Unit 6

Tools for Forecasting the Business Cycle

- Economists often look at the operations of the stock market. Not always, but often, if a recession is coming, the stock market will take a quick nosedive. Stock prices plummet and suddenly investors are anxious to sell stocks, further driving the prices downward. - The Conference Board, an organization that conducts economic research, has a list of leading economic indicators that it follows, and it publishes monthly reports that note changes in these indicators. Data, such as the prices of stocks sold in the stock market, as well as interest rates and contracts for new products and large equipment are reviewed. Economists review this data every month looking for trends that might show a possible recession in the near future. *For instance, if orders for new capital goods seem to be decreasing three or more months in a row, a possible trend in decreasing economic output, economists may feel that a recession is starting.

Unemployment

- Life in the 21st century is a predominantly consumer-oriented society rather than a producer-oriented one. This means that we purchase most of the items we need to survive instead of producing them ourselves. - Just as the economy faces upswings and downswings, we also feel the effects in our personal and professional lives. *For instance, as the economy contracts, falling prices and a decrease in production levels may lead to company layoffs - One of the rates that economists consider when measuring the health of the economy is the unemployment rate. - Unemployment statistics are very important to government leaders. *High unemployment rates indicate that the government needs to do something to get people back into the workforce to prevent the economy from entering a recession.

Uncontrollable Events

In times of natural disaster and war, the supply of resources is interrupted. This can lead to a rise in price while production decreases. - a factor that influences business cycles

Customer Viewpoints

The hopes and/or fears of people have a great effect on business cycles. People often fear the worst scenarios and cut down on the amount they spend, sending the business cycle into a contraction even further. - a factor that influences business cycles

Using Inflation Figures to Measure Economic Performance

This information tells government leaders that they must either decrease the amount of money in circulation (monetary policy) or cut government spending (and possibly raise taxes) in order to bring down prices (fiscal policy). These actions are dictated by the government's fiscal policy.

Growth

U.S. economic policy calls for a steady, growing economy, thus, as the population of the U.S. continues to grow the number of jobs must grow with it so that there will be enough for all citizens to actively participate in the economy and support themselves and their families - an economic goal as it relates to U.S. economic policies

Interest Rates

When interest rates rise, people and businesses are less likely to borrow money. Therefore, higher interest rates can bring on a contraction in the economy. Less demand for expensive items will lead to a cutback in production and higher unemployment. - a factor that influences business cycles

Depression

a prolonged period of recession - unemployment is very high and there are very low rates of industrial production - one of the three other possible situations that can occur during a contraction in the economy

Security

a secure economy is a stable one, especially important to those who are elderly or in need of financial assistance, in which the government provides a safety net for those who have fallen on hard times or otherwise need help - an economic goal as it relates to U.S. economic policies

Business Cycle

a series of upswings and downswings, in which economic growth expands continually upward until it reaches a peak (its highest point) followed by a period of economic decline (also known as contraction) OR a period of macroeconomic expansion, followed by a period of contraction - eventually they cycle "bottoms out" at its lowest point and then the process starts to move upward again as the economy begins to expand (up and down, up and down) - there are a number of factors that keep the business cycle moving and it can be affected by each of them either singly or when they are in combination

Stability

a stable economy supports a stable society, having a satisfactory supply of goods, services, and jobs so that the needs of the people are met and society remains stable - drastic swings in the economy can lead to chaos and uncertainty - an economic goal as it relates to U.S. economic policies

Seasonal

occurs when industries slow or shut down for a season or make seasonal shifts in their production schedules - one of the four major types of unemployment

Frictional

occurs when people take time to find a job - one of the four major types of unemployment

Structural

occurs when workers' skills do not match the jobs that are available - one of the four major types of unemployment

The Unemployment Rate

- Since unemployment rates are a good indication of how the economy is doing, economists and government leaders pay close attention to them. The U.S. Census Bureau, a government agency, operates a monthly census that is reflective of the population at large. - The Bureau of Labor Statistics then polls a sample of the population and calculates how many people in the population are unemployed and employed. Once it has these figures, the Bureau of Labor Statistics calculates the unemployment rate. - The unemployment rate is merely an average for the entire country. Certainly it may be higher or lower in specific areas. Therefore, state and federal authorities calculate the rates in specific geographic regions in an effort to find areas that are in particular need of attention. - Because seasonal, frictional, and structural unemployment will always exist to some degree, it is unrealistic to expect an unemployment rate to be near zero.

