ECON Chapter 17

In the third quarter of 2019, real potential output was $18,964 billion while real GDP was $19,121 billion. What is the output gap?

0.83%

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. Links Unemployment and GDP

The Unemployment Rate

The unemployment rate is a snapshot of the strength of the labor market. It's a measure of excess capacity.

Unemployment and Business Cycles

Unemployment rises substantially in a recession. Unemployment often continues to rise for a period after the recession is officially over.

lagging indicators

Variables that follow the business cycle with a delay are called

leading indicators

Variables that tend to predict the future path of the economy are called

positive output gap

actual output is above potential output: the economy is using its resources with intensity

Business cycles

are short-term fluctuations in economic activity

Annualized rates

data converted to the rate that would occur if the same growth rate had occurred throughout the year.

Seasonally adjusted

data stripped of predictable seasonal patterns. Removing the predictable influences allows us to spot changes in the underlying trends

negative output gap

occurs when actual output is below its potential: there are idle resources, and it typically corresponds with high unemployment.

You predict that the output gap will decline from 1% to -1%. If the current unemployment rate is 3.5%, you predict the unemployment rate to

rise to 4.5%.

Changes

tell you where the economy is going, we can look at GDP growth rates to tell us if the economy is expanding or contracting

Levels

tell you where the economy is, We can look at the level of GDP relative to potential output to see where the economy is

Real GDP

the broadest measure of economic activity. It measures total production, total spending, and total income across the whole economy

Potential output

the level of output that occurs when all resources are fully employed. Long-run economic growth reflects growth in an economy's potential output

Peak

A high point in economic activity

Business Cycles Are Not Cycles

No two business cycles are the same, the economy's fluctuations are anything but predictable, thus, the word cycle is misleading. Business cycles are persistent. The economy is likely to perform the same this year as it did last year.

Nonfarm Payrolls

track how many jobs are created each month. They provide an early and reliable look at how quickly the economy is creating jobs

Suppose a report picked up by many major news outltes argues that the United States is quickly heading into a recession. As a result, Bert's family, as well as many other like-minded families and individuals, reduces their spending and increase their savings. As a result of this behavior

the economy is actually harmed, since there is a sharp decease in consumer spending.

Trough

A low point in economic activity

Recession

A period of declining economic activity. Recessions are short and sharp.

Expansion

A period of increasing economic activity. Expansions are long and gradual.

Business Confidence

Business confidence tells you what managers are planning. When it starts to fall, a recession might be on the horizon

Real GDI

Calculated by adding up total income, GDI often flashes warning signs for the economy sooner than GDP does

Initial Unemployment Claims

Initial unemployment claims tell you how many people lost their jobs and applied for unemployment the previous week. They offer a timely insight into what is happening

output gap

The difference between actual and potential output, measured as a percentage of potential output: Actual Output - Potential Output / Potential Output * 100