eco2013 (6) - principles of economics: macro unit 6 study guides

Key Concepts

• Business cycles refer to the fluctuations in economic activity over time, characterized by periods of expansion, peak, contraction, and trough
• Expansion phase marked by increasing GDP, employment, and income while contraction phase marked by declining economic activity
• Measuring economic activity involves using indicators such as GDP, unemployment rate, and inflation rate to gauge the health of the economy
• Causes of business cycles include changes in aggregate demand and supply, technological advancements, and external shocks (oil price fluctuations)
• Economic indicators provide insights into the current state and future direction of the economy
  • Leading indicators (stock market indexes, building permits) signal future economic trends
  • Lagging indicators (unemployment rate) confirm patterns that have already occurred
• Government policies and interventions aim to stabilize the economy and mitigate the impact of business cycles
  • Fiscal policy involves adjusting government spending and taxation
  • Monetary policy focuses on controlling the money supply and interest rates
• Real-world examples help illustrate the impact of business cycles on various sectors and economies
• Different sectors of the economy may be affected differently by business cycles, with some industries being more sensitive to economic fluctuations than others

Business Cycle Phases

• Expansion phase characterized by increasing economic activity, rising GDP, employment growth, and consumer spending
  • Businesses experience higher profits and invest in new projects
  • Inflation may start to rise as demand for goods and services increases
• Peak phase represents the highest point of economic activity in the cycle, where GDP and employment reach their maximum levels
• Contraction phase marked by declining economic activity, falling GDP, rising unemployment, and reduced consumer spending
  • Businesses face lower profits and may cut back on investments and layoffs
  • Inflation tends to decrease as demand for goods and services declines
• Trough phase represents the lowest point of economic activity in the cycle, where GDP and employment reach their minimum levels
  • Economy may experience a recession if the contraction phase is prolonged and severe
• Recovery phase begins after the trough, with economic activity starting to increase again, leading to a new expansion phase

Measuring Economic Activity

• Gross Domestic Product (GDP) measures the total value of all goods and services produced within a country's borders over a specific period
  • Real GDP adjusts for inflation, providing a more accurate picture of economic growth
• Unemployment rate indicates the percentage of the labor force that is actively seeking employment but unable to find work
  • Helps gauge the health of the labor market and the economy's ability to create jobs
• Inflation rate measures the percentage change in the average price level of goods and services over time
  • Calculated using price indexes (Consumer Price Index)
  • Helps assess changes in purchasing power and the stability of the currency
• Industrial production index tracks the output of the manufacturing, mining, and utilities sectors
• Retail sales measure the total value of goods sold by retailers, providing insights into consumer spending patterns

Causes of Business Cycles

• Changes in aggregate demand, influenced by factors such as consumer confidence, investment spending, and government policies
  • Positive demand shocks (tax cuts) can stimulate economic growth
  • Negative demand shocks (financial crises) can lead to a contraction
• Fluctuations in aggregate supply, caused by changes in input prices, technological advancements, or natural disasters
  • Positive supply shocks (technological breakthroughs) can boost productivity and economic growth
  • Negative supply shocks (oil price hikes) can lead to higher costs and reduced output
• Monetary policy decisions by central banks, such as changes in interest rates or money supply
• External shocks, such as global economic crises, trade disputes, or geopolitical events, can impact domestic business cycles
• Psychological factors and market sentiment can amplify or dampen the effects of other causes

Economic Indicators

• Leading indicators provide early signals of future economic trends and help predict turning points in the business cycle
  • Examples include stock market indexes, building permits, and consumer confidence surveys
• Coincident indicators move in tandem with the current state of the economy and confirm the current phase of the business cycle
  • Examples include GDP, employment levels, and industrial production
• Lagging indicators change after the economy has already begun to follow a particular trend, confirming patterns that have already occurred
  • Examples include unemployment rate and average duration of unemployment
• Economic indicators are closely monitored by policymakers, businesses, and investors to make informed decisions
• Composite indexes (Conference Board Leading Economic Index) combine multiple indicators to provide a more comprehensive view of the economy

Government Policies and Interventions

• Fiscal policy involves the use of government spending and taxation to influence economic activity
  • Expansionary fiscal policy (increased spending, tax cuts) stimulates economic growth during a contraction
  • Contractionary fiscal policy (reduced spending, tax hikes) cools down the economy during an expansion to control inflation
• Monetary policy refers to the actions taken by central banks to control the money supply and interest rates
  • Expansionary monetary policy (lower interest rates, increased money supply) encourages borrowing and spending during a contraction
  • Contractionary monetary policy (higher interest rates, reduced money supply) curbs inflation during an expansion
• Automatic stabilizers (progressive taxation, unemployment benefits) help mitigate the impact of business cycles without direct government intervention
• Governments may also implement structural policies (labor market reforms, infrastructure investments) to address long-term economic challenges
• International coordination of policies can help address global economic issues and spillover effects

Real-World Examples

• The Great Recession (2007-2009) triggered by the subprime mortgage crisis in the United States, leading to a global economic downturn
  • Characterized by high unemployment, declining GDP, and financial market turmoil
• The dot-com bubble (late 1990s) and its subsequent burst in the early 2000s, affecting the technology sector and stock markets
• The oil price shocks of the 1970s, which led to stagflation (high inflation and high unemployment) in many countries
• The COVID-19 pandemic (2020) causing a global economic contraction due to lockdowns, supply chain disruptions, and reduced consumer spending
  • Governments and central banks implemented unprecedented fiscal and monetary stimulus measures to support their economies
• The post-World War II economic boom in the United States, characterized by rapid economic growth, rising living standards, and technological advancements

Impact on Different Sectors

• Cyclical sectors (automotive, construction) are more sensitive to business cycles and tend to perform well during expansions but suffer during contractions
• Defensive sectors (healthcare, utilities) are less affected by economic fluctuations and provide stable performance throughout the business cycle
• Technology sector can be volatile, with rapid growth during expansions but vulnerability to market corrections and bubbles
• Service sector (retail, hospitality) is sensitive to changes in consumer spending and confidence
  • Discretionary services (travel, entertainment) are more affected by business cycles than essential services (healthcare, education)
• Export-oriented sectors are influenced by global economic conditions and exchange rate fluctuations
• Small businesses may face greater challenges during economic downturns due to limited resources and access to credit