econ terms weeks 10-14

GDP Equation

%change real gdp=([new real gdp- old real gdp]/old real gdp)*100

excess reserves

Excess reserves represent any vault cash that banks hold that is in excess of the required reserves amount. Banks typically have low incentive to maintain excess reserves because cash earns the rate of return of zero and can lose value over time due to inflation. Thus, under normal circumstances, banks minimize their excess reserves and lend out money to clients rather than holding cash in their vaults. Bank reserves decrease during periods of economic expansion and increase during recessions. Required Reserves

GDP

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well. GDP includes all private and public consumption, government outlays, investments and exports minus imports that occur within a defined territory. Put simply, GDP is a broad measurement of a nation's overall economic activity. Gross domestic product can be calculated using the following formula: GDP = C + G + I + NX where C is equal to all private consumption, or consumer spending, in a nation's economy, G is the sum of government spending, I is the sum of all the country's investment, including businesses capital expenditures and NX is the nation's total net exports, calculated as total exports minus total imports (NX = Exports - Imports). BREAKING DOWN 'Gross Domestic Product - GDP' GDP is commonly used as an indicator of the economic health of a country, as well as a gauge of a country's standard of living. Since the mode of measuring GDP is uniform from country to country, GDP can be used to compare the productivity of various countries with a high degree of accuracy. Adjusting for inflation from year to year allows for the seamless comparison of current GDP measurements with measurements from previous years or quarters. In this way, a nation's GDP from any period can be measured as a percentage relative to previous years or quarters. When measured in this way, GDP can be tracked over long spans of time and used in measuring a nation's economic growth or decline, as well as in determining if an economy is in recession. GDP's popularity as an economic indicator in part stems from its measuring of value added through economic processes. For example, when a ship is built, GDP does not reflect the total value of the completed ship, but rather the difference in values of the completed ship and of the materials used in its construction. Measuring total value instead of value added would greatly reduce GDP's functionality as an indicator of progress or decline, specifically within individual industries and sectors. Proponents of the use of GDP as an economic measure tout its ability to be broken down in this way and thereby serve as an indicator of the failure or success of economic policy as well. For example, from 2004 to 2014 France's GDP increased by 53.1%, while Japan's increased by 6.9% during the same period. Criticisms of GDP There are, of course, drawbacks to using GDP as an indicator. For example, the previous example omits the fact that France's GDP climbed to an all time high in 2008 and subsequently dropped. Critics of GDP add that the statistic does not take into account the underground or unofficial economy: everything from black market activity to under-the-table employment, as well as other transactions that, for various reasons, are not reported to the government. Others criticize the tendency of GDP to be interpreted as a gauge of material well being, when in reality it serves as a measure of a nation's productivity, which are not necessarily unrelated. There are three primary methods by which GDP can be determined. All, when correctly calculated, should yield the same figure. These three approaches are often termed the expenditure approach, the output (or production) approach, and the income approach. The expenditure approach measures the total sum of all products used in developing a finished product for sale. To return to the example of the ship, the finished ship's contribution to a nation's GDP would here be measured by the total costs of materials and services that went into the ship's construction. This approach assumes a relatively fixed value of the completed ship relative to the value of these materials and services in calculating value added. The production approach is something like the reverse of the expenditure approach. Instead of exclusively measuring input costs that feed economic activity, the production approach estimates the total value of economic output and deducts costs of intermediate goods that are consumed in the process, like those of materials and services. Whereas the expenditure approach projects forward beyond intermediate costs, the production approach looks backward from the vantage of a state of completed economic activity. The third approach, the income approach, is something of an intermediary between the two aforementioned approaches. It measures GDP by way of totaling domestic incomes earned at all levels and by using gross income both as an indicator of implied productivity and of implied expenditure. GDP calculated in this way is sometimes referred to as gross domestic income (GDI), or as gross national income (GNI) when incorporating income received from overseas. Read more: Gross Domestic Product (GDP) http://www.investopedia.com/terms/g/gdp.asp#ixzz4h0GxLlDL Follow us: Investopedia on Facebook

inflation vs unemployment

The inverse correlation between inflation and unemployment should be intuitively easy to grasp. Based on the fundamental principles of supply and demand, inflation ought to be low when unemployment is high, and vice versa. However, this relationship is more complicated than it appears at first glance, and has broken down on a number of occasions over the past 45 years. As inflation and (un)employment are two of the most important economic variables that affect us in our daily lives, it is important to gain an understanding of their association. Supply and Demand of Labor Let's consider wage inflation, i.e. the rate of change in wages, as a proxy for general inflation in an economy. When unemployment is high, the number of people willing to work significantly exceeds the number of jobs available, which means that the supply of labor is greater than the demand for it. As a result, there is little need for employers to "bid" for the services of employees by paying higher wages. In this scenario, wages will remain stagnant and wage inflation would be literally non-existent. Now consider the reverse situation where unemployment is low, which means that the demand for labor (by employers) exceeds supply. In such a tight labor market, employers will not hesitate to offer higher wages to attract employees, leading to rising wage inflation. Phillips Curve A.W. Phillips was one of the first economists to present compelling evidence of the inverse relationship between unemployment and wage inflation. Phillips studied the relationship between unemployment and the rate of change of wages in the United Kingdom over a period of almost a full century (1861-1957), and discovered that the latter could be explained by (a) the level of unemployment, and (b) the rate of change of unemployment. Phillips hypothesized that when demand for labor is high and there are few unemployed workers, employers can be expected to bid wages up quite rapidly. However, when demand for labor is low and unemployment is high, workers are reluctant to accept lower wages than the prevailing rate, and as a result, wage rates fall very slowly. A second factor that affects wage rate changes is the rate of change of unemployment. If business is booming, employers will bid more vigorously for workers , which means demand for labor is increasing at a fast pace (i.e. percentage unemployment is decreasing rapidly), than they would if demand for labor is either not increasing (i.e. percentage unemployment is unchanging) or is only increasing at a slow pace. Phillips' idea that the relationship between unemployment and rate of change of wages was likely to be highly non-linear was proved by scatter diagrams of these two variables, plotted for three separate periods from 1861 to 1957. (See "Examining the Phillips Curve").The curves depicting the relationship between general price inflation -- rather than wage inflation -- and unemployment came to be known as "Phillips Curves." The data supporting wage inflation can easily be extended to general price inflation.Given that the cost of wages and salaries is a major input cost for business, rising wages will lead to higher prices for products and services in an economy, which is the basic definition of inflation. Implications of the Phillips Curve Low inflation and full employment are the cornerstones of monetary policy for the modern central bank. For instance, the Federal Reserve's monetary policy objectives are maximum employment, stable prices and moderate long-term interest rates. The tradeoff between inflation and unemployment led economists to posit that Phillips Curves could be used to fine-tune monetary or fiscal policy options so as to meet desired economic outcomes. Since a Phillips Curve for a specific economy would show an explicit level of inflation for a specific rate of unemployment and vice versa, it should be possible to aim for a balance between desired levels of inflation and unemployment. Figure 1 shows the U.S. consumer price index (CPI) and unemployment rates in the 1960s. Assuming this relationship held, if the goal was to lower unemployment from 6% to 5%, for example, the concomitant rise in the level of inflation (from monetary or fiscal stimulus required to drive the unemployment rate lower) would not be much. Inflation in this case would probably rise from around 1% to 1.5%, an increase of half a percentage point. But if the goal was to drive unemployment down from 6% to 4%, inflation would triple to the 3% region, which might be beyond the central bank's comfort zone in terms of the inflation target. ]

