American Policy In Action

Economics Business Cycle

the natural, recurring fluctuation of economic activity between periods of expansion (growth) and contraction (recession)

• Measured by real GDP

Depression/Trough

Lowest part of business cycle

• Inflation slowest

• Consumer spending lowest

• “Bottoming out”

Prosperity/Peak

Highest part of business cycle

• Inflation highest

• Highest consumer spending

• Highest level of real GDP growth before a contraction

Expansion/Recovery

Rising part of business cycle

• Inflation rising

• Consumer spending increasing

• Period of economic growth/activity

Recession/Contraction

Decreasing part of business cycle

• Inflation decreases

• People lose jobs

• Spending decreases

GDP

measures the total market value of all final goods and services produced within a country in a specific period

• GDP = Consumption + Investment + Government Spending + Net Exports

Consumer spending

“C”

Personal consumption expenditures, including spending on household goods (durable/nondurable), and services

ex. buying a car

Investment

“I”

Gross private domestic investment, including business spending on capital goods, construction, and inventory changes.

ex. real estate investment building apartments

Government spending

“G”

Government consumption expenditures and gross investment on goods and services, such as defense, infrastructure, and public salaries (excludes transfer payments).

ex. funding the army

Net exports

“Nx”

The value of a country's exports minus its imports (Exports − Imports). 

Economic indicators

Leading indicators (move ahead of the economy ex. increased employment = upturn in cycle), Coincident indicators (move up and down with economy ex. GDP), Lagging indicators (moving behind economy ex. unemployment won’t decline until recovery is underway)

consumer price index

series of index numbers measuring changes in level of prices over time

market basket

Structural unemployment

number of jobs is not enough to meet demand for number of unemployed. can be caused by technical innovations (ex. AI taking over low level jobs)

Frictional unemployment

time when unemployed are looking for the job best suited for them

Cyclical unemployment

unemployment that occurs with the ups and downs of the business cycle (high during trough, low during peak)

Seasonal unemployment

unemployment occurs during specific time of year every year

demand pull inflation

total demand rises faster than production of goods (causes shortage and drives up price)

cost push inflation

prices pushed upward by rising production costs (non price determinants)