Chapter 17: Tracking the Business Cycle

Vocabulary practice flashcards covering macroeconomic trends, business cycle phases, Okun's rule of thumb, and key economic indicators from Chapter 17.

Potential Output

The level of output that occurs when all resources are fully employed, representing what an economy can sustainably produce given its current resources.

Business Cycle

Short-term fluctuations in economic activity that reflect the tendency for actual output to deviate from potential output.

Output Gap

The difference between actual and potential output, measured as a percentage of potential output: $\frac{\text{Actual output} - \text{Potential output}}{\text{Potential output}} \times 100$.

Bust (Negative Output Gap)

A situation where actual output is below potential output, characterized by idle resources such as unemployed workers and shuttered storefronts.

Boom (Positive Output Gap)

A situation where actual output exceeds potential output, characterized by an unsustainable intensity of production that is possible only for a short time.

Peak

A high point in economic activity marking the end of an expansion and the start of a recession.

Trough

A low point in economic activity marking the transition from a recession into an expansion.

Recession

A period of declining economic activity that runs from a peak to a trough.

Expansion

A period of increasing economic activity that runs from a trough to a peak and continues until ended by an adverse shock.

Comovement

The tendency of many economic variables (such as payrolls, retail sales, and production) to move up and down together across the business cycle.

Leading Indicators

Variables that tend to change first and predict the future path of the economy, such as business confidence, consumer confidence, and the stock market.

Lagging Indicators

Variables that tend to follow business cycle movements with a delay, such as the unemployment rate.

Okun's Rule of Thumb

An empirical rule stating that for every percentage point actual output falls below potential output, the unemployment rate will typically rise by around half a percentage point.

Seasonally Adjusted Data

Data that have been stripped of predictable seasonal fluctuations to reveal underlying economic trends.

Annualized Rate

Data from a time period shorter than a full year converted to the rate that would occur if that same rate had continued throughout an entire year.

Nominal Variables

Economic variables expressed in dollar values using the current prices of that year's data without adjusting for inflation.

Real Variables

Economic variables adjusted for inflation to compare quantities over time while holding prices constant.

Data Revisions

Updates made to earlier published economic estimates as more complete and comprehensive data become available.

Real GDP

The broadest macroeconomic measure of total economic activity and output, adjusted for changes in price levels.

Real GDI (Gross Domestic Income)

An economic measure that calculates activity by summing total income, providing an early and reliable cross-check on Real GDP.

Nonfarm Payrolls

A monthly labor market metric tracking the number of workers on businesses' payrolls to indicate monthly job gains or losses.

Initial Unemployment Claims

A timely weekly indicator measuring how many people lost their jobs and filed for unemployment insurance during the previous week.

Employment Cost Index

An economic indicator that tracks how rapidly wages and benefits are rising, serving as a leading indicator of inflationary pressure.