Chapter 5: Business Cycles

Business Cycles

Are defined as alternating increases and decreases in economic activity.

1) the peak2) followed by a recession3) leading to the trough or bottom of the cycle4) finally followed by a recovery or an expansion to another peak.

What are the four phases of the business cycle are


Highest point at the end of an economic expansion until the start of a contraction


Occurs if a contraction is severe enough. the immediate downturn in economic activity after the peak in the business cycle, and represents the downward region of the cycle from the peak to the trough

Trough (bottom of the cycle)

The stage of the economy business cycle that marks the end of a period of declining business activity and the transition to expansion. (could be a depression)


Once economic activity turns upward. This phase of the business cycle immediately follows the trough, and is characterized by the continuous expansion of economic activity.


The economy is in ____ when overall activity in the recovery phase exceeds the peak of the previous business cycle (upper horizontal dotted line


Slowdown in the pace of an economic activity

A Peak

______ in the business cycle usually means the economy is operating at its capacity. It is followed by downturns or recessions.

Curtail hiringlay offThis adds to the recessions depth.

Once recessions are underway what do businesses usually do?

Jobless recovery

If a recovery in the business cycle is not accompanied by strong job growth, then it is termed?

Double-Dip recession

Occurs when an economy's recovery falls short and enters another recession before it fully recovers.

NBER- National Bureau of Economic research

Who identifies the turning points at which the economy switches from peak to downturn or from trough to recovery?They are a non-profit research organization founded in 1920 that officially date the business cycles.

1)Federal Reserve Bank of Chicago2)Production Income Employment Consumption Housing Inventories

NATIONAL ACTIVITY INDEX1)The _____________ complies a weighted average of 85 economic indicators, included? 2)List 6 main ones.

Expanding at its historical trend rate of growth;

A zero value for the index indicates that the national economy is ...

1)Negative value below zero2)positive value above zero

On the National Activity Index1)______ indicate below-average growth; and 2)_____indicate above-average growth.

The onset of a recession

On the National Activity Index a Value below -.70 suggest what?

The potential for inflation

On the National Activity Index a Value above .70 suggest what?

LEILeading Economic Index

Another measure economist look to when predicting movements in the business cycle, An index published monthly by the Conference Board used to predict the direction of the economy's movements in the months to come.

How the economy will change tomorrow.

Because each indicator predicts economicperformance in the near future, anychange in the LEI today will likely reflect what?

Yield curve

shows the interest rates forbonds with different maturity rates.

They base their forecasts on the theory thata recession is likely when interest rates onshort term bonds exceed those on long termbonds.the spread between the interest rates on theten-year Treasury note and the three-month Treasurybill.

How do some economists use the yield curve topredict recessions?


is used to determine the level of economic activity of a country.

1)the EXPENDITURE APPROACH: sums what has been purchased during the year andthe INCOME APPROACH: sums what has been earned during the year.

1)What are the two methods that the National Income Accounting use to determine the level of economic activity of a country and what are the results reconciled?

Measure our nation's economic performanceCompare American income and output withthat of other nationsTrack the economy's condition throughout thebusiness cycle

The national income and product accounts does what

Good to knows

Just as firms need to know how well they are doing, so does a country. National income accounting provides the statistics to determine if the economy is encountering difficulties.

A circular flow diagram

A depiction of how money and products are exchanged within an economy. Might be used by a business to show how a specific series of exchanges of goods, services and payments make up the building blocks of a given economic system of interest.

Spending in the product market generatesequal income in the factor market. (look at Diagram)

What is shown on the left side of the diagram.

Becomes a dollar of income to someone else.

The circular flow diagram illustrates theidea that EVERY DOLLAR SPENT

The nation's GDP

______is equal to the total marketvalue of all final goods and services producedby labor and property within its borders.

Goods and services produced

GDP (Gross Domestic Product) reflects the final value of?

To avoid double counting

Why are Intermediate goods areexcluded?

Labor and property in the United States

U.S. GDP is a measure of the output produced by

GDP (Gross Domestic Product)

is a measure of themarket valueof output

Personal consumption expenditures-Gross private domestic investment-Government spending-Net exports

The expenditure side of GDP is equal tothe sum of

Goods and servicespurchased by households

In Expenditure approach to GDP :Personal consumption spending, whichaccounts for slightly more than 70% ofGDP includes?


The second expenditure component ofGDP is:

Expansions and enhancements toeconomy's productive capacity, andchanges in inventoriesGross private domestic investment accountsfor nearly 11% of GDPIncludes spending on items such asequipment, software, and structures

These investments include

Government purchases

The third component of expenditures, account formore than one fifth of economic activity.

Net exports

The final component

Exports minus imports,and will be a negative number when importsare larger than exports

Net exports equals

GDP = C + I + G + (X − M)

There is a useful shorthand way ofexpressing the expenditure side of GDP

Compensation of employees-Proprietor's income-Rental income-Corporate profits-Net interest

GDP also can be calculated as thecompensation to factors of production

Wages, salaries, and benefits-Profits-Rental income-Interest

NATIONAL INCOME:National incomeis all income, including:

Net domestic product

______is defined as GDPminus depreciation.

Capital used upin the process

Net domestic product represents the marketvalue of output the economy has producedafter adjusting for the value of?

Wages, salaries, and other labor income:-Proprietors'(the owner of a business, or a holder of property) income:-Rental income, interest, and corporatedividend income:-Transfer payments received:Minuspersonal contributions for socialinsurance(minus from the sums of all thee above)

Personal incomeincludes

Pay taxes, spend the money, or save it.

PERSONAL INCOME:What are the three things people can do with the moneythey receive as personal income:

Disposable personal income

_____is defined aspersonal income minus taxes

GDP per capita

GDP AND OUR STANDARD OF LIVING _____is equal to GDP dividedby the country's population.It is a useful measure of the relativestandard of living of citizens in differentcountries

Environmental benefitsor harmful effectsof economic activity.

Our national income and productionstatistics do little to account for ?

One clue might be the extent to whichcountries spend resources to reach a targetlevel of environmental quality-Wealthier countries tend to place greatervalue on the environment than do developingcountries

How does an economy accuratelymeasure the economic impact of a cleanenvironment?

Calculations are being made to determinewhat is "sustainable."-Carbon footprints are being measured.-Metrics of economic progress that includeenvironmental quality are being created

ISSUE: ENVIRONMENTAL QUALITYAND MEASURES OF GDP•Investments in green technologies are notfully reflected in the NIPA accounts, butsome progress has been made. What are these progress?

Informal economy

_______is a largeunmeasured component of our economy

Money earned from a garage sale or fromitems sold on eBay and not reported to theIRS-Transactions dealing with illegal goods andservices-Income earned by undocumented residents

The informal economy includes: