The Eonomy.docVIP

The Economy Overview scarcity decision makers - consumers -companies -government Factors of production - capital - labour - natural resources $ S Equilibrium D Q Economic Growth Gross Domestic Product - GDP value of all goods services produced in country in year - final goods GDP = C + G + I + (X-M) C = consumption G = government expenditures I = investment in plant, machinery, inventory, housing X-M = exports – imports = gross domestic income = gross domestic expenditures Real GDP - GDP after removing inflation E.g. if 6%^ in GDP and 2% inflation - real GDP ^ 4% Growth - economy has grown over time - but not always smoothly - have periods of growth and periods of recession (2 quarters of declining real GDP) - results from 1)( in population 2) ( in capital stock 3) technological innovation Short Run - Figure 2.2, p. 2-9 - fluctuations - actual vs. potential output Business Cycle - has 5 phases - see graphs page 2 Expansion - economy steadily growing Peak - final stage of expansion Contraction - level of economic activity declining Trough - final stage of contraction Recovery - economy recovering - GDP reaches its previous peak soft landing Economic Indicators Leading Indicators - anticipate economic change – peak trough before the economy e.g. housing starts, manufacturing new orders, commodity prices, stock prices, average hours worked Composite Leading Indicator - index of 10 leading indicators Coincident Indicators - change at approximately the same time as the economy e.g. GDP, industrial production, personal income Lagging Indicators - change after the economy has changed e.g. capital spending, unemployment rate, inventory levels, inflation Long Run growth rates - Table 2.5 p. 2-14 GDP per capita determinants of economic growth The Economy - 2 Economic Scenario PEAK - D S – high interest rates, inflation, wages - slowing growth in