chapte6 - Chapter 6 I. Economic Fluctuations analyzing the...

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Chapter 6 I. Economic Fluctuations – analyzing the different patterns in GDP 1. Secular Trend – general tendency over long periods of time (several to many decades). In the US this averages about 3% real growth per year, and trend for periods of ten years or more have been positive. 2. Business Cycles – output and income experience a cycle of peak (boom), contraction, trough (bust), and expansion. The boom-bust cycle usually takes 6-8 years to complete, but can occur within only a few years or last slightly over a decade. So, while the stages of the cyclical fluctuation are unchanging, the duration of any specific boom-bust cycle is unpredictable. 3. Seasonal variations – Certain industries thrive mostly in particular seasons 4. Random variations – External, unexpected shock that affects the economy II. A. Characteristics of the Recession 1. 6 months (2 consecutive quarters) of falling GDP is a recession 2. In a recession, all of the following will decrease (or remain stagnant): output, employment, Investment and Consumption spending, Prices. In a recovery, all of these will be increasing. 3. Unused Plant Capacity will be increasing in a recession and decreasing in the expansion. B. Goods Purchases: 1. Durables
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Quantities will fall because people can postpone major purchases. Cars and appliances that could be replaced will continue being used longer. Prices very often remain flat or fall only slightly because the producers in the durable goods industries have “concentrated” ownership, meaning varying degrees of monopoly power exist. 2. Non-durables Quantities are flat (unchanged) or only slightly declining because many non-durables are necessity goods, like food. Prices may decrease as many producers of non-durables are in competitive markets, so their prices fluctuate along with the business cycle. III. Major Causes of GDP Fluctuation 1. Innovation: Technological Advancement A. Often it occurs in “swarms” as one new invention or breakthrough leads to several related advancements, or applications of the new technology such as all the applications that grew out of the Internet. B. The Internet example also shows how the new technology at first will see a wide variety of business ideas putting it to use, but as the expansion slows down, only the best (most profitable) ideas will survive. C. Weaker firms die off and the expansion ends, signaling the
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chapte6 - Chapter 6 I. Economic Fluctuations analyzing the...

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