"total value"

- refers to the selling prices of the final goods and services

Economists

- statistics and data help them study the economy - they answer questions, with statistics and data, like: *How do we know that the economy is in a period of expansion or contraction? *How do suppliers determine if they need to cut back production or expand it? - they use a number of methods to measure the economy and help businesses, the government, and consumers make economic decisions - they use the data to determine if the economy has grown from one year to the next

"within a country"

- the sales must take place within that country's economy

Capital Investment

As the economy grows, businesses will invest heavily into their businesses by purchasing new resources. At some point however, businesses stop expanding and expansion levels off and slows down. GDP begins to drop and so do some jobs in certain industries. - a factor that influences business cycles

Efficiency

an efficient economy requires maximum utilization of resources (resources that are used to the fullest) and the economy produces those items for which it has the necessary resources - waste is reduced as much as possible - a strong economy is an efficient one - an economic goal as it relates to U.S. economic policies

Equity

attempting to keep people above the poverty line is important to the stability of the economy and society as a whole, thus, the U.S. government has established a number of programs designed to help those less fortunate in society to meet their basic needs - equity isn't a major goal - an economic goal as it relates to U.S. economic policies

Bureau of Labor Statistics

calculates how many people in the population are unemployed and employed

Purchasing Power

describes what happens to our ability to buy goods and services when prices rise due to inflation

Length of Each Business Cycle Phase

different for each cycle - the only definite thing is that a period of contraction will eventually follow a period of expansion and some time after that, the cycle will start all over again

Freedom

economic freedom is of great importance in U.S. economic policy goals; people having a great deal of economic freedom and the ability to make choices - an economic goal as it relates to U.S. economic policies

Real GDP

gross domestic product expressed in constant or unchanging prices - to fix the problem that occurs with nominal GDP, economists calculate real GDP, which means they calculate the year's prices using constant or unchanging prices - government economists look at GDP measurements to determine the growth of the economy and, to gain further insight, economists break down GDP into two specific types

Nominal GDP

gross domestic product measured in current prices - is calculated using the current prices in a year - using nominal GDP it will look like the economy grew (meaning production increased) because more was spent, however, that really is not what happened since inflation caused those prices to increase - government economists look at GDP measurements to determine the growth of the economy and, to gain further insight, economists break down GDP into two specific types

Studying the U.S. Economy

helps us understand how well our economy is functioning and meeting the needs of the people - the data helps predict what is ahead on the economic horizon so the government can take action to prevent or minimize undesirable forecasted events

Forecasting the Business Cycle

it is difficult for economists to predict changes in the business cycle - accurate predictions in the economy are necessary for many reasons: *businesses must know about the possibilities of contractions and recessions so that they can make key decisions about expansion projects and output quotas *government officials must also know if a recession is looming on the economic horizon so preventative steps can be made to keep the economy running smoothly and hopefully avoid a contraction in the business cycle

The Effects of Inflation

it lowers the purchasing power of consumers, so consumers can buy less with the same amount of money - inflation lowers your purchasing power because one you can buy less with the same amount of money - it can eat into the income of consumers, especially those on a fixed income

The Consumer Price Index (CPI)

one of the best-known price indexes used by the government and economists, which measures how the standard price of a select group of goods changes over time - a Price Index is a way to illustrate how a regular group of goods and services changes over time - is used to calculate how prices have changed over the years - the government measures a standards set of goods and services called the market basket to track changes in prices over time - a measure of the average change in prices over time in a market basket of goods and services - used to evaluate and predict the economy - economists can determine the rate of inflation by reviewing data obtained from the Consumer Price Index - governments and financial organizations are constantly measuring trends in the economy to try to predict what will happen next - predicting economic trends successfully can have a profound effect on whether or not a business will make a profit or lose money - people depend on predictions about the economy to make decisions in their personal lives and a prediction about interest rates or developments in the labor market can help with these decisions

U.S. Census Bureau

operates a monthly census that is reflective of the population at large

"final goods and services"

refers to the finished product, or the final good or service that consumers purchase - intermediate goods are not included in GDP calculations because they are the goods that are used in the production of final goods

