Chapter 5: Business Cycles

Capital used up in the process

Net domestic product represents the market value of output the economy has produced after adjusting for the value of?

A Peak

______ in the business cycle usually means the economy is operating at its capacity. It is followed by downturns or recessions.

Wages, salaries, and benefits - Profits - Rental income - Interest

NATIONAL INCOME: National income is all income, including:

Exports minus imports, and will be a negative number when imports are larger than exports

Net exports equals

Informal economy

_______is a large unmeasured component of our economy

Net domestic product

______is defined as GDP minus depreciation.

NATIONAL INCOME ACCOUNTING

is used to determine the level of economic activity of a country.

Expanding at its historical trend rate of growth;

A zero value for the index indicates that the national economy is ...

They base their forecasts on the theory that a recession is likely when interest rates on short term bonds exceed those on long term bonds. the spread between the interest rates on the ten-year Treasury note and the three-month Treasury bill.

How do some economists use the yield curve to predict recessions?

Recession

Occurs if a contraction is severe enough. the immediate downturn in economic activity after the peak in the business cycle, and represents the downward region of the cycle from the peak to the trough

Double-Dip recession

Occurs when an economy's recovery falls short and enters another recession before it fully recovers.

The onset of a recession

On the National Activity Index a Value below -.70 suggest what?

Recovery

Once economic activity turns upward. This phase of the business cycle immediately follows the trough, and is characterized by the continuous expansion of economic activity.

Environmental benefits or harmful effects of economic activity.

Our national income and production statistics do little to account for ?

Pay taxes, spend the money, or save it.

PERSONAL INCOME: What are the three things people can do with the money they receive as personal income:

Expansion

The economy is in ____ when overall activity in the recovery phase exceeds the peak of the previous business cycle (upper horizontal dotted line

Personal consumption expenditures - Gross private domestic investment - Government spending - Net exports

The expenditure side of GDP is equal to the sum of

Labor and property in the United States

U.S. GDP is a measure of the output produced by

How the economy will change tomorrow.

Because each indicator predicts economic performance in the near future, any change in the LEI today will likely reflect what?

GDP = C + I + G + (X − M)

There is a useful short hand way of expressing the expenditure side of GDP

1)the EXPENDITURE APPROACH: sums what has been purchased during the year and the INCOME APPROACH: sums what has been earned during the year.

1)What are the two methods that the National Income Accounting use to determine the level of economic activity of a country and what are the results reconciled?

A circular flow diagram

A depiction of how money and products are exchanged within an economy. Might be used by a business to show how a specific series of exchanges of goods, services and payments make up the building blocks of a given economic system of interest.

LEI Leading Economic Index

Another measure economist look to when predicting movements in the business cycle, An index published monthly by the Conference Board used to predict the direction of the economy's movements in the months to come.

Business Cycles

Are defined as alternating increases and decreases in economic activity.

Goods and services produced

GDP (Gross Domestic Product) reflects the final value of?

GDP per capita

GDP AND OUR STANDARD OF LIVING _____is equal to GDP divided by the country's population. It is a useful measure of the relative standard of living of citizens in different countries

Compensation of employees - Proprietor's income - Rental income - Corporate profits - Net interest

GDP also can be calculated as the compensation to factors of production

Peak

Highest point at the end of an economic expansion until the start of a contraction

One clue might be the extent to which countries spend resources to reach a target level of environmental quality - Wealthier countries tend to place greater value on the environment than do developing countries

How does an economy accurately measure the economic impact of a clean environment?

Calculations are being made to determine what is "sustainable." - Carbon footprints are being measured. - Metrics of economic progress that include environmental quality are being created

ISSUE: ENVIRONMENTAL QUALITY AND MEASURES OF GDP • Investments in green technologies are not fully reflected in the NIPA accounts, but some progress has been made. What are these progress?

Jobless recovery

If a recovery in the business cycle is not accompanied by strong job growth, then it is termed?

Goods and services purchased by households

In Expenditure approach to GDP :Personal consumption spending, which accounts for slightly more than 70% of GDP includes?

Good to knows

Just as firms need to know how well they are doing, so does a country. National income accounting provides the statistics to determine if the economy is encountering difficulties.

1)Federal Reserve Bank of Chicago 2)Production Income Employment Consumption Housing Inventories

NATIONAL ACTIVITY INDEX 1)The _____________ complies a weighted average of 85 economic indicators, included? 2)List 6 main ones.

1)Negative value below zero 2)positive value above zero

On the National Activity Index 1)______ indicate below-average growth; and 2)_____indicate above-average growth.

The potential for inflation

On the National Activity Index a Value above .70 suggest what?

Curtail hiring lay off This adds to the recessions depth.

Once recessions are underway what do businesses usually do?

Wages, salaries, and other labor income: - Proprietors'(the owner of a business, or a holder of property) income: - Rental income, interest, and corporate dividend income: - Transfer payments received: Minus personal contributions for social insurance(minus from the sums of all thee above)

Personal income includes

Contraction

Slowdown in the pace of an economic activity

Becomes a dollar of income to someone else.

The circular flow diagram illustrates the idea that EVERY DOLLAR SPENT

Net exports

The final component

Money earned from a garage sale or from items sold on eBay and not reported to the IRS - Transactions dealing with illegal goods and services - Income earned by undocumented residents

The informal economy includes:

Measure our nation's economic performance Compare American income and output with that of other nations Track the economy's condition throughout the business cycle

The national income and product accounts does what

Investment

The second expenditure component of GDP is:

Trough (bottom of the cycle)

The stage of the economy business cycle that marks the end of a period of declining business activity and the transition to expansion. (could be a depression)

Government purchases

The third component of expenditures, account for more than one fifth of economic activity.

Expansions and enhancements to economy's productive capacity, and changes in inventories Gross private domestic investment accounts for nearly 11% of GDP Includes spending on items such as equipment, software, and structures

These investments include

1) the peak 2) followed by a recession 3) leading to the trough or bottom of the cycle 4) finally followed by a recovery or an expansion to another peak.

What are the four phases of the business cycle are

Spending in the product market generates equal income in the factor market. (look at Diagram)

What is shown on the left side of the diagram.

NBER- National Bureau of Economic research

Who identifies the turning points at which the economy switches from peak to downturn or from trough to recovery? They are a non-profit research organization founded in 1920 that officially date the business cycles.

To avoid double counting

Why are Intermediate goods are excluded?

The nation's GDP

______is equal to the total market value of all final goods and services produced by labor and property within its borders.

Disposable personal income

_____is defined as personal income minus taxes

GDP (Gross Domestic Product)

is a measure of the market value of output

Yield curve

shows the interest rates for bonds with different maturity rates.