BEC: Economics

Business Cycle

Business Cycle

more or less regular pattern of expansion and contraction around the trend of gross domestic product (GDP) growth

What are the 4 business cycle phases?

These are the phases of?

1. expansion phase

2. the peak

3. the contraction or recession

4. the trough

Expansion phase

where more resources become employed and actual output approaches potential output. In the extreme there may be over employment as workers work overtime and the utilization rate for plant and equipment exceeds normal levels

The peak

the highest point of output during the cycle. The economy is operating above the long-term growth trend of real GDP

The contraction or recession

more resources become unemployed and actual output falls below potential output.

The trough

the lowest point of output during the cycle. There are high unemployment rates, a decline in annual income, and overproduction. Real GDP stops declining and starts expanding

How a business cycle is measured

the period of time the peak of one cycle though the four phases to the peak of the next cycle

Economic Growth

the trend or the path of economic growth measures the level of output (potential output) that could be produced if all resources were fully employed over time.

The real business cycle model

is based on the premise that fluctuations in output and employment result from real supply shocks that periodically hit the economy, and that markets adjust rapidly to the shock and always remain in equilibrium

The political business cycle model

explains the business cycle as resulting from interactions between economy policy decisions and political decisons designed to influence voter behavior.

The insufficient aggregate expenditure model

is based on the premise that a business cycle is caused by inadequate spending

What are the key components of the aggregate expenditure model

These are the key components of what?

(c) personal consumption

(I) business investment

(G) government expenditures

(X) the net difference between exports and

(M) Imports

What is the formula for the aggregate expenditure model

GDP = C + I + G + (X-M)

The accelerator model

assumes that the business cycle is caused by the volatility of investment spending

Unemployment rate

measures the percentage of the labor force that is not working. (The number of unemployed workers divided by the number of workers in the labor force multiplied by 100)

Labor force

equals all U.S residents 16 years or older who are not institutionalized, working, unemployed, actively looking for work

Discouraged workers

unemployed workers who are not actively seeking employment, and they are not considered to be a part of the labor force.

fricitional unemployment

occurs due to normal labor turnover

Seasonal unemployment

occurs in regual and recurring patterns in some industries

cyclical unemployment

unemployment that is related to the general level of economic activity and tends to rise during the recession phase

Structual unemployment

arises when changes in technology and international competitiveness change the skills required to perform jobs and/or change the location of jobs

What are the costs of unemployment

These are the costs of?

a. unemployment represents forgone output, and causes actual output to be less than the potential output. The primary economic cost of unemployment is the loss of output. The economy is not producing its potential output.

b. There is a social dimension to unemployment as a loss of a job causes problems with self-esteem. Generally, there is also an increase in domestic violence as the unemployment rate increases in the average time workers are main unemployed increases.

c. The burden of unemployment is unequally shared. Lower skilled workers have a higher unemployment rates than higher skilled workers.

full employment

The level of employment, where the actual unemployment rate is equal to the natural rate of unemployment(NRU)

when does natural rate of unemployment occur? (NRU)

this causes the occurrence of?

Occurs when the number of jobseekers is equal to the number of job vacancies and actual unemployment would be greater than zero due to frictional unemployment

Economic indicators

are a set of variables that measure various aspects of economic activity that provide information to policy makers as to the state of the economy. The best known set of indices is developed by the conference board a private business research group.

Leading indicators

Are an index of 10 economic variables that have generally provided advance signals of a change in the level of economic activity

What are the 10 economic variables of leading indicators?

these are variables of what?

1. average work week for manufacturing workers

2. S&P 500 stock index.

3. Average weekly initial unemployment insurance claims.

4. New orders for customer goods.

5. New orders for non-defense capital goods.

6. Permits for new residential construction

7. A measure of vendor delivery performance.

8. Inflation adjusted growth in the money supply.(M2)

9. Consumer sentiment index.

10. Interest rates spread between the 10 T-bond and the fed funds rate.

Coincident indicators

an index of for economic variables that tend to change in tandem to the changes and economic activity

what are the four economic variables of coincident indicators??

these are the economic variables of what?

1. Number of employees are nonagricultural payrolls.

2. Personal income minus transfer payments.

3. Industrial production index.

4. Manufacturing and trade sales.

Lagging indicator's

are an index of seven economic indicators that tend to follow in the same direction as a change in the level of economic activity, but lag, and only begin to change after the level of economic activity has been changing for some.

What are the seven economic indicators of lagging?

these are the economic indicators of what?

