Chapter 5 Study Guide

What are the details of a Peak?

-A peak in the business cycle usually means that the economy is operating at its capacity. -Peaks are followed by downturns or recessions. This change can happen simply because the economy runs out of steam and business investment begins to decline, causing economic growth to slow or turn negative.

The duration and intensity of business cycles are measured using data collected by the _________________________________________ and the ________________________________.

-Bureau of Economic Analysis -U.S. Department of Labor

The major components of the NIPA can be found in either of which two ways?

-By adding up the income in the economy -By adding up spending.

What are 3 methods to predict phases of the business cycle before they occur?

-Chicago Fed National Activity Index -Conference Board Leading Economic Index (LEI) -Yield Curve

GDP also can be calculated as the compensation to factors of production: - Compensation of employees - Proprietor's income - Corporate profits - Rental income - Net interest -Taxes on production and imports - Adjustments to national income

-Compensation of employees -Proprietor's income -Corporate profits -Rental income -Net interest -Taxes on production and imports -Adjustments to national income

What are the 2 ways of measuring GDP?

-Expenditures Approach -Income Approach

What are the details of Simon Kuznets?

-He developed a systematic approach to measuring and analyzing national data -He developed Gross National Product (GNP) -Won Nobel Memorial Prize in Economic Sciences in 1971

GDP does not measure _______________ or ___________________________

-Informal -Nonmarket

What does NIPA do?

-Let's economists judge our economic performance -Compare US income and output to that of other nations -Track the economy's condition over the course of the business cycle.

What is Gross National Product (GNP)?

-Reflects the market value of all final goods and services produced domestically and abroad using resources supplied by U.S. citizens while excluding the value of goods and services produced in the United States by foreign-owned businesses.

With the expenditures approach, all spending on final goods and services is added together. The four major categories of spending are what?

-personal consumption expenditures -gross private domestic investment (GPDI) -government spending -Net exports (exports minus imports).

The LEI predicts a recession whenever the index falls for ___ months in a row

3

What does a "Change in inventory" refer to?

A change in the physical volume of the inventory a private business owns, valued at the average prices over the period.

What is GDP per Capita?

A countries GDP divided by it's population. GDP per capita provides a useful measure of a country's relative standard of living.

What is a double-dip recession?

A recession that begins after only a short period of economic recovery from the previous recession

What are business cycles?

Alternating increases and decreases in economic activity that include 4 phases: peak, recession, trough, and recovery (or expansion).

A higher GDP generally equates to a higher what?

Average standard of living

Why does a yield curve have a positive slope in most cases?

Because investors typically demand a higher interest rate the longer their money is tied up.

Macroeconomics is concerned with ____________________________.

Business cycles

What do business cycles resemble?

Business cycles resemble roller coasters- some are higher, faster, or longer than others, but all are similar in terms of the up-and-down nature of the ride.

GDP does not take into account __________________________________________.

Environmental Quality

What are the details of a trough?

Eventually a trough is reached, and economic activity begins to pick up as businesses and consumers become more optimistic about the economy.

What are Net Exports?

Exports minus imports for the current period. Exports include all goods and services we sell abroad, while imports include all goods and services we buy from other countries.

What is GPDI?

Fixed investments, or investments in such things as structures (residential and nonresidential), equipment, and software. It also includes changes in private inventories. (Residential housing represents about one-fifth of GPDI, and nonresidential structures make up most of the rest because inventory changes are small).

It is important to note that imports do not actually lead to a smaller ________.

GDP

What is the equation that constitutes GDP?

GDP = C + I + G + (X − M)

Population with GDP

GDP Per Capita takes into account differences in the sizes of countries by dividing GDP by population

Purchasing Power Parity (PPP)

GDP-PPP takes into account differences in the cost of living between countries (especially services to adjust GDP measures).

What are personal Consumption Expenditures

Goods and services purchased by residents of the United States, whether individuals or businesses; they include durable goods, nondurable goods, and services.

G=

Government Spending

Y =

Gross Domestic Product (GDP)

What does GPDI stand for?

Gross Private Domestic Investment

I =

Gross Private Domestic Investment (GDPI)

What is the informal economy

Includes all transactions that are conducted but are not licensed. This income is not reported to the government so no taxes are collected.

What is Government Spending?

Includes the wages and salaries of government employees (federal, state, and local) and the purchase of products and services from private businesses and the rest of the world. Government spending also includes the purchase of new structures and equipment.

What does the circular flow diagram show?

It illustrates how households and firms interact through product and resource markets and shows that economic aggregates can be determined by examining either spending flows or income flows to households.

whenever possible, the NIPA uses ______________, or the prices paid for products, to compute GDP

Market Values

What is the NBER?

National Bureau of Economic Research

What is the NIPA?

National Income and Product Accounts

X - M =

Net Exports

What are the details of a recession?

Once a recession is under way, businesses react by curtailing hiring and perhaps even laying off workers, thus adding to the recession's depth.

C =

Personal Consumption Expenditures

What is a Yield Curve?

Shows a relationship between the interest rate earned on a bond (measured on the vertical axis) and the length of time until the bond's maturity data (shown on the horizontal axis).

What are details of the Conference Board Leading Economic Index (LEI)?

The LEI uses 10 important leading indicators to produce a weighted index. Because each indicator is a predictor of how the economy should perform in the near future, any change in the LEI today is supposed to reflect how the economy will change tomorrow. -Measures 10 important leading indicators.

What does the NBER do?

The official arbiter to decide when a recession begins and when it ends.

What is Real GDP?

The total value of final goods and services produced in a country in a year measured using prices in a base year.

Why is the work of the NBER in dating the turning points important for investors and businesses?

They help form expectations of how the economy might perform based on the phase of the business cycle it has reached.

GDP is a measure of the output produced by resources in a given country. What does this mean?

To determine U.S. GDP, it does not matter whether the producers are American citizens or foreign nationals as long as the production takes place within the country's borders. GDP does not include goods or services produced abroad, even if the producers are American citizens or companies.

The NBER assigns a committee of economists the task of dating what?

Turning points

What is a treasury Spread?

When Short-Term interest rates exceed Long-Term interest rates, the Treasury spread turns negative, which has been a reliable predictor of a pending recession.

What is the Expenditures approach to GDP?

Y= C + I + G + (X - M)

What is Gross Domestic Product (GDP)?

a measure of the economy's total output; it is the most widely reported value in the NIPA. Technically, a nation's GDP is equal to the total market value of all final goods and services produced by resources in a country in a given year.

What are details of the Chicago Fed National Activity Index?

a weighted average of 85 indicators of national economic activity. These indicators are drawn from a huge swath of economic activity including production, income, employment, unemployment, hours worked, personal consumption, housing, sales, orders, and inventories.

All spending by households that occurs in the product market becomes income to _______________.

businesses

Gross Private Domestic Investment is a key factor driving _____________________________.

economic growth

GDP reflects the _______ value of goods and services produced. Therefore, measurements of GDP do not include the value of intermediate goods used to produce other products.

final

all spending by businesses that occurs in the resource market becomes income to _______________.

household

The NIPA accounts focus on _________________________ goods and services.

market-produced

A recession begins after two consecutive quarters of _______________ growth.

negative

Real GDP takes __________ into account

prices

What are turning points?

times at which the economy switches from peak to downturn or from trough to recovery. -Turning points are established by a consensus of eminent economists after private deliberations