cyclical unemployment

Cyclical unemployment comes around due to the business cycle itself. Cyclical unemployment rises during recessionary periods and declines during periods of economic growth. For example, the number of weekly jobless claims in the United States has slowed in the month of June, as oil prices begin to rise and the economy starts to stabilize, adding jobs to the market. Read more: Unemployment http://www.investopedia.com/terms/u/unemployment.asp#ixzz4gzIwvjqk Follow us: Investopedia on Facebook

deflation

Deflation is a contraction in the supply of circulated money within an economy, and therefore the opposite of inflation. In times of deflation, the purchasing power of currency and wages are higher than they otherwise would have been. This is distinct from but similar to price deflation, which is a general decrease in the price level, though the two terms are often mistaken for each other and used interchangeably. Read more: Deflation http://www.investopedia.com/terms/d/deflation.asp#ixzz4gzDzWYky Follow us: Investopedia on Facebook BREAKING DOWN 'Deflation' In effect, deflation causes the nominal costs of capital, labor, goods and services to be lower than if the money supply did not shrink. While price deflation is often a side effect of monetary deflation, this is not always the case. Causes of Deflation By definition, monetary deflation can only be caused by a decrease in the supply of money or financial instruments redeemable in money. In modern times, the money supply is most influenced by central banks, such as the Federal Reserve. Periods of deflation most commonly occur after long periods of artificial monetary expansion. There are two principle causes of price deflation. The first is a general increase in the demand for cash savings by consumers and businesses. This could be because consumers are uncertain, or because their time preferences for consumption have lengthened. The second cause is a general increase in economic productivity, which grows the supply of goods and boosts the purchasing power of incomes. Price deflation through increased productivity is different in specific industries. Consider the technology sector, for example. In 1980, the average cost per gigabyte of data was $437,500; by 2010, the average gigabyte cost 3 cents. The decline of the price of advanced technology greatly increasing the standard of living around the world. Changing Views On Deflation's Impact Following the Great Depression, when monetary deflation coincided with high unemployment and rising defaults, most economists believed deflation was per se an adverse phenomenon. Thereafter, most central banks adjusted monetary policy to promote consistent increases in the money supply, even if it promoted chronic price inflation and encouraged debtors to borrow too much. In recent times, economists increasingly challenge the old interpretations about deflation, especially after the 2004 study by economists Andrew Atkeson and Patrick Kehoe, "Deflation and Depression: Is There an Empirical Link?" After reviewing 17 countries across 180 years, Atkeson and Kehoe found 65 out of 73 deflation episodes with no economic downturn, while 21 out of 29 depressions had no deflation. There are now a wide range of opinions on the usefulness of deflation and price deflation. Deflation Changes Debt and Equity Financing Deflation makes it less economical for governments, businesses and consumers to use debt financing. However, deflation increases the economic power of savings-based equity financing. From an investor's point of view, companies that accumulate large cash reserves or that have relatively little debt are more attractive under deflation. The opposite is true of highly indebted businesses with little cash holdings. Deflation also encourages rising yields and increases the necessary risk premium on securities. Read more: Deflation http://www.investopedia.com/terms/d/deflation.asp#ixzz4gzF0u8R7 Follow us: Investopedia on Facebook

required reserve ratio formula

change in money supply= money multiplier(1/required reserve ratio)*change in reserves

deficit and debt

A budget deficit is an indicator of financial health in which expenditures exceed revenue. The term budget deficit is most commonly used to refer to government spending rather than business or individual spending, but can be applied to all of these entities. When referring to accrued federal government deficits, the deficits are referred to as the national debt. Read more: Budget Deficit http://www.investopedia.com/terms/b/budget-deficit.asp#ixzz4h0QytQVa Follow us: Investopedia on Facebook

types of taxation

A business must pay a variety of taxes based on the company's physical location, ownership structure and nature of the business. Business taxes can have a huge impact on the profitability of businesses and the amount of business investment. Taxation is a very important factor in the financial investment decision-making process because a lower tax burden allows the company to lower prices or generate higher revenue, which can then be paid out in wages, salaries and/or dividends. Business may be required to remit the following types of taxes: Federal Income Tax: A tax levied by a national government on annual income. State and/or Local Income Tax: A tax levied by a state or local government on annual income. Not all states have implemented state level income taxes. Payroll Tax: A tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the United States, both state and federal authorities collect some form of payroll tax. In the United States, Medicare and Social Security, also called FICA, make up the payroll tax. Unemployment Tax: A federal tax that is allocated to state unemployment agencies to fund unemployment assistance for laid-off workers. Sales Tax: A tax imposed by the government at the point of sale on retail goods and services. It is collected by the retailer and passed on to the state. Sales tax is based on a percentage of the selling prices of the goods and services and is set by the state. Technically, consumers pay sales taxes, but effectively, business pay them since the tax increases consumers costs and causes them to buy less. Foreign Tax: Income taxes paid to a foreign government on income earned in that country. Value-Added Tax: A national sales tax collected at each stage of production or consumption of a good. Depending on the political climate, the taxing authority often exempts certain necessary living items, such as food and medicine from the tax. Read more: Types Of Taxes http://www.investopedia.com/walkthrough/corporate-finance/2/taxes/types-taxes.aspx#ixzz4h0E3zMYW Follow us: Investopedia on Facebook

peak

A peak is the highest point between the end of an economic expansion and the start of a contraction in a business cycle. The peak of the cycle refers to the last month before several key economic indicators, such as employment and new housing starts, begin to fall. It is at this point real GDP spending in an economy is at its highest level. Read more: Peak http://www.investopedia.com/terms/p/peak.asp#ixzz4gzTfPHtv Follow us: Investopedia on Facebook

private investment

A private investment in public equity, often called a PIPE deal, involves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors. It is an allocation of shares in a public company not through a public offering in a stock exchange. Private equity is a source of investment capital from high net worth individuals and institutions for the purpose of investing and acquiring equity ownership in companies. Partners at private-equity firms raise funds and manage these monies to yield favorable returns for their shareholder clients, typically with an investment horizon between four and seven years. Read more: What Is Private Equity? http://www.investopedia.com/articles/financial-careers/09/private-equity.asp#ixzz4h0MPb1sI Follow us: Investopedia on Facebook

recession

A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP), although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession. Read more: Recession http://www.investopedia.com/terms/r/recession.asp#ixzz4gzTzEhyK Follow us: Investopedia on Facebook Aside from two consecutive quarters of GDP decline, economists assess several metrics to determine whether a recession is imminent or already taking place. These indicators are divided into two categories: leading indicators and lagging indicators. Leading indicators materialize before a recession is officially declared. Perhaps the most common leading indicator is contraction in the stock market. Declines in broad stock indices, such as the Dow Jones Industrial Average (DJIA) and Standard & Poor's (S&P) 500 index, often appear several months before a recession takes shape. This was the case in 2007, when the market began declining in August, four months ahead of the official recession in December 2007. Lagging indicators of a recession include the unemployment rate. Though the Great Recession began in December 2007, the unemployment rate still indicated full employment -- a rate of 5% or lower -- four months later. The unemployment rate began declining in May 2008 and did not recover until several months after the recession ended in June 2009. Read more: Recession http://www.investopedia.com/terms/r/recession.asp#ixzz4gzUCmS8O Follow us: Investopedia on Facebook

trough

A trough is the stage of the economy's business cycle that marks the end of a period of declining business activity and the transition to expansion. In general, the business cycle is said to go through expansion, then a peak, followed by contraction and then finally bottoming out with the trough. Read more: Trough http://www.investopedia.com/terms/t/trough.asp#ixzz4gzTp7qXB Follow us: Investopedia on Facebook

consumption

According to mainstream economists, only the final purchase of goods and services by individuals constitutes consumption, while other types of expenditure — in particular, fixed investment, intermediate consumption, and government spending — are placed in separate categories (See consumer choice). Other economists define consumption much more broadly, as the aggregate of all economic activity that does not entail the design, production and marketing of goods and services (e.g. the selection, adoption, use, disposal and recycling of goods and services).

