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Dr. Mohammed Alwosabi

Dr. Mohammed Alwosabi

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Published by coldpassion
Econ 141, By Dr.Alwosabi
Econ 141, By Dr.Alwosabi

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Published by: coldpassion on Dec 07, 2009
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12/07/2009

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Dr. Mohammed Alwosabi Econ 141- Ch.21
Notes on Chapter 2
POPULATION SURVEY AND LABOR MARKET
BUSINESS CYCLE:
 
We study macroeconomics to describe, analyze, and predict theeconomic activity. But economic activity is not constant. It fluctuatesups and downs for different reasons. These ups and downs are calledbusiness cycle (or economic cycle).
Economic activity is measured using RGDP. Estimates of GDP areused for business cycle forecasting.
To understand the business cycle we must distinguish between RGDPand potential GDP (PGDP).
 
RGDP
is the market value of the total production measured at theconstant (base year) prices. RGDP eliminates the influence ofinflation and determines how much production has grown from oneyear to another.
 
PGDP
is the RGDP when all country’s resources are fully employed.
Since resources are not always fully employed, RGDP fluctuatesaround PGDP.
 
Business Cycle
can be defined as periodic but irregular short runupward and downward movements (fluctuations)in production andemployment (in RGDP around the PGDP).
Every business cycle has
two phases
(expansion and recession) andtwo
turning points
(peak and trough).
 
Dr. Mohammed Alwosabi Econ 141- Ch.22
 
Recession:
 
o
A
recession
is a period in which is a significant decrease inRGDP of the country that occurs for at least two quarters.
o
A recession begins just after the economy reaches its peak ofactivity and ends as the economy reaches its trough.
 
Expansion:
o
 
An expansion
period in
 
which there is a significant increase inRGDP lasting for at least two quarters.
o
During expansion, productionof goods and services increasesand unemployment decreases.
o
An expansion begins just afterthe economy reaches its troughof activity and ends as theeconomy reaches its peak.
 
A peak:
 
o
A
peak
is the point at which the real GDP stops increasing (anexpansion ends) and begins its decline (a recession begins). Itis the highest point.
o
At the peak, employment, consumer spending, and productionhit 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 ofinflation.
TimePGDPRGDPRGDP
Peak ExpansionRecession
 
Trough
 
Dr. Mohammed Alwosabi Econ 141- Ch.23
 
A trough:
 
o
The trough is the time at which the real GDP stops its decline (arecession ends) and starts expanding (an expansion begins). Itis 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 whereresources are fully employed.
If the RGDP is equal to PGDP theeconomy is producing on the PPF atpoints such as B or C or any point on the PPF.
If RGDP < PGDP this means some resources are not fully used(resources are unemployed or underused) and it is represented bypoints inside the curve such as A.
If RGDP > PGDP this means resources are overused. This isrepresented by point D outside the PPF.
The economy grows throughout the years.
Economic growth
is theexpansion of the economy’s production possibilities. It is representedby an outward shift of the PPF.
XYABCD

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