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business cycles

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Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.

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peak

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The point in a business cycle at which business activity has reached a temporary maximum; the point at which an expansion ends and a recession begins. At the peak, the economy is near or at full employment and the level of real output is at or very close to the economy's capacity.

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recession

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A period of declining real GDP, accompanied by lower real income and higher unemployment.

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trough

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The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession ends and an expansion (recovery) begins. At the trough, the economy experiences substantial unemployment and real GDP is less than potential output

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expansion

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The phase of the business cycle in which real GDP, income, and employment rise.

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labor force

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Persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work.

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unemployment rate

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the percentage of the labor force unemployed at any time

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discouraged workers

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Employees who have left the labor force because they have not been able to find employment.

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frictional unemployment

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A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

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structural unemployment

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Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.

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cyclical unemployment

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A type of unemployment caused by insufficient total spending (insufficient aggregate demand) and which typically begins in the recession phase of the business cycle.

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full-employment rate of unemployment

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The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 5 and 6 percent in the United States because some frictional and structural unemployment are unavoidable.

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natural rate of unemployment (NRU)

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The full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation

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potential output

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The real output (GDP) an economy can produce when it fully employs its available resources.

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GDP gap

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Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap).

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Okun's law

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The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2 percent of potential output (potential GDP)

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inflation

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A rise in the general level of prices in an economy; an increase in an economy's price level.

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Consumer Price Index (CPI)

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An index that measures the prices of a fixed "market basket" of some 300 goods and services bought by a "typical" consumer.

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deflation

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A decline in the general level of prices in an economy; a decline in an economy's price level.

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demand-pull inflation

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Increases in the price level (inflation) resulting from increases in aggregate demand.

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cost-push inflation

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Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply.

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per-unit production costs

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A per-unit production cost is the average cost of a particular level of output. This average cost is found by dividing the total cost of all resource inputs by the amount of output produced. That is, per unit production cost = total in coat /units of out put

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core inflation

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the underlying increases in the price level after volatile food and energy prices are removed.

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nominal income

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The number of dollars received by an individual or group for its resources during some period of time.

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real income

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the amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation. real income = nominal income / price index (in hundredths)

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unanticipated inflation

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An increase of the price level (inflation) at a rate greater than expected.

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anticipated inflation

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the redistribution effects of inflation depend upon whether or not it is expectedWith the ability to plan ahead, people are able to avoid or lessen the redistribution effects associated with inflation.The redistribution effects of inflation are less severe or are eliminated altogether if people anticipate inflation and can adjust their nominal incomes to reflect the expected price-level rises.

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cost-of-living adjustments (COLAs)

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An automatic increase in the incomes (wages) of workers when inflation occurs; often included in collective bargaining agreements between firms and unions. Cost-of-living adjustments are also guaranteed by law for Social Security benefits and certain other government transfer payments.

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real interest rate

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is the percentage increase in purchasing power that the borrower pays the lender

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nominal interest rate

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The interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation. nominal interist rate = real interest rate +inflation premium

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hyperinflation

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A very rapid rise in the price level; an extremely high rate of inflation.

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Economists cite several possible general sources of shocks that can cause business cycles.

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irregular innovation, Productivity changes, Monetary factors, political events, and financial instability

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Irregular innovation

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Significant new products or production methods, such as those associated with the Internet, can rapidly spread through the economy, sparking sizable increases in investment, consumption, output, and employment. After the economy has largely absorbed the new innovation, the economy may for a time slow down or possibly decline. Because such innovations occur irregularly and unexpectedly, they may contribute to the variability of economic activity.

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Productivity changes

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When productivity output per unit of input unexpectedly increases, the economy booms; when productivity unexpectedly decreases, the economy recedes. Such changes in productivity can result from unexpected changes in resource availability or from unexpected changes in the general rate of technological advance.

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Monetary factors

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Some economists see business cycles as purely monetary phenomena. When a nation's central bank shocks the economy by creating more money than people were expecting, an inflationary boom in output occurs. By contrast, printing less money than people were expecting triggers an output decline and, eventually, a price-level fall.

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Political events

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Unexpected political events, such as peace treaties, new wars, or the 9/11 terrorist attacks, can create economic opportunities or strains. In adjusting to these shocks, the economy may experience upswings or downswings.

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Financial instability

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Unexpected financial bubbles (rapid asset price increases) or bursts (abrupt asset price decreases) can spill over to the general economy by expanding or contracting lending, and boosting or eroding the confidence of consumers and businesses. Booms and busts in the rest of the economy may follow.

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part time employment

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the BLS lists all part-time workers as fully employed. however many part time workers are looking for more towers so critics of the measurement say they are partially employed

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There are three types of unemployment:

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frictional, structural, and cyclical

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non economic cost of unemployment include

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loss of skills, loss of self-respect, plummeting morale, family disintegration, and sociopolitical unrest. Widespread joblessness increases poverty, heightens racial and ethnic tensions, and reduces hope for material advancement.

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Savers

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Unanticipated inflation hurts savers

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coeditors

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Unanticipated inflation harms creditors (lenders

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Flexible-Income Receivers

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People who have flexible incomes may escape inflation's harm or even benefit from it. For example, individuals who derive their incomes solely from Social Security are largely unaffected by inflation because Social Security payments are indexed to the CPI

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Debtors

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Unanticipated inflation benefits debtors

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deflation

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The effects of unanticipated deflation—declines in the price level—are the reverse of those of inflation. People with fixed nominal incomes will find their real incomes enhanced. Creditors will benefit at the expense of debtors. And savers will discover that the purchasing power of their savings has grown because of the falling prices

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