold, silver & saltEx: gold, silver & salt Barter SystemBarter System

– Buy goods & services without moneyBuy goods & services without money– Exchange one set of goods or services Exchange one set of goods or services

for anotherfor another– Ex: trade loaf of bread for farmer’s Ex: trade loaf of bread for farmer’s

vegetablesvegetables

Measure of ValueMeasure of Value

Expresses the worth of somethingExpresses the worth of something

Able to compare products according Able to compare products according to their valueto their value

Bargain shoppingBargain shopping– Ex: Pair of shoesEx: Pair of shoes

Store of ValueStore of Value

Money keeps its value if you store it Money keeps its value if you store it or keep itor keep it

Is the same value today as it will be Is the same value today as it will be in 3 monthsin 3 months

One exception -- InflationOne exception -- Inflation

InflationInflation

Economy goes through a fast, general Economy goes through a fast, general increase in pricesincrease in prices

Inflation occurs, value of dollar decreasesInflation occurs, value of dollar decreases

Average person will pay more for goods & Average person will pay more for goods & services than beforeservices than before

If wages stay same & prices go up, people If wages stay same & prices go up, people can’t afford things they needcan’t afford things they need

MoneyMoney

Past CurrencyPast Currency– Used gold, silver, precious stones, salt & Used gold, silver, precious stones, salt &

cattlecattle– Do not meet the needs of all the Do not meet the needs of all the

characteristics of moneycharacteristics of money TodayToday

– Use coins & paper billsUse coins & paper bills– Meet needs of all the characteristics of Meet needs of all the characteristics of

moneymoney

Characteristics of MoneyCharacteristics of Money

Be portableBe portable

Be durableBe durable

Be divisibleBe divisible

Limited availabilityLimited availability

BankingBanking

Federal Deposit Insurance Federal Deposit Insurance CorporationCorporation– FDICFDIC– Guarantees and insures money in banksGuarantees and insures money in banks– Provides safe and convenient place to Provides safe and convenient place to

store moneystore money

Beginning of BankingBeginning of Banking

People asked goldsmiths to store their People asked goldsmiths to store their goldgold

A receipt would be writtenA receipt would be written Charged people a fee to store their goldCharged people a fee to store their gold Goldsmiths then started lending out Goldsmiths then started lending out

some of the goldsome of the gold Charged a fee to borrow goldCharged a fee to borrow gold 11stst banks banks

Banking TodayBanking Today

Savings AccountsSavings Accounts– Store money for a long timeStore money for a long time– Earn interestEarn interest– More money the more interest earnedMore money the more interest earned

Checking AccountsChecking Accounts– Used for day-to-day expensesUsed for day-to-day expenses– Withdraw money anytimeWithdraw money anytime

BankingBanking

Banks Loaning MoneyBanks Loaning Money– People borrow moneyPeople borrow money– Pay back amount borrow plus interestPay back amount borrow plus interest– Pay back more than he/she borrowedPay back more than he/she borrowed– Borrow money forBorrow money for

Improving homesImproving homes Paying tuitionPaying tuition businessesbusinesses

BankingBanking

DefaultDefault– Borrowers do not pay loan backBorrowers do not pay loan back

Bank loses moneyBank loses money

Need to apply for loanNeed to apply for loan– Bank makes decision Bank makes decision

Stock MarketStock Market

StocksStocks– Certificates of ownership in a Certificates of ownership in a

corporationcorporation SharesShares

– Corporations sell portions of stockCorporations sell portions of stock– Help raise money for corporationsHelp raise money for corporations

EquitiesEquities– Same as stocksSame as stocks

Stock MarketStock Market

Stockholders make profit byStockholders make profit by– DividendsDividends

Paid 4 times a yearPaid 4 times a year Profit high dividends are high; profit low Profit high dividends are high; profit low

dividends are lowdividends are low

– Capital gains/capital lossCapital gains/capital loss Stockholder selling stockStockholder selling stock Sell stock for more or less than original Sell stock for more or less than original

amountamount More = gain; less = lossMore = gain; less = loss

Stock MarketStock Market

StockbrokerStockbroker– Person who buys & sells stock for a Person who buys & sells stock for a

companycompany– Specializes in trading stocksSpecializes in trading stocks

Stock Market/Stock ExchangeStock Market/Stock Exchange– Market for buying & selling stockMarket for buying & selling stock

Major Stock MarketMajor Stock Market

New York Stock Exchange (NYSE)New York Stock Exchange (NYSE)

National Association of Securities National Association of Securities Dealers Automated Quotation Dealers Automated Quotation System (NASDAQ)System (NASDAQ)

New York Stock ExchangeNew York Stock Exchange

Largest & most powerful in U.SLargest & most powerful in U.S Started in 1972Started in 1972 Trading on floorTrading on floor List only largest & best-known List only largest & best-known

companies in U.S.companies in U.S. Blue-chip companiesBlue-chip companies

– Have very good reputationsHave very good reputations

NASDAQNASDAQ

OTC MarketOTC Market

Over-the-counterOver-the-counter

No trading floorNo trading floor

Trading through computersTrading through computers

Stock MarketStock Market

Buy stocks & keep for a long timeBuy stocks & keep for a long time

Expect value will increase over timeExpect value will increase over time

Dow Jones Industrial AverageDow Jones Industrial Average– Shows how certain stocks are traded Shows how certain stocks are traded

each dayeach day– Show how market is doingShow how market is doing

Bull MarketBull Market

Stock Market rises steadily over a Stock Market rises steadily over a period of timeperiod of time

Expect increase in profitsExpect increase in profits

Buy more stocksBuy more stocks

Bear MarketBear Market

Stock market falls steadily over a Stock market falls steadily over a period of timeperiod of time

Sell stocksSell stocks

Expect lower profitsExpect lower profits