econ 2 - Dr. Mohammed Alwosabi Econ 141- Ch.2 Notes on...

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Dr. Mohammed Alwosabi Econ 141- Ch.2 1 Notes on Chapter 2 BUSINESS CYCLE AND LABOR MARKET BUSINESS CYCLE: ± We study macroeconomics to describe, analyze, and predict the economic activity. But economic activity is not constant. It fluctuates ups and downs for different reasons. These ups and downs are called business cycle (or economic cycle). ± Economic activity is measured using RGDP. Estimates of GDP are used for business cycle forecasting. ± To understand the business cycle we must distinguish between RGDP and potential GDP (PGDP). ± RGDP is the market value of the total production measured at the constant (base year) prices. RGDP eliminates the influence of inflation and determines how much production has grown from one year to another. ± PGDP is the RGDP when all country’s resources are fully employed. ± Since resources are not always fully employed, RGDP fluctuates around PGDP. ± Business Cycle can be defined as periodic but irregular short run upward and downward movements (fluctuations)in production and employment (in RGDP around the PGDP). ± Every business cycle has two phases (expansion and recession) and two turning points (peak and trough).
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Dr. Mohammed Alwosabi Econ 141- Ch.2 2 ± Recession: o A recession is a period in which is a significant decrease in RGDP of the country that occurs for at least two quarters. o A recession begins just after the economy reaches its peak of activity and ends as the economy reaches its trough. ± Expansion: o An expansion period in which there is a significant increase in RGDP lasting for at least two quarters. o During expansion, production of goods and services increases and unemployment decreases. o An expansion begins just after the economy reaches its trough of activity and ends as the economy reaches its peak. ± A peak: o A peak is the point at which the real GDP stops increasing (an expansion ends) and begins its decline (a recession begins). It is the highest point. o At the peak, employment, consumer spending, and production hit their highest levels. o When the peak lasts for a long time, we are in a period of prosperity . One of the dangers of peak periods is that of inflation. ± A trough: Time PGDP RGDP RGDP Peak Expansion Recession Trough
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Dr. Mohammed Alwosabi Econ 141- Ch.2 3 o The trough is the time at which the real GDP stops its decline (a recession ends) and starts expanding (an expansion begins). It is the lowest point. o When the trough lasts for a long time, we are in a period of depression. ± Using production possibilities frontier (PPF), the PGDP is on the curve itself where resources are fully employed. ± If the RGDP is equal to PGDP the economy is producing on the PPF at points such as B or C or any point on the PPF. ± If RGDP < PGDP this means some resources are not fully used
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econ 2 - Dr. Mohammed Alwosabi Econ 141- Ch.2 Notes on...

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