business cycle Flashcards
what is a business cycle?
short-term fluctuations in economy activity
what is potential output?
the level of output that occurs when all resources are fully employed
what is the output gap?
the difference between actual and potential output, measured as a percentage of potential output
what is the formula for output gap?
( (actual output - potential output) / potential output ) * 100
when does a negative output gap occur?
when actual output is below its potential: there are idle resources, and it typically corresponds with high unemployment
when does a positive output gap occur?
when actual output is above potential output: the economy is using its resources with intensity
what are the phases of the business cycle?
peak: a high point in economic activity
trough: a low point in economic activity
recession: a period of declining economic activity
expansion: a period of increasing economic activity
explain the difference between levels vs. changes?
levels tell us where the economy is (look at level of GDP relative to potential output to see where economy is)
changes tell us where the economy is going (look at GDP growth rate to tell us if the economy is expanding or contracting)
what are the characteristics of a recession?
short and sharp
what are the characteristics of an expansion?
long and gradual
how do you predict how the economy will perform?
business cycles are persistent
the economy is likely to perform the same this year as it did last year
what is a leading indicator?
variables that tend to predict the future path of the economy
what are lagging indicators?
variables that follow the business cycle with a delay
what is Okun’s Rule of Thumb?
for every percentage point that actual output falls below potential output, the unemployment rate increases around half a percentage point
what is seasonally adjusted data?
seasonally adjusted data are stripped of predictable seasonal patterns
why is data seasonally adjusted?
removing the predictable influences allows us to spot changes in the underlying trends
what are annualized rates?
annualized rates are data converted to the rate that would occur if the same growth rate had occurred throughout the year
what is a revision?
update to earlier estimates
what are the top 10 economic indicators?
- real GDP
- real GDI
- nonfarm payrolls
- unemployment rate
- initial unemployment claims
- business confidence
- consumer confidence
- inflation rate
- employment cost index
- stock market
describe indicator: real GDP
- broadest measure of economic activity
- measures total production, total spending, and total income across the whole economy
describe indicator: real GDI
- gross domestic income is calculated by adding up total income
- GDI often flashes warning signs for the economy sooner than GDP does
describe indicator: nonfarm payrolls
- track how many jobs are created each month
- provide an early and reliable look at how quickly the economy is creating jobs
describe indicator: unemployment rate
- snapshot of the strength of the labour market
- measure of excess capacity
describe indicator: initial unemployment claims
- tells you how many people lost their jobs and applied for unemployment the previous week
- offer a timely insight into what is happening
describe indicator: business confidence
- tells you what managers are planning
- when it starts to fall, a recession might be on the horizon
describe indicator: consumer confidence
- tells you what consumers are thinking
- it rises when consumers are upbeat about the economy
describe indicator: inflation rate
- tells you what’s happening with prices
describe indicator: employment cost index
- tells you how fast wages and benefits are rising
- rising compensation is a sign of a healthy economy
describe indicator: stock market
- tells you about the future expected profits of businesses
