Changes in Economic and Business Cycles Flashcards
Business Cycles
refer to the rise and fall of economic activity relative to its long-term growth trend
characterized by fluctuations
part of macroeconomics
Macroeconomics
study of the economy as a whole
examines the determinants of national income, unemployment, inflation, and how monetary and fiscal polices affect economic activity
Gross Domestic Product (GDP)
most common measure of the economic activity or output of an economy
Total MV of all final goods and services produced within the borders of a nation in a particular period
EXCLUDES final goods and services that have been resold
INCLUDES foreign owned factory output, but EXCLUDES US-owned factories operating abroad
Nominal GDP
NOT adjusted for inflation
measures the value of all final goods and services in at current prices
Real GDP
measures the value of all final goods and services in constant prices. Adjusted for changes in price level such as inflation
Price Index
used to calculate real GDP
GDP deflator
Real GDP = (Nominal GDP/GDP Deflator) X 100
Calculate Change in Real GDP
(Current year GDP/Past Year GDP) - 1
Real GDP per Capita
real GDP divided by the population
used to compare standard of living or economic growth
Economic growth
increase in real GDP per capita over time
Expansionary Phase
rising economic activity and growth
firms likely to increase workforce, and price of goods and services to rise
Increase in:
GDP
Profits
Prices
Decrease in:
unemployment
Peak
high point of economic activity
marks end of expansionary phase
firms face capacity constraints and input shortages
Contractionary Phase
falling economic activity and growth following a peak
Increase in:
unemployment
Decrease in :
GDP
Profits
Trough
low point of economic activity
firms experience excess production, reducing workforces, and cutting costs
Recovery Phase
follows a trough
economic activity begins to increase and return to its long-term growth trend
firms profits begin to stabilizes and demand begins to rise
Recession
economy experiences negative real economic growth
two consecutive quarters of falling national output
Increase in:
unemployment
Decrease in:
GDP
Profits
Depression
very severe recession
relatively long period of stagnation in business activity and high unemployment rates
firms will go out of business
Economic indicators
gathered by the Conference Board, statistics that historically have been highly correlated with economic activity
Leading Indicators
Change before economy starts to follow a trend:
- avg new unemployment claims
- building permits for residence
- avg, length of workweek
- money supply
- standard and poor’s 500 stock index
- orders for gods
- price changes of materials
- index of consumer expectations
- interest rate spread
- index of supply deliveries
Lagging Indicators
follows economic activity. Change after economic trend has started:
- prime rate charged by banks
- avg. duration of unemployment
- commercial and industrial loans outstanding
- consumer price index for services
- consumer debt-to-income ratio
- changes in labor cost per unit of mfg output
- inventories to sales ratio
Coincident Indicators
occur at same time as the economy:
- industrial production
- manufacturing and trade sales
- GDP
- personal incomes less transfer payments
Aggregate Demand Curve
max quantity of all goods and services that households, firms, and the govt are willing and able to purchase at any given price level
Aggregate Supply Curve
maximum quantity of all goods and services producers are willing and able to produce at any given price level
Short Run AS curve
upward sloping
as prices rise, firms are willing to produce more goods and services
Long Run AS curve
vertical