aggregate demand

Aggregate demand is an economic measurement of the sum of all final goods and services produced in an economy, expressed as the total amount of money exchanged for those goods and services. It specifies the amounts of goods and services that will be purchased at all possible price levels. Since aggregate demand is measured through market values, it only represents total output at a given price level, and does not necessarily represent quality or standard of living. The Keynesian equation for aggregate demand is: AD = C+I+G+(Nx) Where: C = Consumer spending I = Private investment spending for non-final capital goods G = Government spending Nx = Net exports BREAKING DOWN 'Aggregate Demand' Aggregate demand necessarily equals gross domestic product (GDP), at least in purely quantitative terms, because they share the same equation. As a matter of accounting, it must always be the case the aggregate demand and GDP increase or decrease together. Technically speaking, aggregate demand only equals GDP in long-run equilibrium. This is because short-run aggregate demand measures total output for a single nominal price level, not necessarily (and in fact rarely) equilibrium. In nearly all models, however, the price level is assumed to be "one." Aggregate demand is by its very nature general, not specific. All consumer goods, capital goods, exports, imports and government spending programs are considered equal so long as they traded at the same market value. Aggregate Demand and Recessions According to Keynesian demand-side theory, future economic production is propelled by money spent on goods and services. British economist John Maynard Keynes considered unemployment to be a byproduct of insufficient aggregate demand, because wage prices would not adjust downward fast enough to compensate for reduced spending. He believed government could spend money and increase aggregate demand until idle economic resources, including laborers, were redeployed. This is the subject of major debates in economic theory. Boosting aggregate demand also boosts the size of the economy in terms of measured GDP. However, this does not prove that an increase in aggregate demand creates economic growth. Since GDP and aggregate demand share the same calculation, it is only tautological that they increase concurrently. The equation does not show which is cause and which is effect. Other schools of thought, notably the Austrian School and real business cycle theorists, stress consumption is only possible after production. This means an increase in output drives an increase in consumption, not the other way around. Any attempt to increase spending rather than sustainable production only causes maldistributions of wealth or higher prices, or both. Read more: Aggregate Demand http://www.investopedia.com/terms/a/aggregatedemand.asp#ixzz4gzWOfpSx Follow us: Investopedia on Facebook

kenyesian theory

An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the Depression. Subsequently, the term "Keynesian economics" was used to refer to the concept that optimal economic performance could be achieved - and economic slumps prevented - by influencing aggregate demand through activist stabilization and economic intervention policies by the government. Keynesian economics is considered to be a "demand-side" theory that focuses on changes in the economy over the short run. BREAKING DOWN 'Keynesian Economics' Prior to Keynesian economics, classical economic thinking held that cyclical swings in employment and economic output would be modest and self-adjusting. According to this classical theory, if aggregate demand in the economy fell, the resulting weakness in production and jobs would precipitate a decline in prices and wages. A lower level of inflation and wages would induce employers to make capital investments and employ more people, stimulating employment and restoring economic growth. The depth and severity of the Great Depression, however, severely tested this hypothesis. Keynes maintained in his seminal book, "General Theory of Employment, Interest and Money," and other works, that structural rigidities and certain characteristics of market economies would exacerbate economic weakness and cause aggregate demand to plunge further. For example, Keynesian economics refutes the notion held by some economists that lower wages can restore full employment, by arguing that employers will not add employees to produce goods that cannot be sold because demand is weak. Similarly, poor business conditions may cause companies to reduce capital investment, rather than take advantage of lower prices to invest in new plant and equipment; this would also have the effect of reducing overall expenditures and employment. Read more: Keynesian Economics http://www.investopedia.com/terms/k/keynesianeconomics.asp#ixzz4gzOObGJn Follow us: Investopedia on Facebook

exports

An export is a function of international trade whereby goods produced in one country are shipped to another country for future sale or trade. The sale of such goods adds to the producing nation's gross output. If used for trade, exports are exchanged for other products or services in other countries. Read more: Export http://www.investopedia.com/terms/e/export.asp#ixzz4gzSLe0XP Follow us: Investopedia on Facebook

imports

An import is a good or service brought into one country from another. The word "import" is derived from the word "port," since goods are often shipped via boat to foreign countries. Along with exports, imports form the backbone of international trade; the higher the value of imports entering a country, compared to the value of exports, the more negative that country's balance of trade becomes. Read more: Import http://www.investopedia.com/terms/i/import.asp#ixzz4gzSTeCxi Follow us: Investopedia on Facebook

bank reserves

Bank reserves are the currency deposits that are not lent out to a bank's clients. A small fraction of the total deposits is held internally by the bank in cash vaults or deposited with the central bank. Minimum reserve requirements are established by central banks in order to ensure that the financial institutions will be able to provide clients with cash upon request. Read more: Bank Reserve http://www.investopedia.com/terms/b/bank-reserve.asp#ixzz4h08u8p2I Follow us: Investopedia on Facebook Bank reserves are typically held by financial institutions to avoid bank runs and have sufficient cash on hand, should an unexpected and large withdrawal request come up. Bank reserves are divided into required reserves and excess reserves. Because of the banking industry's importance to the economy, national authorities regulate banks by obligating them to hold a certain amount of required reserves with central banks. According to the Federal Reserve Board's regulation, the required reserves represent the amount of funds a bank must hold in its cash vault or deposit with the central bank against certain liabilities. The reserve ratio determines the required reserve, and it varies by the amount deposited in net transaction accounts, which include demand deposits, automatic transfer accounts and share draft accounts. Net transactions are calculated as the total amount in transaction accounts minus funds due from other banks and less cash in the process of collection. The required reserve ratio can be used by national authorities as a tool to implement monetary policies. Through this ratio, a central bank can influence the amount of funds available for borrowing. Beginning in October 2008, the Federal Reserve began paying interest to the banks for required and excess reserves as a way to infuse more liquidity into the U.S. monetary circulation. The rates on required and excess reserves are determined separately and depend on the targeted federal funds rate. Excess Reserves Banks typically keep excess reserves at a minimum, because these reserves do not earn any interest. However, because the Federal Reserve engaged in an accommodating monetary policy after December 2008, the interest rate at which banks could originate their loans decreased dramatically. The banks took funds injected by the Federal Reserve and kept them as excess reserves, which are earning an essentially risk-free interest rate subsequent to the policy change in 2008. For this reason, the amount of excess reserves spiked after 2008, despite an unchanged required reserve ratio. Read more: Bank Reserve http://www.investopedia.com/terms/b/bank-reserve.asp#ixzz4h09e0Y00 Follow us: Investopedia on Facebook

