[Music]
In 2012, the Whirlpool Corporation had more
than 68 thousand employees and $18 billion
in revenues.
Just as the U.S. economy has experienced long-run
economic growth and navigated through a series
of short-run business cycles, Whirlpool has
experienced long-run growth and been sometimes
negatively affected by the business cycles.
Improvements in household technology have
raised the standard of living and given men
and women more time to pursue careers outside
of their homes and to enjoy more leisure activities.
But the housing market collapse that led to
the recession of 2007-09 caused a sharp decline
in the demand for durable goods, including
household appliances.
As the economy started recovery from the recession,
spending on durable goods rose.
So far, Whirpool's recovery has been positive,
but partial.
In the last chapter, we explored employment
in terms of employee training, technologies
in the business environment, and through business
cycles.
In this chapter we explore the effects of
the business cycle in greater detail.
We explore how contractions and expansions
are dealt with, and how Strong and Weak economic
conditions are measured.
These lead into long-term and short-term projections
and reactions in the economy.
All the things that we're seeing in the
papers and seeing on the news as bad as
they appear and you introduced about
saying could it get worse it's going to
get worse Colin you should be worried
you should watch Archie
TV get knowledgeable get worried and get
prepared it's going to be much worse or
a lot but if we see the bankers saying
it's getting bad for them and we see
things happening different distant from
people's lives how's it going to affect
people like you and me and and the bills
that we pay and our mortgages is it
going to be as bad as 2008 well you're
lucky because you're a journalist if
somebody has to report all of this so
you probably have some job security it's
going to be worse than 2008 so you're
going to see bankruptcies the dead just
much higher all over the world now Colin
and it was eight years ago even China
now has a lot of debt which it did not
have in 2008 so I'm afraid you're going
to see a lot of problems everybody's
dead has gone through the roof money has
been printed be worried how's this come
to happen though because after 2008
which everybody missed the people
that we pay a lot of money to look out
for these kind of things it happened
anyway but we were told look it's okay
we've done the bailout we've got plenty
of safeguards it can't happen again why
is it happening again the first thing
you need to learn is don't listen to
governments don't listen to pure breath
and don't loose with the politicians
they always say everything is okay there
were people who in 2000 before 2008 said
it was going to end badly they're good
people cent who said is going to bed so
just start learning your own judgment
your own idea because the idea they took
the solution to more debt to too much
debt is more debt and more spending is
ludicrous is ludicrous that grown-ups
would stand there and say something like
that and yet that's what governments all
over the world have been doing what can
you explain it to us then what exactly
are the causes of this current global
slowdown it mistakes or is it just the
general economic laws that are at play
here well it's some of both if the
central bank in the United States is
driven interest rates too absurd
historically never before have you seen
interest rates at 0% all over the world
that is ruining the people who save and
invest your parents told you to save and
invest for the future but all the people
who did that are now being groynes
because interest rates is zero all over
the world pension plans trust
departments and down with insurance
companies so a lot of people are being
ruined and you then have government
spending a lot of money and you know
calling the more debt you have this more
and more difficult is to grow at a fast
pace and the whole world is looking over
its shoulder now because there's so much
debt built up that we all have to worry
about can we focus on oil just briefly
because that's cited always as one of
the key drivers here now I know for a
lot of people they'll think that's ok
it's going to be cheaper to fill up my
car is going to be cheaper to fly
somewhere because I'm not going to have
the fuel surcharges but you've got large
countries massive countries like China
energy Hungary normally using less oil
with the price of crude being as
depressed as it is it's not all good
news is it how long is that going to go
on for how worse haven't was going to
get well you're right is good for people
who consume oil but there are a lot of
people who could do soil including
Russia and Nigeria Kazakhstan some very
big countries that produce oil and they
are of course suffering and many
Americans who produce oil or Suffolk now
they ran up big debt it is good for sum
up and it helps some of us but overall
the big debt in the economy is a drag
worldwide that's why things are slowing
down the power remember it's a historic
accurate to have flowed out every four
to seven years we're overdue for one so
what's being done to cushion this then
if we don't want another 2008 and
apparently everybody can see this coming
now what's being done to try and cushion
the blow what they're going to do
College they're going to say the central
bank in America is going to say don't
worry we will save you after they get
enough complaints and then they're going
to print more money and try to drive
interest rates even lower but that's
going to make things worse call it the
only solution is to take the pain to
realize we've made horrible mistakes let
some people go bankrupt and start over
that's the only way history ever saw
problems like this you cannot just kick
the can down the road
we're also positive on New Year's Day
weren't we doing how well however eyes
thanks for your insight on that Jim
Rogers financial commentator and Investor.
