Chapter 17: Business Cycles
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
