Midterm 2 - Business Cycles

Are recessions similar or different in severity

Vary Significantly

Is percent change in output positive or negative during a recession?

Negative

What are leading indicators and examples?

Leading indicators predict the future path of the economy

1. Consumer confidence

2. Business confidence

3. Stock Market (investor confidence)

4. Business orders

What are lagging indicators and examples?

Lagging indicators are variables that tend to follow the path of the economy

1. Unemployment

2. GDP

3. Consumer Price Index (shows inflationary effects)

Okun’s Rule of Thumb

• For every percentage fall in output, unemployment increases by 0.5 percent

When do we use seasonally adjusted data?

• When you use quarterly to describe or predict trends that occur over the course of a year

What do we use to size the economy?

• Real GDP

What do we use to track at the labor market performance?

• unemployment rate

What do we use to track wages and benefits?

• the employment cost index

What are the stages of business cycle?

• peak

• recession

• trough

• expansion

Recessions reflect major, sustained economic turmoil; not every bump going downwards is indicative of a recession

What is potential output?

• level of output that occurs when all resources are fully employed; what economy can sustainably produce

• unemployment is at the natural rate

• Inputs aren’t being wasted

What is the output gap?

Difference between actual and potential output

• (actual - predicted) / predicted

What does a negative output gap indicate?

• Some resources are under-used

• unemployment

What does a positive output gap indicate?

• resources are being over used

• unsustainable intensity

• overworked ppl and companies putting off repairs

What is an economic boom?

• workers over stretched

• machinery not being repaired

What is an economic bust?

• unemployment

• unused factories / machineries

How do recessions work?

• short and sharp

How do expansions work?

• long and gradual

How to look at macroeconomic data:

1. Look at real data

2. Compare apples to apples

3. Pay attention to revisions of data

What causes a Recession?

• Less productivity

• Price hikes

• High interest rates

• Banking crisis

• Overvaluation of stocks

• Housing bubble

What is more sensitive? Production of goods or services?

goods