1. How does nominal GDP differ from real GDP?

2. Nominal = measures current prices Real = measured in constant/unchanging prices

3. Business Cycles

4. Tracking a Business Cycle

5. Contractions Recession – prolonged economic contraction, usually 6-18 months. Unemployment in the 6- 10% range Depression – no precise definition. Long and severe recession with high unemployment and low factory output

6. Economic Variables 1.Business Investment 2.Interest Rates and Credit 3.Consumer Expectations 4.External Shocks

7. Business Investment When economy is expanding firms expect sales and profits to rise So they invest and this spending creates output and jobs Until they cutback

8. Interest Rates and Credit When interest is low people are willing to invest/borrow/use credit When interest is high people do not spend as much – 1980s some credit card interest rates reached 21% – Loans as high as 17%

9. Consumer Expectations Self-fulfilling Prophecy – Believe that economy is growing makes people willing to spend Can cause an expansion – Believe economy is slow people not willing to spend Can cause a contraction

10. External Shocks Difficult to predict Positive – Discovery of oil or minerals – Bountiful harvests Negative – War, droughts, hurricanes

11. Leading Indicators Economists use to predict Stock Market The Conference Board Private business research organization Ten leading Economic Indicators – Stock prices, interest rates, etc

12. History Great Depression – Economists need to monitor – GDP fell by 1/3, Unemployment 25% – FDR: Gov’t programs to get people back to work WPA (Works Progress Admin) and CCC (Civilian Conservation Corps)

13. History 1970s – OPEC oil embargo – High oil prices forced Americans to find alternatives 1980s – High Interest rates 1990s – Pretty good 2000s – Another recession

14. What are 3 indicators of how the Economy is performing?

15. Stock Market, GDP, The Conference Board