B5-Economic Concepts Flashcards
Economic Concepts
Changes in Economic and Business Cycles
Business Cycles
Business cycles refer to the rise and fall of economic activity relative to its long-term growth trend.
Economic Concepts
Changes in Economic and Business Cycles
Business Cycles
Macroeconomics
Macroeconomics is the study of the economy as a whole. It examines the determinants of national income, unemployment, inflation, and how monetary and fiscal policies affect eocnomic activity.
Economic Concepts
Changes in Economic and Business Cycles
Business Cycles
Measuring Econ Activity-Gross Domestic Product
GDP is the total market value of all final goods and services produced within the borders of a nation in a particular period.
Note that GDP includes all final goods and services produced by resources within a country regardless of who owns the resources. Thus, US GDP includes the output of foreign owned factories in the US but excludes the output of US owned factories operating abroad-(GNP includes this)
Economic Concepts
Nominal GDP vs Real GDP
Nominal GDP
Not adjusted for inflation. Measures value of all goods and services in prices prevailing at the time of production. Current prices.
Real GDP
Adjusted for inflation. Measures the value of all goods and services in constant prices. Real GDP is adjusted to account for changes in the price level. Most commonly used measure of economic activty and national output.
Economic Concepts
Price Index (GDP Deflator)
Removes the impact of inflation. it is the price index used to calculate real GDP. It is a price index for all goods and servcies included in GDP.
Real GDP = Nominal GDP x 100
GDP Deflator
Economic Concepts
Changes in Economic and Business Cycles
Summary Composition of Business cycles
- Expansionary Phase*
- Peak*
- Contractionary Phase*
- Trough*
- Recovery Phase*
Expansionary Phase
Characterized by rising economic acitivity (Real GDP) and growth. Econ activity rising above its L-T growth trend.
“GDP increases, Profits Increase, Unemployment Decreases, Prices Increase”
Peak
High point of econ activity. It marks the end of an expansionary phase and the beginning of a contractionary phase in econ activity. Profis are at their highest levels. Firms also are likely to face capacity constraints and input shortages.
Contractionary Phase
Falling economic activity and growth and follows a peak.
GDP decreases, profits decrease, unemployment increases.
Trough
Low point of econ activity. Profits at lowest levels. Firms experience significant excess production capacity, leading them to reduce workforce and cut costs.
Recovery Phase
Follows a trough. Econ activity begins to increase and return to its long term trend. Firm’s profits typically begin to stabilize as demand for goods and services begins to rise.
Economic Concepts
Recession
Contractionary phase: GDP decreases, profits decrease, and unemployment increases.
A recession occurs when the economy experiences negative real economic growth (declines in national output). Economists define a recession as two consecutive quarters of falling national output.
Economic Concepts
Depressesion
Depression is a very severe recession. It is characterized by a relatively long period of stagnation in business activity and high unemployment rates. Many businesses go out of business during this period.
Economic Concepts
Economic Indicators
- Leading Indicators*
- Lagging Indicators*
- Coincident Indicator*
are statistics that historically have been highly correlated with economic activity.
Leading Indicators
tend to predict economic activity.
Lagging Indicators
tend to follow economic activity. Economists measure lagging indicators to confirm or dispute previous forecasts and the effectiveness of policy directives.
Coincident Indicators (Industrial production is an example)
change at approx the same time as the whole economy, thereby proving info about the current state of the economy.
Economic Concepts
Reasons for Fluctuations
Economists generally agree that business cycles result from shifts in aggregate demand and or aggregate supply.
Aggregate demand and supply curves can be used to illustrate the relationship between a country’s output (real GDP) and price level (GDP deflator). They are also used to examine the causes of economic fluctuations.
Economic Concepts
Aggregate Demand Curve
Illustrates the maximum quantity of all goods and services that households, firms, and the government are willing and able to purchase at any given price level. Shows relationship between total output (real GDP) of the economy and the price level.
X axis-real GDP
y-axis is the price level
Economic Concepts
- Aggregate Supply Curve*
- Short Run*
- Long Run*
- Agg. Supply Curve*-maximum quantity of all goods and services producers are willing and able to produce at any given price level.
- Short Run Agg. Supply Curve-*upward sloping, illustrating that as the price level rises, firms are willing to produce more goods and services
- Long-Run Agg. Supply Curve-*vertical, illustrating that in the long run, if all resources are fully utilized, output is determined solely by the factors of production.
Economic Concepts
Potential GDP
Potential GDP-level of real GDP (national output) that the economy would produce if its resources (capital and labor) were fully employed.