monetary policy

Broadly, there are two types of monetary policy, expansionary and contractionary. Expansionary monetary policy increases the money supply in order to lower unemployment, boost private-sector borrowing and consumer spending, and stimulate economic growth. Often referred to as "easy monetary policy," this description applies to many central banks since the 2008 financial crisis, as interest rates have been low and in many cases near zero. Contractionary monetary policy slows the rate of growth in the money supply or outright decreases the money supply in order to control inflation; while sometimes necessary, contractionary monetary policy can slow economic growth, increase unemployment and depress borrowing and spending by consumers and businesses. An example would be the Federal Reserve's intervention in the early 1980s: in order to curb inflation of nearly 15%, the Fed raised its benchmark interest rate to 20%. This hike resulted in a recession, but did keep spiraling inflation in check. Central banks use a number of tools to shape monetary policy. Open market operations directly affect the money supply through buying short-term government bonds (to expand money supply) or selling them (to contract it). Benchmark interest rates, such as the LIBOR​ and the Fed funds rate, affect the demand for money by raising or lowering the cost to borrow—in essence, money's price. When borrowing is cheap, firms will take on more debt to invest in hiring and expansion; consumers will make larger, long-term purchases with cheap credit; and savers will have more incentive to invest their money in stocks or other assets, rather than earn very little—and perhaps lose money in real terms—through savings accounts. Policy makers also manage risk in the banking system by mandating the reserves that banks must keep on hand. Higher reserve requirements put a damper on lending and rein in inflation. Read more: Monetary Policy http://www.investopedia.com/terms/m/monetarypolicy.asp#ixzz4gzaSAldu Follow us: Investopedia on Facebook

depression

Depression is a severe and prolonged downturn in economic activity. In economics, a depression is commonly defined as an extreme recession that lasts two or more years. A depression is characterized by economic factors such as substantial increases in unemployment, a drop in available credit, diminishing output, bankruptcies and sovereign debt defaults, reduced trade and commerce, and sustained volatility in currency values. In times of depression, consumer confidence and investments decrease, causing the economy to shut down. BREAKING DOWN 'Depression' A depression is a sustained and severe recession. Where a recession is a normal part of the business cycle, lasting for a period of months, a depression is an extreme fall in economic activity lasting for a number of years. Economists disagree on the duration of depressions; some economists believe a depression encompasses only the period plagued by declining economic activity. Other economists, however, argue that the depression continues up until the point that most economic activity has returned to normal. The Great Depression began shortly after the Oct. 24, 1929,U.S. stock market crash known as Black Thursday. The stock market bubble had burst and a huge sell-off began, with a record 12.9 million shares traded. The United States was already in a recession, and the following Tuesday, on Oct. 29, 1929, the DJIA fell 12% in another mass sell-off, triggering the start of the Great Depression. Many investors' portfolios became completely worthless. Although the Great Depression began in the United States, the economic impact was felt worldwide for more than a decade. The Great Depression was characterized by a drop in consumer spending and investment, and by catastrophic unemployment, poverty, hunger and political unrest. In the U.S., unemployment climbed to nearly 25% in 1933, remaining in the double-digits until 1941, when it finally receded to 9.66%. Shortly after Franklin D. Roosevelt was elected President in 1932, the Federal Deposit Insurance Corporation (FDIC) was created to protect depositors' accounts. In addition, the Securities and Exchange Commission (SEC) was formed to regulate the U.S. stock markets. Read more: Depression http://www.investopedia.com/terms/d/depression.asp#ixzz4gzUStwG0 Follow us: Investopedia on Facebook

expansion

Expansion is the phase of the business cycle when the economy moves from a trough to a peak. It is a period when the level of business activity surges and gross domestic product (GDP) expands until it reaches a peak. A period of expansion is also known as an economic recovery. BREAKING DOWN 'Expansion' An expansion is one of two basic business cycle phases; the other is contraction. The transition from expansion to contraction is a peak, and the changeover from contraction to expansion is a trough. Expansions last on average about three to four years, but they have been known to last anywhere from 12 months to more than 10 years. Much of the 1960s was a time of expansion, which lasted almost nine years. Economists and policy makers closely study business cycles. Learning about economic expansion and contraction patterns of the past can help forecast potential trends in the future. Whether cash is available or scarce, interest rates are low or high, and companies and consumers can borrow money to spend on goods and services affects how businesses and consumers react. Examples of Expansion and Contraction Expansion, or a boom, occurs when the Federal Reserve lowers interest rates and buys back bonds in the open market to add money to the financial system. The bondholders put their cash in the bank, which lends out money to companies that purchase buildings and equipment and hire workers. The employees produce more products and services to meet consumer demand as the economy improves. Unemployment is low while productivity and consumer spending are high. Money flows freely through the economy. When the economy contracts, or busts, productivity declines, business revenues go down and companies lay off workers to decrease expenses. Unemployment rises, and consumers spend less. When the GDP declines over two consecutive quarters, a recession occurs. When productivity and revenue slowly begin increasing, economic recovery begins. The unemployment rate decreases as consumers spend more and the economy begins expanding. Read more: Expansion http://www.investopedia.com/terms/e/expansion.asp#ixzz4gzUqOIyx Follow us: Investopedia on Facebook

fiscal policy

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. These two policies are used in various combinations to direct a country's economic goals. Here we look at how fiscal policy works, how it must be monitored and how its implementation may affect different people in an economy. Before the Great Depression, which lasted from Sept. 4, 1929, to the late 1930s or early 1940s, the government's approach to the economy was laissez-faire. Following World War II, it was determined that the government had to take a proactive role in the economy to regulate unemployment, business cycles, inflation and the cost of money. By using a mix of monetary and fiscal policies (depending on the political orientations and the philosophies of those in power at a particular time, one policy may dominate over another), governments can control economic phenomena. How Fiscal Policy Works Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian economics, this theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when between 2-3%), increases employment and maintains a healthy value of money. Fiscal policy is very important to the economy. For example, in 2012 many worried that the fiscal cliff, a simultaneous increase in tax rates and cuts in government spending set to occur in January 2013, would send the U.S. economy back to recession. The U.S. Congress avoided this problem by passing the American Taxpayer Relief Act of 2012 on Jan. 1, 2013. Balancing Act The idea, however, is to find a balance between changing tax rates and public spending. For example, stimulating a stagnant economy by increasing spending or lowering taxes runs the risk of causing inflation to rise. This is because an increase in the amount of money in the economy, followed by an increase in consumer demand, can result in a decrease in the value of money - meaning that it would take more money to buy something that has not changed in value. Let's say that an economy has slowed down. Unemployment levels are up, consumer spending is down, and businesses are not making substantial profits. A government thus decides to fuel the economy's engine by decreasing taxation, which gives consumers more spending money, while increasing government spending in the form of buying services from the market (such as building roads or schools). By paying for such services, the government creates jobs and wages that are in turn pumped into the economy. Pumping money into the economy by decreasing taxation and increasing government spending is also known as "pump priming." In the meantime, overall unemployment levels will fall. With more money in the economy and fewer taxes to pay, consumer demand for goods and services increases. This, in turn, rekindles businesses and turns the cycle around from stagnant to active. If, however, there are no reins on this process, the increase in economic productivity can cross over a very fine line and lead to too much money in the market. This excess in supply decreases the value of money while pushing up prices (because of the increase in demand for consumer products). Hence, inflation exceeds the reasonable level. For this reason, fine tuning the economy through fiscal policy alone can be a difficult, if not improbable, means to reach economic goals. If not closely monitored, the line between a productive economy and one that is infected by inflation can be easily blurred. And When the Economy Needs to Be Curbed ... When inflation is too strong, the economy may need a slowdown. In such a situation, a government can use fiscal policy to increase taxes to suck money out of the economy. Fiscal policy could also dictate a decrease in government spending and thereby decrease the money in circulation. Of course, the possible negative effects of such a policy, in the long run, could be a sluggish economy and high unemployment levels. Nonetheless, the process continues as the government uses its fiscal policy to fine-tune spending and taxation levels, with the goal of evening out the business cycles. Who Does Fiscal Policy Affect? Unfortunately, the effects of any fiscal policy are not the same for everyone. Depending on the political orientations and goals of the policymakers, a tax cut could affect only the middle class, which is typically the largest economic group. In times of economic decline and rising taxation, it is this same group that may have to pay more taxes than the wealthier upper class. Read more: What Is Fiscal Policy? http://www.investopedia.com/articles/04/051904.asp#ixzz4gzbTxli9 Follow us: Investopedia on Facebook

