Unit 13: Economic Fluctuations & Unemployment Flashcards
Recession
Period where there are 2+ consecutive troughs in a business cycle/ Period where output is lower than usual
Okun’s Law
Explains the negative relationship between GDP growth & unemployment
Ways of measuring GDP
Spending, Income, Production
GDP is defined to include imports & exports as:
- the value added of domestic production/ expenditure on domestic production
- income due to domestic production
Consumption
Expenditure on goods and services. Can be short-lived or long-lives (consumer durables)
Investment
Spending by firms on new capital, investment and building structures, including residential housing
Government spending
Expenditure on consumption and investment done by the government/public individuals
Exports
Domestically produced goods and services which are purchased by households/firms/governments in foreign countries
Imports
Goods produced in a foreign country that are purchased by the domestic economy
Percentage change in GDP
= sum of (% change in each component * share of each component in GDP)
Self-insurance
Saving by a household (usually in times of very high income) to maintain consumption when there is a fall in income. “saving for a rainy day”
Co-insurance
When households help each other maintain consumption in the event that a particular household encounters a shock. Involves altruism
3 suggestions of consumption-smoothing model
- decide if shock is temporary or permanent
- if permanent: adjust long-run consumption accordingly
- if temporary: nothing changes, as you were
Credit-constraint
Restricts a household’s ability to borrow. Most common in low-income households
Weakness of will
Characteristic of human behaviour that prevents people from following through on their plans
Limited co-insurance
When households are unable to receive aid from other households. Usually due to isolation, lack of networks
Vicious investment cycle
- low expectations of future demand
- low capacity utilization rate
- little incentive to invest & hire
- low spending by workers & firms
Virtuous investment cycle
- firms invest & hire
- higher spending by workers & firms
- higher demand for goods
- high capacity utilization rate
Inflation
Increase in the general price level of goods and services in the economy
Deflation
Decrease in general price level of goods and services in the economy (cf disinflation)
Disinflation
Decrease in inflation rates (cf deflation)
CPI
Measure of general price level of goods and services paid by consumers - “price of basket of goods”
GDP
Measure of price level of all DOMESTICALLY produced goods and services
