BEC 5 Changes in economic and business cycles Flashcards Preview

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Flashcards in BEC 5 Changes in economic and business cycles Deck (109)
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Gross Domestic Product (GPD)

total market value of all final goods and serves produced within the borders of a nation in a period of time


Nominal GDP

- measured in “today’s” prices
- measures the value of all final goods and services in prices prevailing at the time of production (current prices)


Real GDP

- measured in “base year” prices
- measures the value of all final goods and services in constant prices.
- It is adjusted to account for changes in the price level.
- Real GDP is the most commonly used measure of economic activity and national output,


Price Index

GDP Deflator - calculates real GDP
It is a price index for all goods and services included in GDP.

Real GDP = (Nominal GDP / GDL deflator ) x 100


Real GDP per Capita and Economic Growth

Real per capital GDP = real GDP / population


Economic growth

the increase in real GDP per capita over time


Business Cycles

1. Expansionary phase - rising economic activity and growth
2. Peak - high point of economic activity
3. Contractionary phase - falling economic activity and growth
4. Trough - low point, the lowest level
5. Recovery phase - increase



- below long term average growth
- two consecutive quarters of falling national output
- negative real economic growth



- a very severe recession
- a relatively long period of stagnation


Economic indicators

1. Leading indicators
2. Lagging indicators
3. Coincident indicators


Leading indicators

Predicting before the fact actually happens
- average new unemployment claims
- building permits for residences
- average length of the workweek
- money supply
- prices of selected stocks
- orders for goods
- prices changes of materials
- index of customer expectations


Lagging indicators

Predicting after the fact happened
- prime rate charged by banks
- average duration of unemployment
- bank loans outstanding


Coincident indicators

Occur at the same time as the economic activity
- industrial production
- manufacturing and trade sales


Reasons for fluctuations

business cycles result from shifts in aggregate demand and/or aggregate supply


Aggregate Demand (AD) Curve

the maximum quantity of all goods and services that households, firms and the government are willing and able to purchase at any given price level


Aggregate Supply (AS) Curve

the maximum quantity of all goods and services producers are willing and able to produce at any given price level
1. Short run aggregate supply curve - upward sloping, Price UP/ Production UP
2. Long run aggregate supply curve - vertical line, potential level of output in the economy, independent of price level, resources available to produce
3. Potential level of output - the level of real GDP that the economy would produce if its resources were fully employed
Real GDP below the potential level of output - recession
Above - expansion


Aggregate demand, aggregate supply and economic fluctuations

business cycles are results of shifts in aggregate demand and short run aggregate supply


Reduction in demand

IF reduced demand, real GDP will decline, leading to a contraction in economic activity and possibly a recession.


Increase in demand

if increased demand, GDP will rise, employment, reduction in excess capacity leading them to increase the size of their workforce


Factors that shift aggregate demand

1. Changes in wealth
a. Increase - aggregate demand shifts to the right
b. Decrease - ag. demand left
2. Changes in Real Interest Rates
a. Increase - reduction in demand
b. Decrease - increase
3. Changes in expectations about the future economic outlook
a. Confident - demand up
b. Uncertain - demand down
4. Changes in Exchange rates
a. Appreciated - expensive foreign demand, aggregate demand down
b. Depreciated - cheap for foreigners, demand up
5. Changes in Government spending
a. Increase - demand up
b. Decrease - down
6. Changes in Consumer Taxes
a. Increase - demand down (shifts to left)
b. Decrease - up


Multiplier effect

an increase in consumer, firm or government speeding produces a multiplied increase int he level of economic activity.
The multiplier effect results from the marginal propensity to consume (MPC)
Multiplier = 1 / (1-MPC)
Change in real GDP = Multiplier = Change in spending


Factors that Shift short run aggregate supply

1. Changes in input prices
a. increase in input prices - shift left
b. decrease in input prices - shift to right
2. Supply shocks
a. plentiful - right
b. curtailed - left


Economic measures

1. Real gross domestic product
2. Unemployment rate
3. Inflation rate
4. Interest rate


The National Income and Product Accounting (NIPA

developed by the US Department of Commerce in order to monitor the health and performance of the US economy.


Expenditure Approach

1. Government purchases of goods and services
2. Gross private domestic investment
3. Personal consumption expenditures
4. Net Exports (exports - imports)


Income Approach

1. Income of proprietors
2. Profits of corporations
3. Interest
4. Rental income
5. Adjustments for net foreign income and misc items
6. Taxes (indirect business taxes)
7. Employee compensation (wages)
8. Depreciation (capital consumption allowance)


Comparison of approaches

Expenditures approach (flow of product) = Income Approach (earnings and costs)


Net Domestic Product

GDP less depreciation (capital consumption allowance)


Gross National Product (GNP)

market value of final goods and services produced by residents of a country in a given time period


Net National Product (NNP)

Gross National Product less economic depreciation