Unit 4: Economic measurement

Business cycle

the periodic ups and downs in business activity

how is the business cycle measured

through cycles from trough to trough

Why do business cycles exist?

because of the freedom of choice of consumers in the market place

Expansion

economic growth measured by a rise in GDP (spending increases, production increases, GDP increases, inflation increases, unemployment decreases)

Peak

Real GDP stops rising, but has not yet begun to fall ( spending, production, GDP are at highest but start to stagnate, inflation increases, full unemployment)

Contraction

economy declines, falling real GDP (spending, GDP, and production decrease, inflation slows, and unemployment increases)

Trough

real GDP stops declining, but has not yet begun to rise (spending, production, GDP, and inflation are all at their lowest and unemployment is at its highest)

Inflation

rising average price of the country

unemployment

those looking for a job, but cannot find one

Misery Index

inflation+ unemployment

recession

a falling GDP for two quarters or 6 continuous months

6-10%

the usual unemployment rate of a recession

How are recessions different from depressions

recessions are shorter and less severe than depressions

what is a depression

if a recession is especially long and severe. high unemployment, low economic output

what is stagflation

combinations of stagnation and inflation

what does stagflation indicate

a decline in real GDP (output) combined with a rise in the price level (inflation)

why do we need contractions? how do they affect wages and price?

contractions keep wages/prices (inflation) in check. inflation worse for economy than unemployment.

dollar value

total cash value of sales of all goods and services produced in a country’s households, firms, and gov’t

GDP

the total dollar value of final goods and services produced in one year

gross GDP

total before any adjustments like repairing old machinery

domestic GDP

companies that produce within the boarders of the US, regardless of where their headquarters are located

product GDP

the value of any goods and services

intermediate goods

produced to make FINAL goods

formula for GDP

Consumer Spending (70%) + Government spending (20%)+ Investment (15%) + Net exports (5%)

Consumer spending-durable

items with longer lifespans (cars, appliances, TV)

Nondurable consumer spending

items with shorter life spans (food, clothing, fuel, newspapers)

Government spending

defense spending (military), road construction, school districts to White House

Investment spending

machines, factories, inventory changes, new houses

Net Exports

exports- imports= net exports

business investments drive the business cycle

when the economy is good, business create production, which creates jobs, which creates more money for people, which creates more spending, which creates business increase production

when the economy is bad, people spend less money and businesses cut production which decreases jobs and decreases spending, decreasing business production

Cost of credit drives the business cycle

cost of credit is the interest rate that financial institutions charge to customers to lend them money.

low interest rate= people are more likely to take out loans which increases spending which then increases production which then businesses hire more people giving more jobs and more money to the public for more spending for more production and business success

expectations drive the business cycle

good economy: more spending= better economy

bad economy: less spending= bad economy

external shocks also drive the business cycle

they have huge impacts on a country’s economy.

negative external shocks: war, 9/11, pandemic, climate change, disruptions in oil supply

positive external shocks: discovery of oil (fracking), good growing season, climate change opening new growing regions

Real GDP

adjusted for inflation and reflects output more accurately (used to compare past years)

Nominal GDP

using THAT years dollars. Not adjusted for inflation. (used to determine GDP in a single year period.)

Real GDP Per capita

how much GDP is spread out per person (indicates standard of living- how well a country’s people live) it measures material goods, doesn’t measure people’s quality of life.

how to calculate GDP Per Capita

GDP/ total population

What does not count in GDP

Nonmarket activities, underground economy, negative externalities, and quality of life

Nonmarket activities

1. activities that people do for themselves

2. purchase of stocks and bonds

3. welfare/unemployment transfer payments

4. mergers

Underground Economy

all transactions on the black market (illegal) do not count. some legal transactions are also not reported.

negative externalities

unintended economic consequence of a business (ex: pollution that decreases a farmer’s harvest)

quality of life

GDP doesn’t indicate quality of life. a higher economic output does not make people happier.

Why is GDP not a perfect measure?

because it doesn’t measure the quality of changes of goods and services, includes products that hurt the environment, and doesn’t report illegal transactions.

GNP (gross national product)

total market value of goods and services produced BY the residents of a country, even if they are living abroad

NI (national income)

the amount of money gained from factor payments in a country (rent+ profit + wages + interest)

DPI (disposable personal income)

the amount of money a person has to spend minus taxed payed by the individual.

Aggregate Supply (total output)

supply curve for whole economy

total amount of goods/services in the economy available at all possible price levels.

prices go up, business produce more

prices go down, business produce less

Aggregate Demand (total output)

the amount of goods and services in the economy that will be purchased at all possible price levels

price goes up, people buy less, price goes down, people buy more

who unemployment does NOT count

those under 16, those in armed forces, those in prison, retired, the “homemakers” (stay at home moms), full time students over the age of 16, the “discouraged” (those not looking for a job)

who DOES count for unemployment

employed full time, employed part time, employed unpaid workers in a family business (if working over 15hrs), unemployed (actively looking for work but can’t find it, or are waiting for better careers)

Seasonal Unemployment (good/ok)

its the wrong season to do business, waiting for the right time to trade.

frictional unemployment (good/ok)

temporary, voluntary unemployment, new entrants to the workforce (fresh out of college)

cyclical unemployment (bad)

unemployment caused by a downturn in the economy

structural unemployment (bad)

unemployment caused by a mismatch of skills and job requirements, outsourcing, technology, eliminating jobs.

full employment

most efficient with 4-6% unemployment

more workers available for future expansion

less pressure to raise wages

100% employment not possible

underemployment

working at a job when you are overqualified or working part-time when you want full-time employment.

discouraged workers

those that have given up searching for employment. common in long recessions.

unemployment rate

#unemployed/ # of labor force x 100

inflation

general increase in prices across an economy

who inflation hurts

• savers- money is worth less, less purchasing power

• creditors- the money they get paid back buys less stuff

who inflation helps

• debtors- meaning the money you will pay back will buy less stuff

pros of inflation

if you owe money, you pay it back cheaper

it can also increase/encourage spending because your money is losing value as time goes on and as you use it

cons of inflation

it decreases purchasing power of money:

loss of real wages

loss of real wealth

loss of value of savings

loss of the value of fixed income

price indices

track changes in price

list of goods that show the average price of changes over time

consumer price index (CPI)

most common of price indices

finds price of market basket

market basket

collection of goods/services bought by average family of four during a one month period

hyper-inflation

inflation rates that rise extremely quickly

typically occurs after a war and is short-lived

can lead to a complete breakdown of a country’s monetary system

(Germany after WWI, Zimbabwe after civil war, Venezuela)

Growth of money supply

when there is too much money in the economy, the money becomes less valued, causing inflation

demand-pull inflation

when total demand for goods and services exceeds the supply. too much money chasing too few goods. (college tuition)

cost-push inflation

cost of production increases (resources and labor), prices increase for goods/services

can lead to wage-price spiral (wages and price going up in a continuous spiral)

(ex. minimum wage increase)

purchasing power

when inflation rises, the same monetary value will buy less of a good/service

income

inflation can make your income less (less purchasing power)

people on fixed incomes are especially harmed by inflation

interest rates

people receive interest for putting their money into saving accounts. if the inflation rate is higher than the banks interest rate, you lose money.

when is normal

unemployment: 4-6%

inflation: 2-3% per year

together is a misery index of 6-8%