Economics: Business Cycle, Indicators, and GDP Concepts

Business Cycle

The pattern of expansion and contraction in the economy over time

Economic Indicators

Tools that inform businesses, investors, and governments about the economy's health and future trends

Gross Domestic Product

The total value of goods and services produced in a country

Consumer Price Index

The measure of inflation based on a basket of consumer goods

Unemployment Rate

The percentage of the labor force that is jobless and actively looking for work

Inflation

A rise in the general level of prices

Deflation

A decrease in the general level of prices

Peak

The highest point of the business cycle where GDP stops rising

Trough

The lowest point of the business cycle where GDP stops falling

Contraction Phase

A period of economic decline with falling GDP and rising unemployment

Expansion Phase

A period of economic growth with rising GDP and falling unemployment

Recession

A period of 6 consecutive months of declining GDP

Depression

A severe and prolonged economic downturn

GDP Formula

C + I + G + (X - N)

Consumption (C)

Spending by households on goods and services

Investment (I)

Spending by businesses on capital and households on new homes

Government Spending (G)

Spending by all levels of government on goods and services

Net Exports (X - N)

Exports minus imports

GDP Rising Meaning

The economy is expanding

GDP Falling for 2 Quarters

The economy is in a recession

CPI Basket of Goods

A group of goods and services tracked over time

Market Basket

A fixed group of goods used to measure price changes

Inflation Rate

The percent change in CPI from one year to the next

CPI Formula

(Cost of basket current year / cost of basket base year) x 100

Inflation Rate Formula

((CPI2 - CPI1) / CPI1) x 100

Real GDP

GDP adjusted for inflation

Nominal GDP

GDP not adjusted for inflation

Per Capita GDP

GDP divided by population

Substitution Bias

When consumers buy cheaper alternatives but CPI does not reflect it

Quality Change Bias

CPI fails to fully account for improved product quality

New Product Bias

Delay in adding new goods to CPI basket

Medium of Exchange

Money used to trade goods and services

Store of Value

Money used to save and transfer purchasing power over time

Unit of Account

Money used to measure value and compare prices

Double Coincidence of Wants

When two people each have what the other wants

Property Rights

Legal ownership of resources

Contract Enforcement

Government ensures agreements are upheld

Government Regulation

Rules that influence behavior to protect consumers

Labor Force

Employed + unemployed people age 16+

Employed

Having a job even part-time

Unemployed

No job but actively looking for work

Not in Labor Force

Not working and not looking for work

Unemployment Rate Formula

Unemployed / labor force x 100

Frictional Unemployment

Temporary unemployment between jobs

Structural Unemployment

Mismatch between worker skills and job requirements

Cyclical Unemployment

Unemployment caused by recession

Natural Rate of Unemployment

Frictional + structural unemployment

Full Employment

No cyclical unemployment

Price Ceiling

Government maximum price to keep prices low

Price Floor

Government minimum price to keep prices high

Price Ceiling Effect

Causes shortages

Price Floor Effect

Causes surpluses

Monetary Policy

Central bank actions controlling money supply and interest rates

Federal Reserve

The central bank of the United States

Expansionary Monetary Policy

Increases money supply and lowers interest rates

Contractionary Monetary Policy

Decreases money supply and raises interest rates

Discount Rate

Interest rate the Fed charges banks

Reserve Requirement

Amount banks must keep and not lend out

FDIC

Government program that guarantees bank deposits

Bank Run

When many people withdraw money at once

Fiscal Policy

Government decisions on taxes and spending

Expansionary Fiscal Policy

Decrease taxes and increase spending

Contractionary Fiscal Policy

Increase taxes and decrease spending

Transfer Payments

Money given by government to individuals

Progressive Tax

Tax rate increases as income increases

Regressive Tax

Lower income people pay higher percentage of income

Proportional Tax

Same tax rate for all incomes

Income Tax

Tax on earnings

Sales Tax

Tax on goods and services

Payroll Tax

Tax for social programs like Social Security

Excise Tax

Tax on specific goods like gas or tobacco

Mandatory Spending

Spending required by law

Discretionary Spending

Spending decided annually

Budget Deficit

Government spends more than it collects

Budget Surplus

Government collects more than it spends

National Debt

Total amount of money the government owes

Deficit Spending

Spending more than revenue

Intellectual Property

Creations of the mind protected by law

Patent

Protects inventions for 20 years

Copyright

Protects original works automatically

Trademark

Protects brand names, symbols, or sounds