foreign currency

Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's currency is valued according to factors of supply and demand. In other words, a currency's value can be pegged to another country's currency, such as the U.S. dollar, or even to a basket of currencies. A country's currency value also may be fixed by the country's government. However, most countries float their currencies freely against those of other countries, which keeps them in constant fluctuation. Read more: What is foreign exchange? http://www.investopedia.com/ask/answers/08/what-is-foreign-exchange.asp#ixzz4gzT7u7zk Follow us: Investopedia on Facebook

frictional unemployment

Frictional unemployment arises when a person is in-between jobs. After a person leaves a company, it naturally takes time to find another job, making this type of unemployment short-lived. It is also the least problematic from an economic standpoint. Arizona, for example, has faced rising frictional unemployment in May of 2016, due to the fact that unemployment has been historically low for the state. Arizona citizens feel confident leaving their jobs with no safety net in search of better employment. Read more: Unemployment http://www.investopedia.com/terms/u/unemployment.asp#ixzz4gzHv1Di1 Follow us: Investopedia on Facebook

full employment

Full employment is an economic situation in which all available labor resources are being used in the most efficient way possible. Full employment embodies the highest amount of skilled and unskilled labor that can be employed within an economy at any given time. Any remaining unemployment is considered to be frictional, structural or voluntary. BREAKING DOWN 'Full Employment' Full employment is considered to be any acceptable level of unemployment above 0%. Full employment exists without any cyclical or deficient-demand unemployment, but does exists with some level of frictional, structural and voluntary unemployment. Full employment is seen as the ideal employment rate within an economy and is normally represented by a range of rates that are specific to regions, time periods and political climates. A government or economy often defines full employment as any rate of unemployment below a defined number. If, for example, a country sets full employment at a 5% unemployment rate, any level of unemployment below 5% is considered acceptable. Full employment, once attained, often results in an inflationary period. The inflation is a result of workers having more disposable income, which would drive prices upward. Read more: Full Employment http://www.investopedia.com/terms/f/fullemployment.asp#ixzz4gzOv7rlE Follow us: Investopedia on Facebook

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly. Read more: Inflation http://www.investopedia.com/terms/i/inflation.asp#ixzz4gzDKMrNx Follow us: Investopedia on Facebook The Fed's monetary policy goals include moderate long-term interest rates, price stability and maximum employment, and each of these goals is intended to promote a stable financial environment. The Federal Reserve clearly communicates long-term inflation goals in order to keep a steady long-term rate of inflation, which in turn maintains price stability. Price stability, or a relatively constant level of inflation, allows businesses to plan for the future, since they know what to expect. It also allows the Fed to promote maximum employment, which is determined by nonmonetary factors that fluctuate over time and are therefore subject to change. For this reason, the Fed doesn't set a specific goal for maximum employment, and it is largely determined by members' assessments. Maximum employment does not mean zero unemployment, as at any given time people there is a certain level of volatility as people vacate and start new jobs. Monetarism theorizes that inflation is related to the money supply of an economy. For example, following the Spanish conquest of the Aztec and Inca empires, massive amounts of gold and especially silver flowed into the Spanish and other European economies. Since the money supply had rapidly increased, prices spiked and the value of money fell, contributing to economic collapse. Read more: Inflation http://www.investopedia.com/terms/i/inflation.asp#ixzz4gzDklEnA Follow us: Investopedia on Facebook

3 functions of money

It acts a medium of exchange. If money did not exist, we would have much more complicated lives. If you wished buy bananas, you would need a barter arrangement where another party valued something you had and could also provide you with bananas. Anything can serve as money (ie. Coins, cigarettes, shells) as long as someone else will accept it as a medium of exchange. Money is a way to store value. Although many things (land, gold, etc.) can serve as a store of value, money has one large advantage in the sense that it can quickly be converted into other goods. One problem with using money as a way to store value is that some forms of money do not pay interest. Another problem is that inflation destroys the value of money over time. Money is also used as a unit of account. The values and costs of goods, services, and assets can be expressed as a unit of money. Prices expressed as money are used to help consumers make choices among numerous goods and services. Read more: Money, Banks, and the Federal Reserve http://www.investopedia.com/exam-guide/cfa-level-1/macroeconomics/money-banks-federal-reserve.asp#ixzz4gzXeUFge Follow us: Investopedia on Facebook

m1,m2,m3 money

M1 is a metric for the money supply of a country and includes physical money — both paper and coin — as well as checking accounts, demand deposits and negotiable order of withdrawal (NOW) accounts. The most liquid portions of the money supply are measured by M1 because it contains currency and assets that can be converted to cash quickly. "Near money" and "near, near money," which fall under M2 and M3, cannot be converted to currency as quickly. BREAKING DOWN 'M1' Using M1 as the definition of a country's money supply references money as a medium of exchange, with demand deposits and checking accounts the most commonly used exchange mediums following the development of debit cards and ATMs. Of all of the components of the money supply, M1 is defined the most narrowly. It doesn't include financial assets like savings accounts. It is the money supply metric most frequently utilized by economists to reference how much money is in circulation in a country. Read more: M1 http://www.investopedia.com/terms/m/m1.asp#ixzz4gzYNMVVg Follow us: Investopedia on Facebook M2 is a measure of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits. These assets are less liquid than M1 and not as suitable as exchange mediums, but they can be quickly converted into cash or checking deposits. BREAKING DOWN 'M2' M2 is a broader money classification than M1, because it includes assets that are highly liquid but are not cash. A consumer or business typically doesn't use savings deposits and other non-M1 components of M2 when making purchases or paying bills, but it could convert them to cash in relatively short order. M1 and M2 are closely related, and economists like to include the more broadly defined definition for M2 when discussing the money supply, because modern economies often involve transfers between different account types. For example, a business may transfer $10,000 from a money market account to its checking account. This transfer would increase M1, which doesn't include money market funds, while keeping M2 stable, since M2 contains money market accounts. Read more: M2 http://www.investopedia.com/terms/m/m2.asp#ixzz4gzYbN89y Follow us: Investopedia on Facebook

