### BUSINESS CYCLE
- Shape: Wavy curve (expansion → peak → contraction → trough).
- Phases:
- Expansion: GDP ⬆, Unemployment ⬇, Inflation ⬆.
- Peak: GDP highest, Unemployment lowest, Inflation high.
- Contraction: GDP ⬇, Unemployment ⬆, Inflation slows.
- Trough: GDP lowest, Unemployment highest, Inflation low.
### GDP (Gross Domestic Product)
- Definition: Total value of all final goods/services produced in a country within a given time.
- Measurement:
- Expenditure Approach: GDP = C + I + G + Xn (Consumption, Investment, Government Spending, Net Exports).
- Income Approach: Sum of all incomes (wages, rent, interest, profit).
- Real vs. Nominal:
- Nominal GDP: Measured in current prices.
- Real GDP: Adjusted for inflation (Real = Nominal / GDP Deflator 100).
- GDP Growth Rate: % change in Real GDP.
- Left Out: Non-market activities, illegal transactions, household work, environmental costs.
### UNEMPLOYMENT
- Types:
- Structural: Skills outdated (e.g., factory worker replaced by AI).
- Cyclical: Due to economic downturns (e.g., layoffs in recession).
- Frictional: Between jobs (e.g., college grad job hunting).
- Seasonal: Job depends on season (e.g., ski instructor).
- Calculations:
- Labor Force: Employed + Unemployed (actively seeking work).
- Labor Force Participation Rate = (Labor Force / Working-Age Population) × 100.
- Unemployment Rate = (Unemployed / Labor Force) × 100.
- Not Counted: Discouraged workers, retired, under 16, stay-at-home parents, institutionalized.
- Natural Rate of Unemployment (NRU): Sum of structural + frictional unemployment (~4-5%). Means full employment with no cyclical unemployment.
### INFLATION
- Definition: General rise in price levels, reducing purchasing power.
- Causes:
- Demand-Pull: Excess demand raises prices (e.g., stimulus checks increase spending).
- Cost-Push: Higher production costs push prices up (e.g., oil price hikes).
- Calculations:
- CPI (Consumer Price Index) = (Current Basket Cost / Base Year Basket Cost) × 100.
- Inflation Rate = ((CPI this year - CPI last year) / CPI last year) × 100.
- Real vs. Nominal:
- Real Income = Nominal Income - Inflation Rate.
- Real Interest Rate = Nominal Interest Rate - Inflation Rate.
- Phillips Curve: Shows inverse relationship between inflation & unemployment (short-run).
- Helped: Borrowers, asset owners, government with debt.
- Hurt: Fixed-income earners, savers, lenders.
### CONSUMPTION/SAVINGS
- MPC (Marginal Propensity to Consume): % of extra income spent.
- MPS (Marginal Propensity to Save): % of extra income saved (MPC + MPS = 1).
- APC (Average Propensity to Consume) = Consumption / Income.
- APS (Average Propensity to Save) = Savings / Income.
- Factors: Income, interest rates, future expectations, wealth.
- Multiplier: 1 / (1 - MPC) → Higher MPC = Larger GDP impact.
### OTHER REVIEW TOPICS
- PPF (Production Possibilities Frontier): Shows max output combos.
- Concave shape (increasing opportunity cost).
- Efficient (on curve), inefficient (inside), unattainable (outside).
- Economic Systems:
- Market (Capitalism, supply & demand), Command (Govt. controlled), Mixed (Blend of both).
- Supply & Demand:
- Demand ⬆ → Price ⬆, Quantity ⬆.
- Supply ⬆ → Price ⬇, Quantity ⬆.
- Shifts caused by: income, tastes, expectations, substitutes, input costs.
- Comparative vs. Absolute Advantage:
- Absolute: Who produces more.
- Comparative: Who has lower opportunity cost.