[Music]
Early in this class, I identified to you the
importance of the Gross Domestic Product.
It is the core of Macroeconomics, and in this
chapter we see how it is also used as an indicator
of people's health within an economy.
We explore GDP per capita to express the value
per person of economic growth.
A successful economy is capable of increasing
production of goods and services faster than
the growth in population.
The U.S. economy has experienced periods of
expanding production and employment followed
by periods of contraction, during which production
and employment decline.
The business cycle refers to alternating periods
of economic expansion and economic recession.
Each period of expansion is not the same length
nor is each period of recession.
Most people in the United States, Western
Europe, Japan, and other high-income countries
expect that, over time, their standard of
living will improve.
Long-run economic growth is the process by
which rising productivity increases the average
standard of living.
The best measure of the standard of living
is real GDP per capita.
We measure long-run economic growth by increases
in real GDP per capita over long periods of
time.
As the economy expands or contracts, it is
measured in context of the GDP.
During economic expansions, the GDP grows,
and during contractions is gets smaller.
Generally, the percent change in the GDP is
expressed as a "speed of economic changes".
This rate of change expresses these economic
changes across all industries and the population
in general.
This annual rate of growth or contraction
provides the measurement of the changes in
GDP, and by extension expresses how individuals
are faring.
Taking this concept another step forward,
consider that the working age has extended
to longer careers, our nation is always growing
as children are born and enter the job market,
and people immigrate into the country to fill
jobs.
If the economy does not grow at a rate at
least as fast as the rate of growth, then
overall the GDP per capita contracts.
When it increases the GDP per capita grows
and the overall quality of life is better.
The growth rate of real GDP or real GDP per
capita during a particular year is equal to
the percentage change from the previous year.
We can judge how rapidly an economic variable
is growing by calculating how many years it
would take to double.
An easy way to calculate how many years it
will take real GDP per capita to double is
to use the rule of 70.
The formula for the rule is:
Number of years to double = 70/(Growth Rate)
Small differences in growth rates can have
large effects on how rapidly the standard
of living in a country increases.
This Rule of 70 is a real thing, you can use
it like shown here, but it works quickly when
applied to everyday finances.
Consider this, you invest money at 3.5% annual
compounded rate of return.
Take 70 divided by 3.5 to see it will take
20 years for your variable to double.
It means you double you're your investment
after 20 years.
Change that rate of return to 7% and right
away you see it will only take 10 years to
double your money.
The rate of return doubled, and your time
to double your money was cut in half.
I use this one a lot as a quick and easy way
to make on the fly calculations.
Increases in real GDP per capita depend on
changes in labor productivity, which is the
quantity of goods and services that can be
produced by each worker during one hour of
work.
Economists usually measure labor productivity
as output per hour of work in order to avoid
fluctuations in the length of the workday
and in the fraction of the population employed.
Economists believe two key factors determine
labor productivity: 1) the quantity of capital
per hour worked and 2) the level of technology.
Be careful about the use of Capital in economics,
we are not referring to Capital as a measure
of money or investment.
Capital refers to manufactured goods that
are used to produce other goods and services.
Think of Capital in this context as the materials
businesses have to enable enhanced worker
productivity.
It is the computers made available to office
workers, it is the automated assembly line
to move new automobile frames past assemblers
in manufacture, it is the software that empowers
new solutions for complex challenges.
The total amount of physical capital available
in a country is known as the country's capital
stock.
As the capital stock per hour worked increases,
worker productivity increases.
Human capital refers to the accumulated knowledge
and skills workers acquired from education
and training or from their life experiences.