When Real GDP is below potential level of output, typically experiening a recession and when above, typically economy experiencing expansion.
Economic Concepts
Y*
Intersection of short-run aggregate supply curve (SRAS), aggregate demand (AD) curve and long-run aggregate supply curve (LRAS).
Economic Concepts
Aggregate Demand, Aggregate Supply, and Economic Fluctuations
Reduction in Demand
Increase in Demand
Reduction of Supply
Increase in Supply
Reduction in Demand-GDP decreases, profits decrease, unemployment inc, prices decrease
Increase in Demand-GDP inc, Profits inc, unemployment dec, and prices inc.
Reduction of Supply-GDP dec, profits dec, unemployment inc, and prices inc
Increase in Supply-GDP inc, profits inc, unemployment dec, prices dec
Economic Concepts
Factors that cause shifts in Aggregate Demand
(TWICEG)
Taxes, Wealth, Interest Rates, Consumer Confidence, Exchange Rates, and Gov’t Spending
- Changes in Wealth
- increase in wealth(right shift)-AD inc, GDP inc, unemployment dec, and prices inc
- decrease in wealth(left shift)-AD dec, GDP dec, unemployment inc, and prices dec
- Changes in Real Interest Rates
- Increase in Real Int Rates-save more and borrow less, thus aggregate demand is going to go down bc less cash on hand to spend. AD dec, GDP dec, unemployment inc, and prices dec (bad for overall economy)
- Decrease in Real Int Rates-(positive for economy)-people tend to save less and consumers borrow more and spend more. AD inc, GDP inc, unemployment dec, and prices inc
- Changes in expectations about the Future Economic Outlook (consumer confidence)
- confident econ outlook-AD inc, GDP inc, unemployemnt dec, prices inc
- uncertain ““-AD dec, GDP dec, unemploy-inc, prices dec
- Exchange Rates
- Appreciated Currencies (strong currencies-$ becomes more expensive relative to foreign currencies)-its good will become relatively more expensive for foreigners(less exports), while foreign goods will become relatively less expensive for its residents (more imports). AD dec, GDP dec, unemployment inc, prices dec. Negative for economy as a whole.
- Depreciated Currencies (weak currencies- $ less expensive relative to foreign currencies)-its goods will become relatively less expensive for foreigners (more exports), while foreign goods will become more expensive for its residents (less imports). AD inc, GDP inc, unemployment dec, prices inc.
-
Changes in Government Spending
- Inc in Gov’t spending-AD inc, GDP inc, unemploy dec, prices inc
- Dec in Gov’t spending-AD dec, GDP dec, unemploy inc, prices dec
- Changes in Consumer Taxes
- Inc in consumer taxes-AD dec, GDP dec, unemployment inc, prices dec
- Dec in consumer taxes-AD inc, GDP inc, unemployment dec, prices inc
Economic Concepts
Graphs
When economy is in a recession what does the gov’t do?
Gov’t can stimulate the economy by increasing gov’t spending or decreasing taxes (or both), shifting the aggregate demand curve to the right and causing national output (real GDP) to rise.
The goal is to push the economy back to LR potential output.
Economic Concepts
Graphs
When economy is in a expansionary phase and the gov’t wants to contract the economy, what does the gov’t do?
the gov’t can contract the economy by decreasing gov’t spending or increasing taxes (or both)., shifting the agg demand curve to the left and causing national output to fall.
Economic Concepts
Multiplier Effect
What is it and whats the formula?
refers to the fact that an increase in consumer, firm, or gov’t spending produces a multiplied increase in the level of economic activity. For example, a $1 inc in gov’t spending results in agreater than $1 increase in GDP.
The multiplier effect results from the marginal propensity to consume (MPC). The MPC is the change in consumption due to an $1 increase in income. B/c people tend to save part of their income, the MPC is typically less than one.
Formula
multiplier = 1 / (1 - MPC) = 1 / MPS (save)
Economic Concepts
Factors that Shift Short-Run Aggregate Supply (SRAS)
- Changes in Input (Resource) Prices
- Increase in Input Prices-AS dec, GDP dec, unemployment inc, prices inc-bad for economy
- Decrease in Input Prices-AS inc, GDP inc, unemployment dec, prices dec-good for economy
- Supply Shocks
- Supplies are plentiful-AS inc, GDP Inc, unemployment dec, prices dec-good for economy
- Supplies are curtailed-AS dec, GDP dec, unemployment inc, and prices inc-bad for economy
