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Macroeconomics

Business Cycles

11th

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Units 1 & 2 Key Terms

11.1

Gross Domestic Product	The total value of all final goods and services produced in a year within that country.
national income	The sum of income earned by the factors of production owned by a country’s citizens.
personal income	Is the money income received by households before personal income taxes are subtracted.
disposable income	Personal income minus personal income taxes.
expenditure approach	Adds up spending by households, firms, the government, and the rest of the world using the following formula: GDP = personal consumption + investment in new physical capital + government purchases + (exports - imports)
income approach	Makes use of the fact that expenditures on GDP ultimately become income. Formula: GDP = NI + Depreciation - Subsidies + Net income of foreigners
depreciation	The decline in the value of capital over time due to wear or obsolescence.
subsidy payments	Given to businesses by governments as assistance.
net foreign income	Add the income of foreign workers and subtract the income of citizens working abroad.
net domestic product	GDP minus depreciation.
economics	The study of how to allocate scarce resources among competing ends.
macroeconomics	The branch of economics that deals with the whole economy and issues that affect most of society.
microeconomics	The branch of economics that looks at decision-making at the firm, household, and individual levels and studies behavior in markets for particular goods and services.
aggregate income	The total of all incomes in an economy without adjustments for inflation, taxation, or types of double counting.
aggregate expenditures	The total current value of all the finished goods and services in the economy.

11.2

labor force	Includes both employed and unemployed adults.
unemployed	A state in which a labor force participant must be willing and able to work, and must have made an effort to seek work in the past four weeks.
labor force participation rate	The number of people in the labor force divided by the working-age population.
unemployment rate	The number of unemployed workers divided by the number in the labor force and then multiplied by 100 to get the percent.
frictional unemployment	Occurs as unemployed workers and firms search for the best available worker-job matches.
structural unemployment	The result of a skills mismatch.
cyclical unemployment	Results from downturns in the business cycle.
seasonal unemployment	The result of changes in hiring patterns due to the time of year.
discouraged worker	Those who are willing and able to work, but become so frustrated in their attempts to find work that they stop trying. Do not count as part of the unemployment rate.
dishonest worker	These individuals claim to be unemployed in order to receive unemployment benefits when, in fact, they do not want a job or are working for cash in an unreported job. Bias the unemployment rate upward.
natural rate of unemployment	The typical rate of unemployment in a normally functioning economy. The sum of frictional and structural unemployment. About 5% in the U.S.
full employment	Not 100 percent employment, but the level of employment that corresponds with the natural rate of unemployment. No cyclical unemployment.
Okun’s law	Economists, including the late Arthur Okun, have estimated that for every one percentage point increase in the unemployment rate above the natural rate, output falls by 2 to 3 percentage points.

11.3

inflation	A sustained increase in the overall price level.
deflation	The opposite of inflation- a sustained decrease in the general price level.
nominal salary	The actual number of dollars.
real salary	The purchasing power of the dollars.
money illusion	When someone notes an increase in their salary but not the general price of goods. Can lead to excessive spending.
menu cost	Costs to change price listings on signs, shelves, computers, and wherever else they are recorded to keep up with inflation.

11.4

Consumer Price Index	The government’s gauge of inflation. It is used, for example, to adjust tax brackets and social security payments for inflation. To find it, the Bureau of Labor Statistics checks the prices of items in a fixed representative “market basket” of thousands of goods and services used by typical consumers in a base year.
Producer Price Index	Similar in calculations to the CPI, but it applies to the prices of wholesale goods such as lumber and steel. Sometimes a good predictor of future inflation because producers often pass their cost increases to consumers.
Gross Domestic Product Deflator	An alternative general price index that reflects the importance of products in current market baskets, rather than in base year market baskets, which become less relevant over time.

11.5

economic cycle	Another term for a Business Cycle.
trade cycle	Another term for a Business Cycle.
business cycles	A recurrent fluctuation of financial and economic activity, which occurs non-periodically within a certain period of time.
classical economists	Theorize that wages, prices, and interest rates fluctuate quickly, clearing (bringing to equilibrium) labor and capital markets, and allowing input and output prices to stay in line with each other.
Say’s law	The idea that supply creates its own demand. When supplying goods, workers can earn money to spend or save, and savings end up being borrowed and spent on business investments. Classical economists believe this.
Keynesian analysis	If wages cannot adjust to match changes in price levels, deviations from full employment output might persist until the government steps in with monetary or fiscal policy to bolster or tame the economy. This is in contrast with the classical economists’ preference for laissez-faire (hands-off) governmental policy.

