Basic Economics for Students and Non-Students Alike by Jerry Wyant

Author:Jerry Wyant
Language: eng
Format: mobi
Publisher: Jerry Wyant
Published: 2013-04-05T14:00:00+00:00

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The Business Cycle, Unemployment, Inflation

The most widely-used measure of the health of an economy is GDP. Real GDP, measured within an economy over time, indicates whether the economy is expanding or contracting, and by how much. When real GDP is rising, the economy is growing. A healthy economy will grow over time. An increase in real GDP per capita is an indication of a rising standard of living.

Economies do not grow at a constant rate, however. At times, economies go through periods of contraction. Changes in real GDP follow a pattern, which is called the business cycle. The business cycle varies in length of time, but the pattern is always the same, a series of stages in this order: expansion, peak, contraction, and trough.

Expansion: Also called a boom period, this is a period of economic growth.

Peak: The point where expansion ends and contraction begins.

Contraction: A period of decline in real GDP. This would be a period known as a recession.

Trough: The point where contraction ends, and the cycle starts over with another expansion.

It is worth noting that the United States has had several well-publicized recessions since the 1950s, yet has averaged about 3% annual growth during the same time period. Periods of expansion tend to be longer than periods of contraction (recession). Each business cycle is different, but recessions in the United States have lasted roughly one year on the average.

Since economic growth is desirable, special focus is on recessions and their side effects.

Definition of a recession:

Recession: A period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.

This is the official definition used in the United States. It is defined by the National Bureau of Economic Research (NBER). Many people consider a recession to be two consecutive quarters of declining real GDP, but that is not the official definition. In fact, the official definition of a recession is not based on GDP statistics at all, although as a practical matter the results would probably be the same if it were. But the NBER focuses on monthly, not quarterly, data. Because real GDP is measured only quarterly, the NBER focus is on these monthly data: employment, real personal income less transfer payments, the volume of sales of manufacturing and wholesale-retail sectors adjusted for price changes, and industrial production.

Indicators:

Indicators are variables that tend to move along with the business cycle. They are classified as leading indicators, coincident indicators, and lagging indicators. Indicators are used to identify changes in the stage of the business cycle.

Leading Indicators are economic variables that tend to change before real GDP changes. Since these are changes that occur before changes in output occur, they are used to predict future output. However, leading indicators can be very unstable. Unless they move in the same direction for several consecutive months, their usefulness for predictions is limited.

Coincident indicators are economic variables that tend to change at the same time that real GDP changes.

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