Economics Principles and Practices © 2012 Georgia

Chapter 13: Economic Instability

Chapter Overviews

Section 1: Business Cycles and Fluctuations

Business fluctuations and cycles interrupt economic growth. Business cycles are the regular ups and downs of real GDP. There are many factors that influence business cycles: changes in investment spending, innovation and imitation, monetary policy decisions, and external stocks. The Great Depression of the 1930s was the worst economic decline in United States history. The economy has been much more stable since World War II with a series of short, mild recessions: however, a recession in 2008–2009 was the most severe one since the Great Depression. While seemingly unavoidable, business cycles can be anticipated with tools such as econometric models and statistical series such as the index of leading economic indicators.

Section 2: Inflation

Inflation is the increase in the general level of prices of goods and services. Several price indexes are used to measure inflation. The consumer price index (CPI) is a statistical series that tracks monthly changes in the prices paid by urban consumers for a representative "basket" of goods and services. The CPI is used to measure inflation. Another index is the producer price index (PPI), which is a monthly series that reports prices received by domestic producers. Causes of inflation include strong demand, rising costs, and wage-price spirals, along with a growing supply of money. Therefore, inflation can reduce purchasing power, distort spending, and affect the distribution of income.

Section 3: Unemployment

Every month, the Census Bureau identifies unemployed persons. The number of unemployed is then divided by the civilian labor force to find the unemployment rate. The unemployment rate is comprehensive, but does not count the dropouts, nor does it distinguish between full- and part-time employment. The kinds of unemployment include frictional, structural, cyclical, seasonal, and technological unemployment. As a result of unemployment, uncertainty, political instability, and social problems can occur.