Business

Macroeconomics

Macroeconomics Business Cycles

Units 1 & 2 Key Terms

11.1

Gross Domestic Product	The total value of all final goods and services produced in a year within that country.
national income	The sum of income earned by the factors of production owned by a country’s citizens.
personal income	Is the money income received by households before personal income taxes are subtracted.
disposable income	Personal income minus personal income taxes.
expenditure approach	Adds up spending by households, firms, the government, and the rest of the world using the following formula: GDP = personal consumption + investment in new physical capital + government purchases + (exports - imports)
income approach	Makes use of the fact that expenditures on GDP ultimately become income. Formula: GDP = NI + Depreciation - Subsidies + Net income of foreigners
depreciation	The decline in the value of capital over time due to wear or obsolescence.
subsidy payments	Given to businesses by governments as assistance.
net foreign income	Add the income of foreign workers and subtract the income of citizens working abroad.
net domestic product	GDP minus depreciation.
economics	The study of how to allocate scarce resources among competing ends.
macroeconomics	The branch of economics that deals with the whole economy and issues that affect most of society.
microeconomics	The branch of economics that looks at decision-making at the firm, household, and individual levels and studies behavior in markets for particular goods and services.
aggregate income	The total of all incomes in an economy without adjustments for inflation, taxation, or types of double counting.
aggregate expenditures	The total current value of all the finished goods and services in the economy.

11.2

labor force	Includes both employed and unemployed adults.
unemployed	A state in which a labor force participant must be willing and able to work, and must have made an effort to seek work in the past four weeks.
labor force participation rate	The number of people in the labor force divided by the working-age population.
unemployment rate	The number of unemployed workers divided by the number in the labor force and then multiplied by 100 to get the percent.
frictional unemployment	Occurs as unemployed workers and firms search for the best available worker-job matches.
structural unemployment	The result of a skills mismatch.
cyclical unemployment	Results from downturns in the business cycle.
seasonal unemployment	The result of changes in hiring patterns due to the time of year.
discouraged worker	Those who are willing and able to work, but become so frustrated in their attempts to find work that they stop trying. Do not count as part of the unemployment rate.
dishonest worker	These individuals claim to be unemployed in order to receive unemployment benefits when, in fact, they do not want a job or are working for cash in an unreported job. Bias the unemployment rate upward.
natural rate of unemployment	The typical rate of unemployment in a normally functioning economy. The sum of frictional and structural unemployment. About 5% in the U.S.
full employment	Not 100 percent employment, but the level of employment that corresponds with the natural rate of unemployment. No cyclical unemployment.
Okun’s law	Economists, including the late Arthur Okun, have estimated that for every one percentage point increase in the unemployment rate above the natural rate, output falls by 2 to 3 percentage points.

11.3

inflation	A sustained increase in the overall price level.
deflation	The opposite of inflation- a sustained decrease in the general price level.
nominal salary	The actual number of dollars.
real salary	The purchasing power of the dollars.
money illusion	When someone notes an increase in their salary but not the general price of goods. Can lead to excessive spending.
menu cost	Costs to change price listings on signs, shelves, computers, and wherever else they are recorded to keep up with inflation.

11.4

Consumer Price Index	The government’s gauge of inflation. It is used, for example, to adjust tax brackets and social security payments for inflation. To find it, the Bureau of Labor Statistics checks the prices of items in a fixed representative “market basket” of thousands of goods and services used by typical consumers in a base year.
Producer Price Index	Similar in calculations to the CPI, but it applies to the prices of wholesale goods such as lumber and steel. Sometimes a good predictor of future inflation because producers often pass their cost increases to consumers.
Gross Domestic Product Deflator	An alternative general price index that reflects the importance of products in current market baskets, rather than in base year market baskets, which become less relevant over time.

11.5

economic cycle	Another term for a Business Cycle.
trade cycle	Another term for a Business Cycle.
business cycles	A recurrent fluctuation of financial and economic activity, which occurs non-periodically within a certain period of time.
classical economists	Theorize that wages, prices, and interest rates fluctuate quickly, clearing (bringing to equilibrium) labor and capital markets, and allowing input and output prices to stay in line with each other.
Say’s law	The idea that supply creates its own demand. When supplying goods, workers can earn money to spend or save, and savings end up being borrowed and spent on business investments. Classical economists believe this.
Keynesian analysis	If wages cannot adjust to match changes in price levels, deviations from full employment output might persist until the government steps in with monetary or fiscal policy to bolster or tame the economy. This is in contrast with the classical economists’ preference for laissez-faire (hands-off) governmental policy.