Chapter 17: Business Cycles

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Real GDI

- calculated by adding up total income - often flashes warning signs for the economy sooner than GDP does

Predicting business cycles

- persistent - economy is likely to perform the same this year as it did last year

unemployment and the business cycles

- rises substantially in a recession - often continues to rise for a period after the recession is over - fluctuates over the business cycle

Business Cycles

- short-term fluctuations in the economy. - no two are the same - not predictable

unemployment rate

- snapshot of strength of the labor market - it is a measure of excess capacity

initial unemployment claims

- tell you how many people lost their jobs and applied for unemployment last week - offer a timely insight into what is happening

stock market

- tells you about the future expected profits of businesses

employment cost index

- tells you how fast wages and benefits are rising - rising compensation is a sign of a healthy economy

Consumer confidence

- tells you what consumers are thinking - it rises when consumers are upbeat about the economy

Business confidence

- tells you what managers are planning - recession on the horizon when it starts to fall

Real GDP

- the broadest measure of economic activity - it measures total production, total spending, and total income across the whole economy - y = c + i + g + nx

inflation rate

- the rate of inflation tells you what is happening with prices

Tips for tracking the economy

- track many indicators - look at broader indicators - seek just-in-time data and leading indicators - find the signal in the noise - change your outlook when data differs from expectations

Nonfarm payrolls

- tracks how many jobs are created each month - provide an early and reliable look at how quickly the economy is creating jobs

Is the output gap of one time most likely the output gap of the next time?

Yes, because changes are slow and unpredictable

recession

a period of declining economic activity

expansion

a period of increasing economic activity

annualized rates

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

seasonally adjusted data

data stripped of predictable seasonal patterns, removing the predictable influences allows us to spot change in underlying trends

Output gap

difference between actual and potential output, measure as a percentage of potential output = (actual output - potential output) / (potential output) * 100

Okun's rule of thumb

for every percentage point that actual output falls below potential output, the unemployment rate increases around half a percentage

peak

high point in teh economy

expansions are

long and gradual

positive output gap

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

negative output gap

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

phases of the business cycle

peak, recession, trough, expansion

recessions are

short and sharp

levels

tell you where the economy is at - look at level of GDP relative to potential output

changes

tell you where the economy is going - look at GDP growth rate

Potential output

the level of output that occurs when all resources are fully employed

trough

the low point in the economic activity

S&P 500

the stock market index that tracks the value of 500 large publicly traded firms - provides a useful summary of the state of the stock market

revisions

updates to earlier estimates

real values

used when comparing data over time

lagging indicator

variables that follow the business cycle with a delay

leading indicator

variables that tend to predict the future path of the economy

how does the business cycle impact different parts of the economy?

when one part of the economy is doing well, it is likely that other parts of the economy are doing well also


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