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Chapter 10 "The business cycle", after reading this chapter, you should be able to: Explain how growth of the economy is measured, tell how unemployment is measured and affects us, discuss why inflation is a problem and how it is measured, define “full employment” and “price stability”, recite the U.S. track record on growth, unemployment, and inflation. | Chapter 10 The Business Cycle Macroeconomics Macroeconomics is the study of aggregate economic behavior, of the economy as a whole. A basic purpose of macroeconomic theory is to explain the business cycle. Macro policy tries to control the business cycle. 10- Macroeconomics focuses on the big picture; microeconomics focuses on the small picture. Assessing Macro Performance There are three basic measures of macro performance: Output (GDP) growth. Unemployment. Inflation. 10- These three measures tell us how the economy is doing. GDP GDP is the total value of output (goods and services) produced in an economy during a given time period. 10- GDP measures the annual output. Changes in GDP from year to year measure economic growth. GDP Growth An economy’s potential output is reflected in its production possibilities curve (PPC): Production possibilities – the alternative combinations of goods and services that could be produced in a given time period with all available resources and technology. When there is GDP growth, the PPC shifts outward. 10- The PPC shows the potential maximum output the economy can achieve. When there is GDP growth, the production possibilities curve shifts outward. The Business Cycle The business cycle is the alternating periods of economic growth and contraction experienced by the economy. It shows the rise and fall of the economy over time. 10- It might be good to caution your students not to think of the business cycle as a regular cycle, like a sine wave. Figure 10.1 (next) suggests this. In reality the downward parts of the cycle happen fast and the upward parts are much longer in length. Figure 10.1 10- It might be good to emphasize that the long-run trend of economic growth (blue line) is up and that for each element of the cycle, the peaks and the troughs are higher than the ones before. Real GDP Business cycles are measured by changes in real GDP: Nominal GDP is measured in current . | Chapter 10 The Business Cycle Macroeconomics Macroeconomics is the study of aggregate economic behavior, of the economy as a whole. A basic purpose of macroeconomic theory is to explain the business cycle. Macro policy tries to control the business cycle. 10- Macroeconomics focuses on the big picture; microeconomics focuses on the small picture. Assessing Macro Performance There are three basic measures of macro performance: Output (GDP) growth. Unemployment. Inflation. 10- These three measures tell us how the economy is doing. GDP GDP is the total value of output (goods and services) produced in an economy during a given time period. 10- GDP measures the annual output. Changes in GDP from year to year measure economic growth. GDP Growth An economy’s potential output is reflected in its production possibilities curve (PPC): Production possibilities – the alternative combinations of goods and services that could be produced in a given time period with all .