Increases in human capital stimulate economic
growth: think of this as your level of "know
how".
Economic growth depends more on technological
change than on increases in capital per hour
worked.
Technology refers to the processes a firm
uses to turn inputs into outputs of goods
and services.
Technological change is an increase in the
quantity of output firms can produce using
a given quantity of inputs.
Most technological change is embodied in new
machinery, equipment, or software.
When implementing technological change, entrepreneurs
are important because they make the crucial
decisions about whether to introduce a new
technology to produce better or lower-cost
products.
Entrepreneurs can also decide whether to allocate
the firm's resources to research and development
that can result in new technologies.
A key requirement for economic growth is that
the government must provide secure rights
to private property.
India has made transition from being a protectorate
territory of England, until 1947 when India
again became an independent Nation.
India has directed their resources to education,
language development, technology enhancement,
and infrastructure.
India has a population of 1.25 billion people,
and in 2014 its GDP per capita was 1,233 USD,
up from 729 USD in 2005 ten years earlier,
yielding a growth rate of 5.40% per year over
this decade.
Can India maintain this growth rate?
Some of the answer to this question relies
on expansion of the current programs with
integration of the rule of law, protection
of property rights, and national support of
risk takers running businesses becoming fully
immersed in globalization.
Maintenance of prolonged high GDP expansion
rates is uncommon, but maintenance of a positive
growth rate is possible.
Potential GDP is the level of real GDP attained
when all firms are producing at capacity.
Potential GDP will increase over time as the
labor force grows, new factories and office
buildings are built, new machinery and equipment
are installed, and technological change takes
place.
From 1949 to 2013, potential Real GDP in the
United States grew at an average rate of 3.2
percent per year.
The actual level of real GDP increased more
or less than 3.2 percent as the economy moved
through business cycles.
During and after the Great Recession of 2007-09,
actual GDP has been striving to reacquire
potential GDP but recovery is still illusive.
We will continue to revisit this scenario
for several chapters yet to come, so keep
your attention on factors showing its change.
[Music]
Economic growth depends on the ability of
firms to expand their operations.
Firms can finance their expansion from retained
earnings, financial markets, and financial
intermediaries.
The financial system is the system of financial
markets and financial intermediaries through
which firms acquire funds from households.
It encompasses the Circular Flow Model giving
life to the interactions of the economy.
Financial markets are markets where financial
securities, such as stocks and bonds, are
bought and sold.
A financial security is a document that states
the terms under which funds pass from the
buyer of the security to the seller.
Stocks are financial securities that represent
partial ownership of a firm.
Bonds are financial securities that represent
promises to repay a fixed amount of money.
Stocks and Bonds are at the core of our commercial
business format.
It is what enables individuals to become economic
players in the business world.
It is also a feature not necessarily shared
with all economies around the world.
Some countries today, report they operate
as a commercial free market economy, when
in reality their interpretation of Free Market
and Stability has a vastly different definition
of what it means to us.
I worked in the newly Independent States of
the Former Soviet Union from the mid-1990s,
through 2002.
I witnessed how the Russian Federation reported
itself to the world as having a well-developed
Financial Market with financial institutions
structured to world-wide standards.
In reality, the Russian Federation since the
breakup of the Former Soviet Union, has operated
more as a Dictatorship then as a Democracy,
with government controlled commerce, not a
free market.
These factors influence the success or failure
of government programs and the free market
of countries to manage their progression through
expansion and contraction cycles.
I discuss contrast between two diverse countries:
the US and Russia.
The difference in Financial Markets becomes
an evident measurement we can consider and
understand.
In the US, financial intermediaries are firms,
such as banks, mutual funds, pension funds,
and insurance companies, that borrow funds
from savers and lend them to borrowers.
The financial system provides three key services
for savers and borrowers:
Risk sharing.
Risk is the chance that the value of a financial
security will change relative to what you
expect.
Liquidity.
This is the ease with which a financial security
can be exchanged for money.
Information, or facts about borrowers and
expectations about returns on financial securities.
Now, we link these concepts into the GDP.
The total value of saving in the economy must
equal the total value of investment.
