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Chapter 5: Business Cycles

Business Cycles
Are defined as alternating increases and decreases in economic activity.
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
Peak
Highest point at the end of an economic expansion until the start of a contraction
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
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)
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.

Expansion
The economy is in ____ when overall activity in the recovery phase exceeds the peak of the previous business cycle (upper horizontal dotted line
Contraction
Slowdown in the pace of an economic activity
A Peak
______ in the business cycle usually means the economy is operating at its capacity.

It is followed by downturns or recessions.

Curtail hiring
lay off
This adds to the recessions depth.
Once recessions are underway what do businesses usually do?
Jobless recovery
If a recovery in the business cycle is not accompanied by strong job growth, then it is termed?
Double-Dip recession
Occurs when an economy’s recovery falls short and enters another recession before it fully recovers.
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.

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.

Expanding at its historical trend rate of growth;
A zero value for the index indicates that the national economy is …
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 onset of a recession
On the National Activity Index a Value below -.70 suggest what?
The potential for inflation
On the National Activity Index a Value above .70 suggest what?
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.
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?
Yield curve
shows the interest rates for
bonds with different maturity rates.
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?
NATIONAL INCOME ACCOUNTING
is used to determine the level of economic activity of a country.
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?
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
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.
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.
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.
Becomes a dollar of income to someone else.
The circular flow diagram illustrates the
idea that EVERY DOLLAR SPENT
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.
Goods and services produced
GDP (Gross Domestic Product) reflects the final value of?
To avoid double counting
Why are Intermediate goods are
excluded?
Labor and property in the United States
U.S. GDP is a measure of the output produced by
GDP (Gross Domestic Product)
is a measure of the
market value
of output
Personal consumption expenditures

Gross private domestic investment

Government spending

Net exports
The expenditure side of GDP is equal to
the sum of
Goods and services
purchased by households
In Expenditure approach to GDP :Personal consumption spending, which
accounts for slightly more than 70% of
GDP includes?
Investment
The second expenditure component of
GDP is:
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
Government purchases
The third component of expenditures, account for
more than one fifth of economic activity.
Net exports
The final component
Exports minus imports,
and will be a negative number when imports
are larger than exports
Net exports equals
GDP = C + I + G + (X ? M)
There is a useful short
hand way of
expressing the expenditure side of GDP
Compensation of employees

Proprietor’s income

Rental income

Corporate profits

Net interest
GDP also can be calculated as the
compensation to factors of production
Wages, salaries, and benefits

Profits

Rental income

Interest
NATIONAL INCOME:
National income
is all income, including:
Net domestic product
______is defined as GDP
minus depreciation.
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?
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
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:
Disposable personal income
_____is defined as
personal income minus taxes
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

Environmental benefits
or harmful effects
of economic activity.
Our national income and production
statistics do little to account for ?
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?
Informal economy
_______is a large
unmeasured component of our economy
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:

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