Business Cycle and Economic Indicators Measuring the Economy Business Cycle and Economic Indicators

Gross Domestic Product The total dollar value of all the goods and services produced within a country during one calendar year.

Gross Domestic Product Formula GDP=C+G+I+(x-m) C = Consumption G = Government Spending I = Investment (business spending) X = Exports M = Imports

Final goods and services produced in a country in a year What’s included in GDP? Final goods and services produced in a country in a year

What’s excluded from GDP? 1. Double counting /intermediate goods Parts necessary to produce the final product 2. Public Transfer Payments a. Social Security b. Welfare Payments c. Veteran’s Pensions 3. Private transfer payments gifts of money scholarships

What’s excluded from GDP? 4. Security Transactions Buying/selling stocks/bonds Brokers services are included 5. Second hand sales 6. Underground Economy (7% in U.S.) - illegal gambling, illegal drugs, illegal immigrants, prostitution, under the table cash payments

Adjusting GDP for Price Increases Nominal GDP- in current dollars Real GDP – in constant dollars; adjusted for inflation GDP per capita – amount of g&s produced per person; compares one country to another What is Real GDP per capita?

Business Cycle 3 types of fluctuations in economic activities Seasonal : changes take place at different times of the year. Examples are produce sales and retail sales Secular: Changes that take place because of non-economic changes that impact on the economy. Examples are technology, weather, political events Cyclical: Changes in business activity over periods of up to 5 years.

Business Cycle

Causes of changes in Business Cycle The money supply & credit: The amount of money in circulation and available Business investments Public expectations & changes in demand: momentum and psychological factors External Factors: Changes in the world’s economic and political climate. Weather and natural disasters can affect communities

Business Cycle Phases Peak: period of general prosperity Contraction: a slowdown marked by declining GDP for 2 quarters Trough: a prolonged low point of the business cycle. Expansion: Economic growth

Business Cycle Phases

Expansion Peak Employment, income, output begins to rise Prices begin to rise Profits up, consumer spending increasing, More credit available Optimism Peak Prices rise faster than costs; worry about inflation Employment is up & Incomes are up Consumers are spending Stock Prices are up

Contraction Trough Costs are rising faster than prices Slowing of investment in new plants Bank credit is harder to get & Interest rates are up Inventories higher than sales Recession – 2 quarters of negative GDP Average Recession last 11 months. 10 since WWII Trough Prices fall (or stabilize) Employment, output, income going down Credit contracts Pessimism prevails

THIS IS A BIASED SLIDE

Predicting the Business Cycle Leading indicators: Anticipate the direction in which the economy is headed Housing starts and Producer Price Index Coincidental indicators: Provide information about the current economy Personal income, GDP, Retail sales Lagging indicators: Identifies changes that occur after the economy changes. They are used to predict the duration of the phase. Unemployment rate, business capital investment