Unit 2: Economic Indicators and Business Cycle

circular flow model

Evaluates the amount of money spent by businesses and consumers in the market.

C

Consumption spending

I

Investment spending

G

Government Spending

Xn

Net exports

Net Exports

Exports - Imports

Employed

people who are currently holding a job in the economy, either full or part-time.

Unemployed

People who are not currently employed but are actively looking for work.

Labor Force

The sum of the employed and the unemployed

labor force participation rate

the percentage of the population that is in the labor force; (labor force/participation) x 100

unemployment rate

the percentage of the total number of people in the labor force who are not employed; (# of unemployed workers/labor force) x 100

frictional unemployment

unemployment where the job is still there, the person wants to work, but cannot for whatever reason

seasonal unemployment

unemployment where a person works a job only during a season

structural unemployment

unemployment where a person’s job description changes, so they leave

cyclical unemployment

unemployment where the person’s job is gone (ex. laid off)

natural rate of unemployment

frictional + structural unemployment - this is okay

actual rate of unemployment

cyclical + frictional + structural unemployment - not good, cyclical shows decline

inflation

overall increase in prices - leads to a decrease in consumer purchasing power

deflation

decrease in prices - leads to an increase in consumer purchasing power

(market basket in current year/market basket in base year) x 100

CPI (Consumer Price Index) formula

(new-old/old) x 100

rate of change formula

expected rate of inflation

the loan rates given from the bank

actual rate of inflation

the current market price of the loan

real value formula

nominal value/price index/100

GDP Deflator

(Nominal GDP/Real GDP) x 100

Real GDP Peak

 Real GDP is at its highest, Unemployment % is low, Stock prices are high, Consumers are confident, Prices are high, inflation is increasing, interest rates are increasing, leading to less investment

Trough

Lowest point of the cycle, Real GDP stops declining: it cannot get any worse, Unemployment is high, Consumer confidence is at its lowest

expansionary policies

 Fiscal: decrease taxes, increase government spending.

Monetary: decrease interest rates, decrease bank requirements, buy bonds.

Contractionary policies

 Fiscal: increase taxes, decrease government spending.

Monetary: increase rates, increase reserve requirements, and sell bonds.