There are two categories of saving: private
saving by households and public saving by
the government.
We can use some relationships from national
income accounting to understand why total
saving must equal total investment.
We begin with the relationships between GDP
(Y) and its components, consumption (C), investment
(I), government purchases (G), and net exports
(NX).
In an open economy, there is interaction with
other economies in terms of both trading of
goods and services and borrowing and lending.
In a closed economy, there is no trading or
borrowing and lending with other economies.
For simplicity, we develop the relationship
between saving and investment for a closed
economy.
Net exports are set to zero, so:
Y = C + I + G.
If we rearrange this relationship, we have
an expression for investment in terms of the
other variables:
I = Y - C - G.
Private saving is equal to what households
retain of their income after purchasing goods
and services (C) and paying taxes (T).
Households earn income for supplying the factors
of production to firms (Y) and from government
in the form of transfer payments (TR).
We can write an expression for private saving
(SPrivate):
SPrivate = Y + TR - C - T.
Public saving (SPublic) equals the amount
of tax revenue the government retains after
paying for government purchases and making
transfer payments to households:
SPublic = T - G - TR.
Total saving in the economy (S) is equal to:
S = SPrivate + SPublic,
or
S = (Y + TR - C - T) + (T - G - TR)
Or, simplified even more:
S = Y - C - G.
We can conclude that total saving must equal
total investment: S = I.
When the government spends the same amount
that it collects in taxes, there is a balanced
budget.
When the government spends more than it collects
in taxes, there is a budget deficit, which
means that public saving is negative.
When the government runs a budget deficit,
the U.S.
Department of the Treasury sells Treasury
bonds to borrow the money necessary to fund
the gap between taxes and spending.
With less saving, investment must be lower.
When the government spends less than it collects
in taxes, there is a budget surplus.
A budget surplus increases public saving and
the total level of saving in the economy.
A higher level of saving results in a higher
level of investment spending.
The infamous Ebenezer Scrooge horded his money,
and in the Charles Dickens novel, his money
management theme was depicted to make his
last name become a byword for miserliness
and misanthropy.
I urge you to consider his actions from the
macroeconomics perspective.
Scrooge saved his money in a bank.
The bank used his savings to make loans to
households and businesses.
This enabled economic activity facilitated
by his business activities.
Soon, in this class, you will learn of a banking
multiplier that enabled the savings of Scrooge,
held in banks, to expand to borrowers who
spent that money to make more money, which
in turn grows into new business expansion
and on it goes.
When the reformed Scrooge started spending
his capital, his money outlay resulted in
business activity filtering money through
households, who spent that money in the economy
and the economy overall grew.
Whether Scrooge was a saver or spender, his
activities resulted in economic activity for
the fictional 1843 England.
Depending on the position of the Business
Cycle, saving may have more positive impact
than spending, or vice versa.
The market for loanable funds refers to the
interaction of borrowers and lenders that
determines the market interest rate and the
quantity of loanable funds exchanged.
The demand for loanable funds is determined
by the willingness of firms to borrow money
and to engage in new investment projects.
The lower the interest rate, the more investment
projects a firm can profitably undertake.
The supply of loanable funds is determined
by the willingness of households to save and
by the extent of government saving or dissaving.
The higher the interest rate, the greater
the reward for saving and the larger the amount
of funds households will save.
Because both borrowers and lenders are interested
in the real interest rate they will receive
or pay, equilibrium in the loanable funds
market determines the real interest rate.
We draw the demand curve for loanable funds
by holding constant all factors, other than
the interest rate, that affects the willingness
of borrowers to demand funds.
We draw the supply curve by holding constant
all factors, other than the interest rate,
that affect the willingness of lenders to
supply funds.
An increase in the demand for loanable funds
increases the equilibrium interest rate.
As a result, the equilibrium quantity of loanable
funds increases.
A government deficit reduces the level of
total saving in the economy and, by increasing
the interest rate, reduces the level of investment
by firms.
By borrowing the money to finance its budget
deficit, the government will have crowded
out some firms that would otherwise have been
able to borrow money to finance investment.
Crowding out is a decline in private expenditures
as a result of an increase in government purchases.