definition of money

Money is an officially-issued legal tender generally consisting of notes and coin, and is the circulating medium of exchange as defined by a government. Money is often synonymous with cash and includes various negotiable instruments such as checks. Each country has its own money that is used as a medium of exchange within that country. BREAKING DOWN 'Money' Also referred to as currency, money is a liquid asset used in the settlement of debts that functions based on the general acceptance of its associated value within an economy. The value of money is not necessarily derived from the materials used to produce the note or coin and, instead, derives based on the amount shown on its face partnered with the public's willingness to support the value as displayed. Read more: Money http://www.investopedia.com/terms/m/money.asp#ixzz4gzXL5TuS Follow us: Investopedia on Facebook

natural unemployment rate

Natural unemployment, or the natural rate of unemployment, is the minimum unemployment rate resulting from real, or voluntary, economic forces. It can also be defined as the minimum level of calculable unemployment in the Walrasian system of general equilibrium, after accounting for labor and commodity movements, market imperfections, stochastic variability and other supply and demand considerations built into the model. The most frequently measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labor force. Read more: Unemployment http://www.investopedia.com/terms/u/unemployment.asp#ixzz4gzQonw3h Follow us: Investopedia on Facebook Read more: Natural Unemployment http://www.investopedia.com/terms/n/naturalunemployment.asp#ixzz4gzQgqPlW Follow us: Investopedia on Facebook

Natural unemployment

Natural unemployment, or the natural rate of unemployment, is the minimum unemployment rate resulting from real, or voluntary, economic forces. It can also be defined as the minimum level of calculable unemployment in the Walrasian system of general equilibrium, after accounting for labor and commodity movements, market imperfections, stochastic variability and other supply and demand considerations built into the model. BREAKING DOWN 'Natural Unemployment' There are many other interpretations and definitions of natural unemployment. Over the centuries, different economists have called natural unemployment the long-run average unemployment rate, "frictional plus structural unemployment" and "catallactic unemployment." Any unemployment not considered to be natural is often referred to as cyclical, institutional or policy-based unemployment. Variables exogenous to the labor market cause an increase in the natural rate of unemployment; for example, a steep recession might increase the natural unemployment rate if workers begin to lose skills or the motivation to find full-time work again. Economists sometimes call this "hysteresis." Read more: Natural Unemployment http://www.investopedia.com/terms/n/naturalunemployment.asp#ixzz4gzK2ZU1S Follow us: Investopedia on Facebook

structural unemployment

Structural unemployment comes about through technological advances, when people lose their jobs because their skills are outdated. Illinois, for example, after seeing increased unemployment rates in May of 2016, seeks to implement "structural reforms" that will give people new skills and therefore more job opportunities. Read more: Unemployment http://www.investopedia.com/terms/u/unemployment.asp#ixzz4gzIbZ4Av Follow us: Investopedia on Facebook

Inflation rate

That is, the inflation rate measures how fast prices for goods and services rise over time, or how much less one unit of currency buys now compared to one unit of currency at a given time in the past. The inflation rate may increase due to massive printing of money, which increases supply in the economy and thus reduces demand. Equally, it may occur because certain important commodities become rarer and thus more expensive. Central banks attempt to control the inflation rate by increasing and decreasing the money supply.

GDP deflator

The GDP price deflator is an economic measure of inflation and is derived by dividing nominal GDP by real GDP, and then multiplying by 100. It is important because an economy's nominal GPD differs from its real GDP in that nominal GDP includes inflation, while real GDP does not. Therefore, the GDP price deflator measures the difference between real GDP and nominal GDP, which can also be used as a measure for price inflation. If, for example, an economy has a nominal GDP of $10 billion and has a real GDP of $8 billion, the economy's GDP price deflator would be derived as: ($10 billion / $8 billion) x 100, or 125. This means that the aggregate level of prices increased by 25% from the base year to the current year. This is because an economy's real GDP is calculated by multiplying its current output by its prices from a base year. So, the GDP deflator will help identify how much prices have inflated over a specific time period. Read more: GDP Price Deflator http://www.investopedia.com/terms/g/gdppricedeflator.asp#ixzz4h0HXy9hw Follow us: Investopedia on Facebook

treasury

The U.S. Treasury, created in 1789, is the government department responsible for issuing all Treasury bonds, notes and bills. Among the government departments operating under the U.S. Treasury umbrella are the Internal Revenue Service (IRS), the U.S. Mint, the Bureau of the Public Debt, the Alcohol and Tobacco Tax Bureau, and the Secret Service, which is best known for its responsibility for protecting the president and vice president of the United States. Key functions of the U.S. Treasury include printing bills, postage and Federal Reserve notes, minting coins, collecting taxes, enforcing tax laws, managing all government accounts and debt issues, and overseeing U.S. banks in cooperation with the Federal Reserve. The secretary of the Treasury is responsible for international monetary and financial policy, including foreign exchange intervention. Read more: U.S. Treasury http://www.investopedia.com/terms/u/ustreasury.asp#ixzz4h0Dfpeeh Follow us: Investopedia on Facebook

business cycle

The business cycle is the fluctuation in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession. During expansions, the economy is growing in real terms (i.e. excluding inflation), as evidenced by increases in indicators like employment, industrial production, sales and personal incomes. During recessions, the economy is contracting, as measured by decreases in the above indicators. Expansion is measured from the trough (or bottom) of the previous business cycle to the peak of the current cycle, while recession is measured from the peak to the trough. In the United States, the National Bureau of Economic Research (NBER) determines the official dates for business cycles. Read more: Business Cycle http://www.investopedia.com/terms/b/businesscycle.asp#ixzz4gzTR0oor Follow us: Investopedia on Facebook

fed reserve bank

The central bank of the United States and the most powerful financial institution in the world. The Federal Reserve Bank was founded by the U.S. Congress in 1913 to provide the nation with a safe, flexible and stable monetary and financial system. It is based on a federal system that comprises a central governmental agency (the Board of Governors) in Washington, DC and 12 regional Federal Reserve Banks that are each responsible for a specific geographic area of the U.S. The Federal Reserve Bank is considered to be independent because its decisions do not have to be ratified by the President or any other government official. However, it is still subject to Congressional oversight and must work within the framework of the government's economic and financial policy objectives. Often known simply as "the Fed". Read more: Federal Reserve Bank http://www.investopedia.com/terms/f/federalreservebank.asp#ixzz4h0D5k5QX Follow us: Investopedia on Facebook

