• How does nominal GDP differ from real GDP?

• Nominal = measures current prices• Real = measured in constant/unchanging

prices

Business Cycles

Tracking a Business Cycle

Contractions

• Recession – prolonged economic contraction, usually 6-18 months. Unemployment in the 6-10% range

• Depression – no precise definition. Long and severe recession with high unemployment and low factory output

Economic Variables

1. Business Investment2. Interest Rates and Credit3. Consumer Expectations4. External Shocks

Business Investment

• When economy is expanding firms expect sales and profits to rise

• So they invest and this spending creates output and jobs

• Until they cutback

Interest Rates and Credit

• When interest is low people are willing to invest/borrow/use credit

• When interest is high people do not spend as much– 1980s some credit card interest rates reached 21%– Loans as high as 17%

Consumer Expectations

• Self-fulfilling Prophecy– Believe that economy is growing makes people

willing to spend• Can cause an expansion

– Believe economy is slow people not willing to spend• Can cause a contraction

External Shocks

• Difficult to predict• Positive– Discovery of oil or minerals– Bountiful harvests

• Negative– War, droughts, hurricanes

Leading Indicators

• Economists use to predict

• Stock Market• The Conference Board

• Private business research organization• Ten leading Economic Indicators

– Stock prices, interest rates, etc

History

• Great Depression– Economists need to monitor– GDP fell by 1/3, Unemployment 25%– FDR: Gov’t programs to get people back to work• WPA (Works Progress Admin) and CCC (Civilian

Conservation Corps)

History

• 1970s– OPEC oil embargo– High oil prices forced Americans to find alternatives

• 1980s– High Interest rates

• 1990s– Pretty good

• 2000s– Another recession

• What are 3 indicators of how the Economy is performing?

• Stock Market, GDP, The Conference Board