The effect of government budget deficits and
surpluses on the equilibrium interest rate
is considered by some to be small, partly
because of the importance of global saving
in determining the interest rate.
Consider these figures, to see how events
by the government, whether Fiscal or Monetary,
have effect on the overall economy.
First, we specifically look into Supply and
Demand to consider the US government increasing
the budget deficit.
The US Government borrows money, causing the
Supply of money to become scarce in the marketplace
and the Supply curve shifts to the left.
The new intersection with the Demand for money
results in an increase in the Real Interest
Rate, and a reduction in the amount of loanable
funds available.
This crowds-out businesses wanting to borrow
money to grow their enterprises, and ultimately
the overall economy.
Some will claim that the US Government's borrowing
of money to fund the national deficit is a
minor influence to the interest rate.
But the federal deficit is only part of the
situation, as commercial enterprises are currently
in the position of having access to low rate
loans, but are not currently taking advantage
of them because of systemic Monetary and Fiscal
problems in the US.
Mr. Clifford created ACDC Leadership and presents
his videos to students of Economics as an
extension of what is taught in the classroom.
They are energetic and sometimes entertaining.
In terms of Crowding Out, this video makes
some topical and meaningful interpretations
I encourage you to view.
[Music]
Since at least the early nineteenth century,
the U.S.
economy has experienced business cycles that
consist of alternating periods of expanding
and contracting economic activity.
During the expansion phase of a business cycle,
production, employment, and income are rising.
The period of expansion ends with a business
cycle peak.
Following the business cycle peak, production,
employment, and income decline during the
recession phase of the cycle.
The recession comes to an end with a business
cycle trough, after which another period of
expansion begins.
Although the average American has experienced
a tremendous increase in the standard of living
over the past century, real GDP per capita
did not increase every year.
The US economy has been through several cycles
of expansion and contraction, or growth and
recession.
Look at these cycles of the GDP through time
to recognize expansion cycles shown as increasing
GDP from year to year.
When it reaches a high point and begins the
decline again, that high point is called a
Peak.
It can be difficult to identify the Peak before
the decline starts.
When the cycle drops to its lowest point and
begins recovery, the low point is called the
Trough.
Stylistically, it shows the full business
cycle pattern from peak to trough and back
into a recovery cycle.
Moving beyond the idealized smooth lines,
we consider the Great Recession of 2007-09.
Notice on this chart expansion of the GDP
was still evident in 2006-07, only identified
as the Peak when in late 2007 GDP started
to fall.
The Recession was declared "over" in 2009
because the tough was indicated.
But it did not mean the Recession was fully
recovered, it is when the recovery process
started.
We were well into 2011 before the level of
economic growth was achieved to pre-recession
levels.
The federal government does not officially
decide when a recession begins and when it
ends.
Most economists accept the decisions of the
Business Cycle Dating Committee of the National
Bureau of Economic Research.
The NBER is fairly slow in announcing business
cycle dates because it takes time to gather
and analyze economic statistics.
Recessions are generally announced only after
recovery has started, meaning the recession
has officially ended.
Firms that expand during a contraction in
the economy are taking a long-term view of
the business growth, and making strategic
plans to buy-low and hopefully be in position
to sell when the economy expands again.
This has been practiced by several firms,
many with successful outcomes.
If the expansion cycle starts before company
funds are exhausted, then advantageous growth
is possible.
The expansion cycle following the 2007-09
Recession has been problematic as recovery
is slow to show the country's expansionary
economic trends.
People often ask economists for predictions
about the future of the macroeconomy.
Forecasts about the economy's future, even
from experts, are not unlike a football writer's
prediction of who will play in the next Super
Bowl.
The prediction can seem well-reasoned and
logical, but it is hardly foolproof.
Certain statistical series tend to move in
a similar way through all business cycles.
Knowledge of these series and their tendencies
can provide some insight into future business
cycle movements.
The Conference Board, a not-for-profit organization,
establishes monthly updates of what is called
the "index of leading economic indicators".
The index is a weighted average of 10 statistical
series that usually lead, or begin turning
upward or downward, before the overall economy
does.