Classical Economic Theory

The earliest classical economists developed theories of value, prices, supply, demand and distribution. Nearly all rejected government interference with market exchanges, giving rise to the French phrase "laissez-faire," or "let it be." Classical thinkers were not completely unified in their beliefs or understanding of markets, though there were notable common themes in most classical literature. The majority favored free trade and competition among workers and businesses. Classical economists wanted to transition away from class-based social structures in favor of meritocracies. Read more: Classical Economics http://www.investopedia.com/terms/c/classicaleconomics.asp#ixzz4gzNm2NqM Follow us: Investopedia on Facebook

discount rate

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank's discount window. Read more: Discount Rate http://www.investopedia.com/terms/d/discountrate.asp#ixzz4h0CVwsfN Follow us: Investopedia on Facebook

money supply

The money supply measures the amount of monetary assets available in an economy. This is an important metric in macroeconomics, because it can dictate inflation and interest rates. Inflation and interest rates have major ramifications for the general economy, as these heavily influence employment, consumer spending, business investment, currency strength and trade balances. In the United States, the Federal Reserve publishes money supply data every Thursday at 4:30 p.m., but this only covers M1 and M2. Data on large time deposits, institutional money market funds, and other large liquid assets is published on a quarterly basis, and it is included in the M3 money supply measurement. Read more: M2 http://www.investopedia.com/terms/m/m2.asp#ixzz4gzYhvZSj Follow us: Investopedia on Facebook M3 is a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and other larger liquid assets. The M3 measurement includes assets that are less liquid than other components of the money supply and are referred to as "near, near money," which are more closely related to the finances of larger financial institutions and corporations than to those of small businesses and individuals. BREAKING DOWN 'M3' The money supply, sometimes referred to the money stock, has many different classifications with respect to liquidity, and M3 is just one of them. The total money supply includes all of the currency in circulation as well as liquid financial products, such as certificates of deposit (CDs). The M3 classification is the broadest measure of an economy's money supply. It emphasizes money as a store-of-value more so than money as a medium of exchange — hence the inclusion of less-liquid assets in M3. It is used by economists to estimate the entire money supply within an economy, and by governments to direct policy and control inflation over medium and long-term periods. M3 can be thought of as a congregation of all the other classifications of money (M0, M1 and M2) plus all of the less liquid components of the money supply. M0 refers to the currency in circulation, such as coins and cash. M1 includes M0 plus demand deposits such as checking accounts as well as traveler's checks; M1 includes the currency that is out of circulation but is readily available. M2 includes all of M1 (and all of M0 as a result) plus savings deposits and certificates of deposit, which are less liquid than checking accounts. M3 includes all of M2 (and all of M1 and M0 as a result) but also adds the least liquid components of the money supply that are not in circulation, such as repurchase agreements that do not mature for days or weeks. Read more: M3 http://www.investopedia.com/terms/m/m3.asp#ixzz4gzZBqiyd Follow us: Investopedia on Facebook

workforce

The participation rate is a measure of the active portion of an economy's labor force. It refers to the number of people who are either employed or are actively looking for work. During an economic recession, many workers often get discouraged and stop looking for employment, resulting in a decrease in the participation rate. Read more: Participation Rate http://www.investopedia.com/terms/p/participationrate.asp#ixzz4gzHAEAyv Follow us: Investopedia on Facebook

currency exchange rate

The rate at which two currencies in the market can be exchanged. International currency exchange rates display how much of one unit of a currency can be exchanged for another currency. Currency exchange rates can be floating, in which case they change continually based on a multitude of factors. Alternatively, the exchange rates of some foreign currencies are pegged, or fixed, to other currencies, in which case they move in tandem with the currencies to which they are pegged. BREAKING DOWN 'International Currency Exchange Rate' International currency exchange rates are important in today's global economy. Knowing the value of your home currency in relation to different foreign currencies helps investors to analyze investments priced in foreign dollars. For example, for a U.S. investor, knowing the dollar to euro exchange rate is valuable when choosing European investments. A declining U.S. dollar could increase the value of foreign investments, just as an increasing U.S. dollar value could hurt the value of foreign investments. Read more: International Currency Exchange Rate - Forex - Investopedia http://www.investopedia.com/terms/forex/i/international-currency-exchange-rates.asp#ixzz4gzSn83b4 Follow us: Investopedia on Facebook

Real vs Nominal Dollars

The real value is nominal value adjusted for inflation. The real value is obtained by removing the effect of price level changes from the nominal value of time-series data, so as to obtain a truer picture of economic trends. The nominal value of time-series data such as gross domestic product and incomes is adjusted by a deflator to derive their real values. BREAKING DOWN 'Real Value' Real values are more important than nominal values for economic measures such as GDP and personal incomes because they help ascertain the extent to which increases over time are driven by inflation and what is driven by actual growth. For example, if personal income is $50,000 year 1 and $52,000 in year 2, but the rate of inflation is 3%, then the nominal growth rate of income is 4%, while the real growth rate is 1%. In the U.S., the Bureau of Economic Analysis maintains the GDP Deflator that is used to compute the real rate of economic growth. The Deflator uses 2005 as the base year, which means that it is set to 100 for 2005, with other years reported relative to the 2005 dollar. Read more: Real Value http://www.investopedia.com/terms/r/real-value.asp#ixzz4gzBYBpqW Follow us: Investopedia on Facebook A nominal value is the stated value of an issued security. Nominal value - also known as face value or par value in reference to securities - disregards an item's market value. Measurements of economic growth and personal income that do not adjust for inflation are nominal values, while measurements that adjust for inflation are real values. Read more: Nominal Value http://www.investopedia.com/terms/n/nominalvalue.asp#ixzz4gzBom1qo Follow us: Investopedia on Facebook

reserve rate

The reserve ratio is the portion of depositors' balances that banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the United States is the Federal Reserve. The reserve ratio affects the money supply in a country at any given time. Read more: Reserve Ratio http://www.investopedia.com/terms/r/reserveratio.asp#ixzz4h0CmqVOu Follow us: Investopedia on Facebook

lag

The time lag between when a corrective action is taken in the economy and when any changes coming from the action are noticed or felt. Corrective actions may be taken by the government directly, or more commonly by central banks or other mandated monetary authorities. Also known as "impact lag", or the time it takes for the impact of corrective action to be felt by the economy. Read more: Response Lag http://www.investopedia.com/terms/r/response_lag.asp#ixzz4gzbfCIVq Follow us: Investopedia on Facebook

unemployment rate

The unemployment rate is the share of the labor force that is jobless, expressed as a percentage. It is a lagging indicator, meaning that it generally rises or falls in the wake of changing economic conditions, rather than anticipating them. When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy is growing at a healthy rate and jobs are relatively plentiful, it can be expected to fall. In the U.S., the U3 or U-3 rate, which the Bureau of Labor Statistics (BLS) releases as part of its monthly employment situation report, is the most commonly cited national rate. It is not the only metric available, however, and it receives criticism for giving the impression that the labor market is healthier than alternative measures would indicate. For this reason some observers prefer to track the more comprehensive U6 rate (see below). BREAKING DOWN 'Unemployment Rate' The Headline Rate: U3 The official unemployment rate is known as U3. It defines unemployed people as those who are willing and available to work, and who have actively sought work within the past four weeks. Those with temporary, part-time or full-time jobs are considered employed, as are those who perform at least 15 hours of unpaid family work. To calculate the unemployment rate, the number of unemployed people is divided by the number of people in the labor force, which consists of all employed and unemployed people. The ratio is expressed as a percentage. Read more: Unemployment Rate http://www.investopedia.com/terms/u/unemploymentrate.asp#ixzz4gzKUE1OK Follow us: Investopedia on Facebook

open market operations

What are 'Open Market Operations - OMO' Open market operations (OMO) refers to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system, facilitated by the Federal Reserve (Fed). Purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy. The Fed's goal in using this technique is to adjust and manipulate the federal funds rate, which is the rate at which banks borrow reserves from one another. Read more: Open Market Operations (OMO) http://www.investopedia.com/terms/o/openmarketoperations.asp#ixzz4h08gpBhb Follow us: Investopedia on Facebook

