Unit 13 - Economic fluctuations and Unemployment Flashcards
What type of relationship does Business cycles and Unemployment have
Causal relationship
What is the definition of Business Cycle
Alternating periods of positive and negative growth rates
What is a Recession
A period when output is declining or below its potential / normal level
What is Okun’s law
When a country’s output growth is high, unemployment tends to decrease
What are 3 equivalent ways of measuring GDP
Total domestic production (measured as value added)
Total spending on domestic products
Total domestic income
What is Government spending and what does it include
Government expenditure on goods and services. It does not include:
1. Government transfers to avoid double-counting, nor
2. Interest payments on the government debt.
How do we calculate Net Exports (trade balance)
Exports (X) - Imports (M)
What is the equation for Total Income (GDP)
GDP (Y) = Consumption (C) + Investment (I) + Government Spending (G) + (X - M)
What is a Shock and what are the two types
An unexpected event that causes GDP to fluctuate
Idiosyncratic - good or bad fortune strikes the household
Aggregate - good or bad fortune strikes the entire economy
What are two strategies to deal with household shocks
What do these strategies highlight
Self-insurance - saving and borrowing. Other households are not involved
Co-insurance - support from social network or government.
(1) Households prefer to smooth consumption, and
(2) They are (to a degree) altruistic
How does consumption soothing help against Shock
It acts as a stabilising factor, shocks are absorbed as spending decisions are based on the long-term
What is weakness of will
Inability to commit to beneficial future plans such as saving money for a known future event
What does business confidence do and what are the benefits
Coordinates firms to invest at the same time and it allows cycles to be self-reinforcing
What are limitations to consumption smoothing
Credit-constraints
Weakness of will
Limited co-insurance
Limitations to smoothing means more susceptible to business cycles, shocks, booms etc.
