ECON Chapter 17
In the third quarter of 2019, real potential output was $18,964 billion while real GDP was $19,121 billion. What is the output gap?
0.83%
Okun's Rule of Thumb
For every percentage point that actual output falls below potential output, the unemployment rate increases around half a percentage point. Links Unemployment and GDP
The Unemployment Rate
The unemployment rate is a snapshot of the strength of the labor market. It's a measure of excess capacity.
Unemployment and Business Cycles
Unemployment rises substantially in a recession. Unemployment often continues to rise for a period after the recession is officially over.
lagging indicators
Variables that follow the business cycle with a delay are called
leading indicators
Variables that tend to predict the future path of the economy are called
positive output gap
actual output is above potential output: the economy is using its resources with intensity
Business cycles
are short-term fluctuations in economic activity
Annualized rates
data converted to the rate that would occur if the same growth rate had occurred throughout the year.
Seasonally adjusted
data stripped of predictable seasonal patterns. Removing the predictable influences allows us to spot changes in the underlying trends
negative output gap
occurs when actual output is below its potential: there are idle resources, and it typically corresponds with high unemployment.
You predict that the output gap will decline from 1% to -1%. If the current unemployment rate is 3.5%, you predict the unemployment rate to
rise to 4.5%.
Changes
tell you where the economy is going, we can look at GDP growth rates to tell us if the economy is expanding or contracting
Levels
tell you where the economy is, We can look at the level of GDP relative to potential output to see where the economy is
Real GDP
the broadest measure of economic activity. It measures total production, total spending, and total income across the whole economy
Potential output
the level of output that occurs when all resources are fully employed. Long-run economic growth reflects growth in an economy's potential output
Peak
A high point in economic activity
Business Cycles Are Not Cycles
No two business cycles are the same, the economy's fluctuations are anything but predictable, thus, the word cycle is misleading. Business cycles are persistent. The economy is likely to perform the same this year as it did last year.
Nonfarm Payrolls
track how many jobs are created each month. They provide an early and reliable look at how quickly the economy is creating jobs
Suppose a report picked up by many major news outltes argues that the United States is quickly heading into a recession. As a result, Bert's family, as well as many other like-minded families and individuals, reduces their spending and increase their savings. As a result of this behavior
the economy is actually harmed, since there is a sharp decease in consumer spending.
Trough
A low point in economic activity
Recession
A period of declining economic activity. Recessions are short and sharp.
Expansion
A period of increasing economic activity. Expansions are long and gradual.
Business Confidence
Business confidence tells you what managers are planning. When it starts to fall, a recession might be on the horizon
Real GDI
Calculated by adding up total income, GDI often flashes warning signs for the economy sooner than GDP does
Initial Unemployment Claims
Initial unemployment claims tell you how many people lost their jobs and applied for unemployment the previous week. They offer a timely insight into what is happening
output gap
The difference between actual and potential output, measured as a percentage of potential output: Actual Output - Potential Output / Potential Output * 100