1. Average duration of unemployment (measured in weeks)

2. Changes in per unit labor costs.

3. Average prime rate changed by banks.

4. Ratio of manufacturing and trade inventories to sales.

5. Outstanding volume of commercial and industrial loans.

6. Ratio of consumer credit outstanding to personal income.

7. Change in the consumer price index (CPI) for services

Gross Domestic Product (GDP)

A measure of the market value of all final goods and services produced in an economy during a year

Intermediate goods

excluded from gross domestic product, they are goods that are purchased for resale, or for further processing or manufacturing

The expenditure approach for calculating GDP

GDP = C + Ig + G + Xn

personal consumption expenditures(C)

On durable goods, nondurable, consumer goods, and services

Gross private domestic investment (Ig)

are all final purchases of machinery and equipment, all construction, all changes in inventory, and purchases of new residential housing

Gross private, domestic investment calculation

net investment = gross investment - capital consumption allowance

Government purchases (G)

The spending for goods and services used in providing government services, including spending on social capital, such as buildings and highways

Net exports (Xn)

equal to exports minus imports (X-M)

National income (NI)

The sum of all payments to factors of production

National income calculation

National income (NI) = compensation of employees + rental income + interest income + proprietors income + corporate profits

GDP calculation income approach

GDP = NI + indirect business taxes + capital consumption allowance + net, foreign factor income

Calculations that provide useful information concerning the economies performance

net domestic product (NDP) = gross domestic product - capital consumption allowance

National income = NDP - net, foreign factor income - indirect business taxes

Personal income (PI) = NI - Social Security contributions - corporate income tax - undistributed corporate profits + transfer payments

Disposable income (DI) = PI - personal taxes

what is the consumer price index CPI used for?

to calculate real income, to adjust Social Security payments, and as a base for money cost of living adjustments (COLA)

What is producer price index PPI?

A measure of the increase in prices paid by producers further inputs

What is the GDP deflator?

An index that was developed to calculate real GDP given nominal GDP

What are possible shortcomings of the use of GDP as a measure of economic well-being

these are shortcomings of what?

1. It does not account for non-market transactions like services of homemakers an individual to do their own repairs.

2. It feels to account for changing attitudes towards leisure as reflected in the fact that the average work week has declined during the 1990s as legislation increased vacation time, the number of holidays, and the amount available leave time.

3. It does not account for improved product quality

4. It does not account for activities in the underground economy.

5. It is not account for most negative externalities, with the primary example being it's failure to account for the economic and social cost of pollution.

Perfect competition

A large number of sellers producing a standardize product with easy entry and exit into an out of the industry

Market equilibrium

Occurs where price equals marginal cost at the minimum point on the average cost curve

Monopolistic competition

is characterized by having many small firms are produced differentiated products. The firm has some degree of control over product price

Oligopoly

A market structure characterized by a few firms that sell either standardized or differentiated product and we're entry into the industry is difficult

Kinked demand curve

One type of demand curve that affirm operating in an oligopoly might face. One strategic assumption is that competitors will follow a price reduction, but will not follow a price increase.

Price leader ship

Another form of competition in an oligopoly. It often result in an implicit agreement that coordinates prices without having the firms engage in illegal collusion.

Monopoly

There is a single seller of a product for which there are no close substitutes. The firm has considerable control over price and is a price maker.

Consumer surplus and producer surplus

The demand curve and supply curve show what consumers and producers are willing and able to buy or offer for sale at various alternative prices at a given moment in time. The interaction of buyers and sellers in the market place determines an equilibrium price.

Price discrimination

affirm can increase profits if different prices can be charged to different buyers. The practice of selling a product or service a different prices to different consumers when those price differences are not justified by cost differences.

Economic variables

The approach is used to forecast the path of the business cycle, and the probable future trends provide a sense of importance of the statistical information that is gathered by various government agencies and business organizations

Indicators that might be changing if they were predicting a contraction in the business cycle

These are indicators that might be changing if?

1. Average manufacturing worker work week.

2. Initial claim for unemployment insurance.

3. New orders for consumer goods.

4. Vendor performance.

5. New orders for non-defense capital goods

6. Building permits for residential construction

7. Stock prices.

8. The inflation adjusted money supply (M2)

9. Interest rates spread.

10. Consumer expectations.

What type of indicator is unemployment?

unemployment is a lagging indicator in that the unemployment rate lags behind the phase of the business cycle. The rate does not begin to decline significantly until the economy as well into an economic recovery.

Demand

The quantity of goods or services that buyers are willing and able to purchase at various alternative prices at a given moment in time. A critical point to remember is that the consumer must be both willing and able to purchase for their desires

Law of demand

States that there is an inverse relationship between price and quantity demanded

Change in demand

A change in quantity demanded relates to movement along a given demand curve, when all demand determinants, other than the price of the good are held constant

Examples of demand determinants

these are examples of what?

1. The price of other goods.

2. Disposable income.

3. Consumer taste and preferences

4. The number of buyers in the market for the product.

5. Future price expectations.

6. Advertising.

Supply

The quantity that producers are willing and able to offer for sale at various alternative prices at a given moment in time

Change in supply

A change in quantity supplied relates to a movement along a given supply curve, went all supply, determinants, other than the price of a good are held constant

Examples of supply determinants

these are examples of?

