The Wild Ride of Economic Cycles | Cash Course: Economics | PragerU Kids

Before we start this episode, here's a quick preview of what's coming. Ready to take charge of your finances and master the art of money management? Cash Course is your ultimate guide to financial literacy from personal budgeting to macroeconomics. Check out more episodes at prageru.com. When you look at an economy, the ups and downs may feel random. Booms, busts, and everything in between. No, folks, I'm not talking about the game of Monopoly. I'm talking about where the real money is in the economy. Reward, risk, hold on your wallets. This is going to be a wild ride, folks. But did you know there's actually a pattern to it all? If you pay close attention, you'll notice that the economy goes through phases of expansion. Booyah. I'm loving it. Companies are hiring, people are spending, and new products are coming out. Time to buy bye-bye. And phases of contraction. Boo na. It's a house of pain out there. Spending is down. Consumers, investors, my mom, don't even talk about jobs. It's time to sell, sell, sell. These phases are also called the economic or business cycle. It comes in four stages: expansion, peak, contraction, and trough. It's difficult to predict when a phase will start or stop, but like the four seasons, there are signs that indicate when one is about to end and another begin. When it cools down and the leaves fall, winter is coming. When it comes to an economy, there are several indicators to help us know where we are. But the most common one is the GDP. GDP. GDP. That's the value of all the goods and services an economy produces over a given time. Also known as gross domestic product. That's right. I know. When GDP trends rise, that means the economy is producing at a greater level. When GDP falls, the economy is producing at a lower level. Let's take a closer look at the four phases. In the expansion phase, production is increasing and people are spending money. Rising GDP growth means there's more demand for goods and services. Unemployment trends lower because companies increase hiring. It's also when investors tend to pour money into new products like this smidg spinner, our sponsor for today's show. Expansion is awesome. When people spend more money on goods and services, that can lead to inflation. But all that growth doesn't last forever. When an expanding economy reaches its highest level of growth, it unlocks a new phase, the peak. This phase can be very short. It's when growth slows and eventually stops. Smid spinners. Ow. Time for a new phase. I guess contraction comes after peak production. When a growing economy turns a corner and starts shrinking, production slows, resulting in lower GDP and a slowing demand for goods and services. This can lead to lower employment and less consumer spending. Hold on your seats and watch out. Recession ahead. If an economy stays in the contraction phase for more than 6 months, then it's a recession. A whole year of contraction means an economy is in a depression. But in free markets where economies are allowed to adjust, the contraction phase has a limit, the trough. That's when contraction slows and eventually stops. Inflation is low and unemployment is at its highest. This is usually when production starts growing again. Come on, you guys. We need a new phase. Come on. It doesn't quite work like that. We can't force an economic phase to start or stop, but there are outside events that can shock the economy. These shocks can be positive or negative. For example, say a business is selling socks. A positive shock could be a celebrity wearing them and causing everyone to want a pair, leading to increased production. A negative shock could be another celebrity trashing the product, causing demand to tank and forcing production to slow. Shocks can also come in the form of political changes, extreme weather, or technological breakthroughs. For example, unusually good weather leading to increased crop production, resulting in surplus supply and lower prices. This increases consumer spending, resulting in a positive shock to the economy. An example of a negative shock is the Dust Bowl of the 1930s when dust storms across the Great Plains destroyed farms and stopped crop production, causing serious economic decline. Too many shocks. I can't take it anymore. Where's the government? Where's the government? Well, the government can sometimes do small things to keep the ups and downs from getting out of control. But more often, sizable intervention can make things worse due to government inefficiency and delays. Your wait time is currently 390 hours. Shocks might sound scary, and recessions are hard on everyone, but there's no stopping the economic cycle any more than stopping the weather. There will always be uptimes of expansion and downtimes of contraction. Knowing the economic phases and understanding the signs and patterns is one way to use your time and resources a little more wisely. Buy No, wait. Sell. Sell. Sell. Is this a wild ride or what? Booyah. Huh? Now we're talking smid spinners. You got to buy them. They're hot. No, wait. They're not. So, sell. [Music] Watch more at pragerukids.com. And parents, don't forget to subscribe.