ECON CH29: Tracking the Business Cycle

potential output

the level of output that occurs when all resources are fully employed → what we can sustainably produce given current resources

fail to meet its potential

In the short run, the economy may ______.

business cycle

short-term fluctuations in economic activity → deviations from potential output

unemployment rate

The business cycle causes the ______ ___ to rise and fall.

lasting impact

While recessions do not usually last long, they have a _____ ____ on people’s careers.

output gap

the difference between actual and potential output measured as a percentage of potential output

actual output - potential output/potential output x 100

output gap equation

negative output gap

the economy is producing less than it can → bust

• idle resources: workers cannot find jobs, storefronts are shuttered, etc.

positive output gap

the economy is producing more than its potential → boom

unsustainable intensity

A positive output gap creates _____ _____ that is possible only for a short while.

peak

a high point in economic activity

trough

a low point in economic activity

recession

a period of declining economic activity

expansion

a period of increasing economic activity; keep going until they are killed by adverse shock

the economy’s fluctuations are not rhythmic, reliable or predictable

Why are business cycles not cycles?

short and sharp, long and gradual

Recessions are _______, expansions are _______.

persistent, many parts

Business cycles are ______ and impact _____ ____ of the economy.

unusual expansion

rapid bounceback following the COVID-19 shutdowns

closely related

The state of the economy this year is _____ _____ to the conditions next year.

comovement

variables that move up and down together

goods-producing industries

Goods producing and private service providing industries rise and fall together, though ________ _____ are usually more sensitive to the business cycle.

leading indicators

variables that tend to predict the future path of the economy → give a sense of where the economy is headed and tend to change first

ex: business confidence, consumer confidence and the stock market

lagging indicators

variables that tend to follow business cycle movements with a bit of delay

ex: unemployment

okun’s rule of thumb

for every percentage point that actual output is less than potential output, the unemployment rate will be around half a percentage point higher

rise, 2%

If the output gap declines from 0% to -4%, then the unemployment rate will likely ____ by about ___.

seasonally adjusted

data stripped of predictable seasonal patterns → helps you see underlying trends

annualized rates

data converted to the rate that would occur if the same rate had occurred throughout the year → data from a time period of less than a year converted into an annual rate

real variables

adjusted for inflation

nominal data

makes it difficult to tell whether an increase reflects rising prices or rising quantities

revisions

pay attention because initial estimates can be based on incomplete data

real GDP

the broadest measure of economic activity

real GDI

acts as a useful cross-check on GDP

nonfarm payrolls

tell you if the labor market is improving → tell you how many jobs are created each month by tracking the number of workers on businesses’ payrolls

unemployment rate

an indicator of excess capacity

initial unemployment claims

_______ provide a timely indicator.

business confidence

tells you what managers are planning

consumer confidence

tells you what consumers are thinking

inflation rate

tells you what is happening with prices

employment cost index

tells you what is happening with wages

stock market

tells you about future expected profits of businesses

many

Track ____ indicators.

broad, narrow

_____ indicators beat _____ indicators.

just in time, leading, lagging

Seek _____ data and distinguish between ____ and ____ indicators.

signal

Find the ____ amid the noise.

differs from expectations

Adjust your outlook when data _______.