Because not all the components of the index
turn before the business cycle hits a peak
or a trough, movements in the index are more
reliable than the movement in any one of its
components.
The leading US index predicts the six-month
growth rate of the coincident index.
In addition to the coincident index, the models
include other variables that lead the economy:
state-level housing permits, state initial
unemployment insurance claims, delivery times
from the Institute for Supply Management manufacturing
survey, and the interest rate spread between
the 10-year Treasury bond and the 3-month
Treasury bill.
On this figure, recognize the series peaked
in December 2003, fell, then again peaked
in August 2005 still 3 years before the trough
was reached in January 2009.
These indicators can give an early warning
to changes in the current cycles.
Characteristics of businesses making Durable
versus Nondurable goods can have a large impact
on their income and employment levels.
Consider the Nondurable good supplier, like
a food store.
These goods are not as significantly affected
by business cycles as are Durable Good providers,
except in respect to which foods are selected.
Take for instance, the demand for hamburger.
When money becomes tightened, the average
household will still purchase the hamburger
because it is a comparatively low-cost item,
and it is a staple needed for their family.
But consider the demand for fresh lobster
when the recession unfolds and money is tight,
households will divert demand for lobster
in favor of more hamburger, or other lower
cost items.
This same process is applied to Durable goods,
those products with a useful life of 3 or
more years.
Typically, households reduce their demand
for Durable goods during a recession, waiting
until finances have recovered enough to justify
the higher ticket items.
The household appliance industry felt the
2007-09 contraction when it hit, and for several
years after recovery started.
In fact, as of 2016 many Durable Goods producers
are still trying to reacquire the sales level
seen during the expansion.
Among the most reliable of the leading indicators
is an index of prices for 500 common stocks.
Investors want to buy stock shares when their
prices are relatively low and sell shares
when prices are relatively high.
During a recession, stock prices fall due
to sluggish sales and profits.
Interest rates are relatively low during the
last months of recessions because of reduced
demand for investment.
In choosing between buying bonds and stocks,
investors will favor stocks when: (a) stock
prices have fallen to a point where there
is a strong possibility of future capital
gains, and (b) the opportunity cost of buying
stocks the interest rate on bonds is low.
Prices of common stocks will usually begin
to rise during the late stages of a business
cycle, before a business expansion begins.
As the economy moves near full employment
during an expansion, the situation is reversed.
Strong demand for consumer goods and investment
will drive prices and interest rates upward.
At some point, investors sell stocks to realize
capital gains and buy bonds, rather than stocks,
to take advantage of high interest rates.
The downward movement in stock prices will
usually begin before a recession begins.
These are some of the indices we watch to
give indication of how the economy is performing.
Before 1950, real GDP went through greater
year-to-year fluctuations than it has since.
By the early twenty-first century, some economists
had begun referring to the absence of severe
recessions in the United States as the "Great
Moderation". This view was questioned with
the recession of 2007-09, which lasted 18
months, the longest of the post 1950 period.
The US economy has gone through several changes
in the past century, some because of Globalization's
influences and some because of significant
advances in technology.
These changes have modified how people interact
in the marketplace.
We have seen an increase in the importance
of services in our economy.
These are as basic as the expansion of fast
food restaurants serving as a staple for many
household's meals.
These are nondurable goods and they represent
a significant balance of the economy, so their
decline was not as severe in the Great Recession
as they would have been if manufacturing jobs
held the highest balance of jobs in our labor
force as they did in 1955.
Today, unlike 1955, most employees are eligible
for unemployment insurance, softening the
blow dealt by a recession and lost jobs.
It does not remove hardship on households,
but it softens the extreme difficulties caused
when a job is lost because of an economic
contractionary period.
The ability of elected officials to positively,
or negatively influence the economy is debated
by many people.
There are policies Presidents and Congress
can implement to lengthen expansionary periods,
and to shorten contractionary periods.
In future chapters we will talk of Monetary
and Fiscal Policies to influence these factors.
On the face of it, some of the best policies
any government can take include policies and
laws to enable businesses to succeed, and
encourage their financial success to employ
US residents.
[Music]