Economic growth

What is 'Economic Growth' Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used. BREAKING DOWN 'Economic Growth' In simplest terms, economic growth refers to an increase in aggregate productivity. Often, but not necessarily, aggregate gains in productivity correlate with increased average marginal productivity. This means the average laborer in a given economy becomes, on average, more productive. It is also possible to achieve aggregate economic growth without an increased average marginal productivity through extra immigration or higher birth rates. Measured in Dollars, Not Goods and Services A growing or more productive economy can make more goods and provide more services than before. However, some goods and services are considered more valuable than others. For example, a smartphone is considered more valuable than a pair of socks or a glass of water. Growth has to be measured in the value of goods and services, not only the quantity. Another problem is not all individuals place the same value on the same goods and services. A heater is more valuable to a resident of Alaska, while an air conditioner is more valuable to a resident of Florida. Some people value steak more than fish, and vice versa. Because value is subjective, measuring for all individuals is very tricky. The best approximation is to use the current market value; in the United States, this is measured in terms of U.S. dollars. Since a higher total produced market value is considered more valuable, higher economic growth is positively associated with an increased quality of life or standard of living. Causes of Economic Growth There are only a few ways to generate economic growth. The first is a discovery of new or better economic resources. An example of this is the discovery of gasoline fuel; prior to the discovery of the energy-generating power of gasoline, the economic value of petroleum was relatively low. Gasoline became a "better" and more productive economic resource after this discovery. Another way to generate economic growth is to grow the labor force. All else equal, more workers generate more economic goods and services. During the 19th century, a portion of the robust U.S. economic growth was due to a high influx of cheap, productive immigrant labor. A third way to generate economic growth is to create superior technology or other capital goods. The rate of technical growth and capital growth is highly dependent on the rate of savings and investment, since savings and investment are necessary to engage in research and development. The last method is increased specialization. This means laborers become more skilled at their crafts, raising their productivity through trial and error or simply more practice. Savings, investment and specialization are the most consistent and easily controlled methods. Read more: Economic Growth http://www.investopedia.com/terms/e/economicgrowth.asp#ixzz4gzBBSntN Follow us: Investopedia on Facebook

crowding out

What is the 'Crowding Out Effect' The crowding out effect is an economic theory stipulating that rises in public sector spending drive down or even eliminate private sector spending. Though the "crowding out effect" is a general term, it is often used in reference to the stifling of private spending in areas where government purchasing is high. The crowding out effect is also often referred to simply as "crowding out." BREAKING DOWN 'Crowding Out Effect' Because "crowding out" is a general term, most cases of crowding out share some important similarities, but there are a few distinct ways in which crowding out can happen. One of the most common forms of crowding out takes place when a large government, like that of the United States, increases its borrowing. Because large governments have the power to borrow large sums of money, doing so can actually have a substantial impact on the real interest rate, raising it by a significant degree. This has the effect of absorbing the economy's lending capacity and of discouraging businesses from engaging in capital projects. Because firms often fund such projects in part or entirely through financing, they are now discouraged from doing so because the opportunity cost of borrowing money has risen, making traditionally profitable projects funded through loans cost-prohibitive. For example, suppose a firm has been planning a capital project that they project will cost $5 million and yield $6 million in returns, assuming that interest on their loans remains at its current rate of 3%. With this plan, the firm anticipates earning $1 million in net income. However, due to the shaky state of the economy the government announces a stimulus package that will help businesses in need but will also raise the interest rate on new loans the firm takes out to 4%. Because the interest rate the firm had factored into its accounting has increased by 33.3%, its profit model shifts wildly and the firm estimates that it will now need to spend $5.75 million on the project in order to make the same $6 million in returns. The firm's projected earnings have now decreased from $1 million to $250,000, a 75% drop, and the company decides that given the time and resources they would need to put into the project, they would be better off pursuing other options. Crowding Out in Healthy vs. Depressed Economies This reduction in capital projects can partially offset benefits brought about through the government borrowing, such as those of economic stimulus, though this is only likely when the economy is operating at capacity. In this respect, government stimulus is theoretically more effective when the economy is below capacity. If this is the case, however, an economic downswing may even occur, reducing revenues the government collects through taxes and spurring the government's need to borrow even more money, which can theoretically lead to a vicious cycle of borrowing and crowding out. Read more: Crowding Out Effect http://www.investopedia.com/terms/c/crowdingouteffect.asp#ixzz4gzRlfRuu Follow us: Investopedia on Facebook

seasonal unemployment

While cyclical unemployment is attributed to the business cycle of an economy, seasonal unemployment occurs as demands shift from one season to the next. This category can include any workers whose jobs are dependent on a particular season. For example, school teachers may be considered seasonal, based on the fact that most schools in the U.S. cease or limit operations during the summer, as well as construction workers living in areas where construction during the winter months is challenging. Certain retail stores hire seasonal workers during the holiday season to better manage increased sales, but release those workers during the post-holiday demand shift. Trading Center Read more: Cyclical Unemployment http://www.investopedia.com/terms/c/cyclicalunemployment.asp#ixzz4gzJYcWQz Follow us: Investopedia on Facebook

aggregate supply

ggregate supply, also known as total output, is the total supply of goods and services produced within an economy at a given overall price level in a given time period. It is represented by the aggregate supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally, there is a positive relationship between aggregate supply and the price level. BREAKING DOWN 'Aggregate Supply' Rising prices are usually signals for businesses to expand production to meet a higher level of aggregate demand. When demand increases amid constant supply, consumers compete for the goods available and therefore pay higher prices. This change in dynamic induces firms to increase supply output to sell more goods. The resulting supply increase causes prices to normalize and output to remain elevated. Causes of Aggregate Supply Shifts A shift in aggregate supply can be attributed to a number of variables. These include changes in the size and quality of labor, technological innovations, increase in wages, increase in production costs, changes in producer taxes and subsidies, and changes in inflation. Some of these factors lead to positive changes in aggregate supply, while others cause aggregate supply to decline. For example, increased labor efficiency, perhaps through outsourcing or automation, raises supply output by decreasing the labor cost per unit of supply. By contrast, wage increases - prevalent in many areas of the U.S. as of 2016 - place downward pressure on aggregate supply by increasing production costs. Read more: Aggregate Supply http://www.investopedia.com/terms/a/aggregatesupply.asp#ixzz4gzX1ax4G Follow us: Investopedia on Facebook

Unemployment

low unemployment one of the 3 economic goals. Unemployment is a phenomenon that occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequently measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labor force. labor force A term used by the U.S. Bureau of Labor Statistics (BLS) to describe the subset of Americans who have jobs or are seeking a job, are at least 16 years old, are not serving in the military and are not institutionalized. In other words, all Americans who are eligible to work in the everyday U.S. economy. Read more: Civilian Labor Force http://www.investopedia.com/terms/c/civilian-labor-force.asp#ixzz4gzFsgyQM Follow us: Investopedia on Facebook Labor participation rate = (unemployed/# in the labor force)*100

real gdp

todays output at base year prices

CPI

weighted average of prices of all consumer goods sold. core index leaves out food and energy.