Gross National Product

the annual income earned by U.S. owned firms and U.S. residents

Trough

when the bottom of the business cycle occurs - the real GDP figures stop decreasing and level off - the economy is at its lowest point - after a trough, the economy begins to move upward again into another period of expansion and the business cycle starts all over again - one of the four major phases of a business cycle

Calculating the Unemployment Rate

the following calculation: 1) The number of employed and unemployed people is added together to get the total number of people in the labor force. 2) The number of unemployed people is divided by the total labor force and then multiplied by 100. This final figure shows the percentage of those unemployed in the labor force. - the labor force is made up of people who are age sixteen and older who are looking for work - those who are over age sixteen, but are not looking for work are not counted in this figure

Using the CPI

the formula is as follows: Year #1 = Year #2 Price x (Year #1 CPI divided by Year #2 CPI)

Inflation

the increase of general prices over time - the amount workers are paid in salary and wages has also risen - it is true that prices do rise over time, but so do salaries and wages

Full Employment

the level of employment that is reached when cyclical unemployment is not present in the economy - there may still be seasonal, frictional, and structural unemployment, but unemployment caused by a turn downward in the business cycle (cyclical unemployment) does not exist

"Disposable Income"

the money that you have to spend after paying all of your taxes - the greater the amount of disposable income, the healthier you are financially - can be used to measure the financial health of a society as well as an individual - whether you decide to spend or save your disposable income is up to you - one of the hallmarks of a free market society

Gross Domestic Product (GDP)

the total value of final goods and services produced within a country in one particular year - an increase in GDP means that the economy is growing and doing well - economists calculate the Gross Domestic Product as a means of measuring the economy - it is used to measure the economic performance of our economy

Cyclical

unemployment that rises during economic downturns and falls when the economy improves - one of the four major types of unemployment

Stagflation

when GDP figures decline but prices rise - one of the three other possible situations that can occur during a contraction in the economy

Recession

when GDP figures decrease for at least six months in a row - one of the three other possible situations that can occur during a contraction in the economy

Demand-Pull Theory

when inflation happens when the demand for goods and services exceeds existing supplies - one of the three main theories that describe inflation

The Quantity Theory

when inflation is caused by too much money in the economy - one of the three main theories that describe inflation

Cost-Push Theory

when inflation occurs when the cost of producing goods and services rise and that cost gets passed on to the consumer through higher prices - one of the three main theories that describe inflation

Maket Basket

when the Bureau of Labour Statistics (BLS) measures goods and services, that most people buy on a monthly basis - is a combination of goods and services that the BLS uses to track changes in the general price level - these are items that an average family will spend money on in a given month - the BLS measures these prices every month to track changes

Income Approach

when the GDP is calculated by adding up all the income earned in the economy - the most accurate way of calculating GDP - both approaches arrive at the same figure, however, economists use them both to compare the calculated figures and make adjustments to help clear up any errors that may have been made - both approaches help ensure that economists arrive at a more accurate result - one of the two approaches used in the calculation/measurement of GDP for any given year

Expenditure Approach

when the GDP is calculated by estimating the annual amount spent in four categories of final goods and services, which includes: consumer, business, and government goods and services, as well as, net exports - economists sum up the amount spent in each category and this total equals GDP - the is a practical way of calculating GDP - both approaches arrive at the same figure, however, economists use them both to compare the calculated figures and make adjustments to help clear up any errors that may have been made - both approaches help ensure that economists arrive at a more accurate result - one of the two approaches used in the calculation/measurement of GDP for any given year

Expansion

when the economy grows or expands, and real GDP figures increase - there are plenty of jobs and businesses are prosperous - unemployment decreases and the economy functions well - increasing employment, income, and vernal prosperity - one of the four major phases of a business cycle

Contraction

when the economy, inevitably, begins to lag a bit and takes a downhill turn - the real GDP figures fall and the economy slows - businesses decrease output and lay off workers - dwindling business activity; unemployment - one of the four major phases of a business cycle

Peak

when the real GDP figures level off - there is no further growth to the economy, but rather a steady "status quo" - one of the four major phases of a business cycle

Period of Full Employment

when there is an unemployment rate of four or five percent - economists generally feel that this shows a healthy economy