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

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

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

6. 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

7. 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

8. 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

9. 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?

13. 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.

14. Business Cycle

15. 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

16. 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

17. Business Cycle Phases

18. 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

19. 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

22. THIS IS A BIASED SLIDE

25. 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