Unit 2: Economic Indicators and the Business Cycle

GDP

________ is used to measure the economic growth of a country.

Gross

________ domestic product (GDP)- The market value of the final goods and services produced within a nation in a given period.

Trough

________- The bottom of the cycle where a contraction has stopped.

CPI

The ________ is based on a market basket of goods bought by consumers, including the ones produced abroad.

Peak

________- The top of a business cycle where an expansion has ended.

Firm

________ is any business that produces goods and supplies them to the product market and then receives the payment for those goods.

Market basket

________- A collection of goods and services used to represent what is consumed in the economy.

Goods

________ evolve- The emergence of new products (smartphones) and the extinction of others (manual typewriters) is understood by firms and consumers, but the market basket must reflect this or it risks becoming irrelevant.

Recession

________- Unofficially defined as two consecutive quarters of falling real GDP.

Business cycles

________ refer to the fluctuations in economic activity over time.

individual dollar

It occurs because inflation causes the value of the ________ to decrease over time.

Consumers

________ are the people who buy the goods /services in an economy.

GDP deflator

The ________ includes all items that make up domestic products.

real GDP

Contraction- A period where ________ is falling.

Deflation

________: the general decrease in prices.

foreign sector

Closed economy- A model that assumes there is no ________ (imports and exports)

Circular flow of economic activity

A model that shows how households and firms circulate resources, goods, and incomes through the economy

Closed economy

A model that assumes there is no foreign sector (imports and exports)

Gross domestic product (GDP)

The market value of the final goods and services produced within a nation in a given period

Aggregate spending (GDP)

The sum of all spending from four sectors of the economy

GDP = C + I + G + (X

M)

Consumer spending (C)

Spending done by customers

Investment spending (I)

Investment is defined as current spending to increase output or productivity later

Government spending (G)

Purchases made by the government for final goods and services and investments in infrastructure

Aggregate income (AI)

The sum of all income-Wages + Rent + Interest + Profit-earned by suppliers of resources in the economy

Value-added approach

A third approach to calculating GDP that considers all stages of production of a final good and the value that was added to the final good along the way

Employed

A person is employed if they have worked for pay at least one hour per week

Unemployed

A person is unemployed if they are not currently working but are actively seeking work

Labor force

The sum of all individuals 16 years and older who are either currently employed (E) or unemployed (U)

Out of the labor force

A person is classified as out of the labor force if they have chosen to not seek employment

Labor force participation

The ratio of the size of the labor force to the size of the population 16 years and older

Unemployment rate

The percentage of the labor force that falls into the unemployed category

Discouraged workers

Citizens who have been without work for so long that they become tired of looking for work and drop out of the labor force

Frictional unemployment

A type of unemployment that occurs when someone new enters the labor market or switches jobs

Seasonal unemployment

A type of unemployment that is periodic, predictable, and follows the calendar

Structural unemployment

A type of unemployment that is the result of fundamental, underlying changes in the economy such that some job skills are no longer in demand

Cyclical unemployment

A type of unemployment that rises and falls within the business cycle

Full employment

Exists when the economy is experiencing no cyclical unemployment

The natural rate of unemployment

The unemployment rate associated with full employment, somewhere between 4 to 6 percent in the United States

Consumer price index (CPI)

The price index that measures the average price level of the items in the base year market basket

Deflation

the general decrease in prices

Inflation

the general increase in prices

Disinflation

a decrease in the rate of inflation

Inflation rate

the percentage change in aggregate price level across an entire economy in a year

Market basket

A collection of goods and services used to represent what is consumed in the economy

Inflation

The percentage change in the CPI from one period to the next

The annual rate of inflation on goods consumed by the typical consumer

The percentage change in the CPI from one year to the next

Nominal income

Todays income is measured in todays dollars

Real income

Todays income is measured in base year dollars

Consumer substitute

As the price of goods begins to rise, we know that consumers seek substitutes

Goods evolve

The emergence of new products (smartphones) and the extinction of others (manual typewriters) is understood by firms and consumers, but the market basket must reflect this or it risks becoming irrelevant

Quality differences

Some price increases are the result of improvements in quality

The real rate of interest

The percentage increase in purchasing power that a borrower pays a lender

Nominal GDP

The value of current production at the current prices

Real GDP

The value of current production but using prices from a fixed point in time

Base year

The year that serves as a reference point for constructing a price index and comparing real values over time

Price index

A measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year

GDP price deflator

The price index that measures the average price level of the goods and services that make up GDP

The business cycle

The periodic rise and fall in 4 phases present in economic activity

Expansion

A period where real GDP is growing

Peak

The top of a business cycle where an expansion has ended

Contraction

A period where real GDP is falling

Recession

Unofficially defined as two consecutive quarters of falling real GDP

Depression

A prolonged, deep contraction in the business cycle

Trough

The bottom of the cycle where a contraction has stopped