1. The price of resources needed to produce the product.

2. Technology.

3. Taxes and subsidies.

4. Prices of other goods

5. Future price expectations.

6. The number of sellers in the market.

Price elasticity of demand

A measure of the responsiveness of consumers to a change in a products price

Income elasticity

Demand measures the responsiveness of consumer demand for a product relative to a change in income

Cross elasticity of demand

Measures responsiveness of consumer demand for a product relative to the change in the price of another product. If consumers buy less of the original product, then the goods are complements.

Complementary goods

Goods and services that are used in conjunction with each other. When the price of one good falls, and the quantity demanded of that good rises, the demand of the other good rises.

Inferior goods

Goods or services, who is demand decreases as a consumer income increases, assuming prices remain constant

Normal goods

Goods or services, who is demand, increases as consumers income increases, assuming prices remain constant

Substitute goods

Goods and services that can be used in place of each other in at least some of their uses. When the price of one good falls, the quantity demanded of that good increases, and the demand for the other good without a price decrease falls.

Law of diminishing marginal utility

A proposition that describes how an individual satisfaction derived from the consumption of each additional unit of the good or service, declines as consumption of that good or service increases

Inflation

A sustained increase in the average level of prices, and is measured by using a fixed wheat price index

New good bias

New goods constantly replace all goods, and the index does not compare about the price and quality between the old and new goods

Quality change bias

The quality of many items improves each year in the improvement must be compared to the increase in the price of the good

Commodity substitution bias

Consumers have a tendency to cut back on the consumption of relatively more expensive goods and substitute. Relatively cheap are good as price rises.

Outlet substitution bias

As price increase, there is a tendency for more people to shop at discount, stores, and in recent years, online shopping has allowed consumers to search for lower prices for many products

Demand pull inflation

Caused by an access in total spending relative to the economies, current capacity to produce goods and services

Cost push inflation

Occurs when rising prices result from an increase in resource cost and loss, arise in per unit cost of production

Hyper inflation

And extremely rapid rate of inflation, that usually has a devastating impact on real output, unemployment

Deflation

A sustained decline in the general price level

Redistribution effects

There is a difference between nominal income, and the purchasing power of that income. When inflation occurs, not everyone's nominal income rises at the same rate and, therefore, there will be some redistribution of purchasing power as inflation persists.

Who is hurt by inflation

A key group that is hurt by unanticipated inflation is those individuals who receive a fixed income. They see their real income fall as prices rise. A second group that is hurt by unanticipated. Inflation is savers. As prices increase, the purchasing power of accumulated savings declines. The third major group hurt by unanticipated. Inflation is creditors. Ignoring interest payments, the same number of dollars will be repaid as are borrowed.

Who is helped by inflation

Those with flexible income may be able to be less affected by inflation.

Anticipated, inflation

If inflation is anticipated, some individuals in firms may be able to reduce the impact of inflation on their purchasing power

Impact of inflation on output

The impact of inflation on the nations level of real output depends on the type of inflation that is occurring and it's severity

impact of inflation related to deflation

A relatively low rate of inflation serves as a buffer against inflation, if there is a decline in the level of aggregate demand

causes of deflation

a. Side effect of a significant decline an aggregate demand that is so large as a force producers to cut prices on current output to attract buyers.

b follows a period of rising productive efficiency generally caused by technological innovation at a time when credit Markets and consumer demand support business investment, which often results in excess capacity, when demand, receipts, creating one of the underlying conditions for potential deflation

c. globalization has been one of the drivers of the flea Sherry pressure is shifting production to countries were the price of production falls, increases the potential for prices to decline

Impact of deflation

a. Recession, rising, unemployment, and significant stress on financial institutions.

nominal interest rates

Seated rate on a loan or deposit

What are the functions of money?

a. to serve as a medium of exchange to facilitate the exchange of goods and services, and promote specialization in division of labor

b. To act as a unit of account to serve as a common denominator, to measure the relative value of goods and services, and define debt obligations, taxes owed, and measure the value of economic output.

c. To serve as a store of value; this allows for the transfer of purchasing power from the present to the future, and allows individuals to accumulate wealth in the form of assets that can be converted to money when the individual wishes to spend it.

d. To be used as a standard of deferred payment that facilitates the creation of debt

Money

Anything that is readily acceptable as a medium of exchange

M1

The most narrowly defined component of the money supply. It consists of coins, and currency in the hands of the public, and the checkable deposits, held in commercial banks and thrift institutions.

M2

A broader definition of the money supply that is equal to M1 +9 checkable savings deposits, small time deposits, an individual money market, mutual fund balances. It consists of near-monies and highly liquid financial assets that do not serve as a medium of exchange, but are readily convertible into currency or checkable deposits.

M3

The brightest definition of the money supply that is equal to M2 plus time deposits in excess of $100,000.

Velocity of money

The rate at which money exchange is spent in an economy, the number of times that money moves from one transaction to another

Money multiplier

We can determine the degree to which the banking system can expand the money supply with new deposits, or an infusion of reserves are received

Reserve requirement

All banks are required to hold a percentage of all deposits on reserve. The amount ranges from 3% to 10%.