ECN_2025review20_23 - 1 Describe the two phases of the...

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Describe the two phases of the business cycle and its two turning points. Explain what you would expect to see happen, and why, in the durable goods sector and the non-durable/services sector, of the economy as we move into a period of declining economic growth. Phase 1: A recession --a period during which real GDP decreases—its growth rate is negative—for at least two successive quarters. Phase 2: An expansion --is a period during which real GDP increases. Turning point 1: Peak --when an expansion ends and a recession begins Turning point 2: Trough --when a recession ends and an expansion begins Contraction Output Employment Prices Durable Goods Decreases Decreases Remain relatively constant Non-durable goods and services Relatively constant Relatively constant Decrease Expansion Durable Goods Increases Increases Increase Non-durable goods and services Relatively constant Relatively constant Increase 2. Using an example explain the difference between nominal and real GDP. 3. What is potential GDP? What is actual GDP? If actual GDP is below potential GDP what do we call it? What are the ramifications of such a situation? Describe the two measures that we might use to estimate the cost to society if productivity growth slows and actual GDP falls below potential GDP. Potential GDP: the value of production when all the economy’s labor, capital, land, and entrepreneurial ability are fully employed. Real GDP: GDP adjusted for inflation that allows comparison of GDP figures over a number of years 4. Describe both the benefits and potential costs associated with economic growth. 5. Describe the various measurement problems associated with calculating GDP. What are some of the problems we encounter when comparing GDP over a period of years. What technique might we use to offset this problem? Non-market activities – since GDP is the dollar value of final goods and services produced and sold in the market place any economic transactions that take place outside of the formal or legal market places are excluded. 1. Mr. or Mrs. Mom is not a part of GDP but maids and housecleaning services are. 2. Friends helping worth homework are not part of GDP but paid tutors are. 3. Working “under the table” as a baby sitter, house painter, landscaper, mechanic or handyman, are activities not included in GDP but may have a dollar value larger than black market activities. 4. Black market activities such as prostitution, drug dealing and bookmaking involve significant resources but are not a part of GDP. 5.
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This note was uploaded on 05/11/2008 for the course ECN 2025 taught by Professor Harrington during the Winter '08 term at Nova Southeastern University.

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ECN_2025review20_23 - 1 Describe the two phases of the...

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