ECONOMIC FLUCTUATIONS AND GROWTH

 Economic fluctuations: are the rise and fall of economic activity relative to the long-term
growth trend of the economy.
o These Business cycles vary in length and intensity.
o Business cycle= contraction + expansion (boom)
 Irregular and unpredictable
 These fluctuations include the whole country’s economies or those around the world.
 The economy has two faces:
o Expansions
 Economy grows as reflected by rising output, employment, income, and other
aggregate measure.
o Contractions
 The economy declines as reflected by falling output, employment, income,
and so on.
 Depression: Sharp contraction
 Sever and prolonged reduction in the nation’s economic activity
(1930s)
 Recession: A milder contraction
 Period of decline in economic activity lasting more than a few months,
as reflected by falling output, employment, income, and so on.
 Two consecutive quarters of declining real GDP
 Output is measure by real GDP, the value of final goods and services after taking away
changed in inflation
o Generally, real GDP overtime tends to have an upward trend (rise over long periods
of time)
o GDP= income = expenditure
o GDP = Y= C+I G+ (X-IM)
 C- Consumption
 I- Investment
 G- Government spending
 (X-IM) Exports – imports = trade offs
o Capital stock = existing machinery/ infrastructure (used to make produce …
o Investment spending adds to capital stock
o Saving (flow)  wealth (stock)
 Inflation: An increase in the economy’s average price level. Production increase because:
o Increase in the amount and quality of resources, especially labour and capital
o Better technology
o Improvements to facilitate production and exchange. Eg. Property rights, patent laws,
the legal system and market prices.

 Contraction begins after the expansion reaches a peak (high point), and continues until the
economy reaches a trough, or low point. The period between a peak and trough is a
contraction, and the period between a trough and subsequent peak is an expansion.
 A recession hits hardest those regions that produce capital goods, (heavy machinery, durable
goods, appliances, furniture, and automobiles.)
 The demand for these goods falls more during hard times than does the demand for other
goods and services
 Because of seasonal fluctuations and random disturbances, the economy does not move
smoothly through the phases of the business cycle.

The Global Economy

 Real means that the effects of inflation have been erased.
 Leading economic indicators: predictions, or leads to a downturn (depression). Upturns in
leading indicators point to an economic recovery.
o They cannot say when a turning point will occur, or whether one will occur.
 Consumer confidence [on state of economy] (increases  spending  GDP
goes up)
 Coincident economic indicators are measure tat reflect expansions, contractions, peaks, and
throughs as they occur:
o Include: total employment, personal income, and industrial production. Some
indicators measure what has already happened.
 Industrial production, same time and direction as changes in GDP
 Lagging economic indicators: follow changes in overall economic activity. Include interest
rates, unemployment rate & duration.