Glossary
Business Cycle
The natural fluctuation of economic activity, characterized by alternating periods of expansion and contraction.
Example:
The economy moving from a booming period to a recession and then back to growth illustrates the Business Cycle.
Circular Flow Model
A simplified representation of the economy that illustrates how money, goods, and services flow between households and firms.
Example:
When you buy a new video game, money flows from your household to the firm, and the game flows from the firm to your household, illustrating the Circular Flow Model.
Consumer Price Index (CPI)
A measure that tracks the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
Example:
The government uses the Consumer Price Index to determine how much Social Security benefits should increase to keep pace with living costs.
Contraction
A phase of the business cycle where economic activity slows down, characterized by decreasing GDP, rising unemployment, and declining consumer spending.
Example:
A period where businesses cut back on production and lay off workers is a sign of an economic Contraction.
Cyclical Unemployment
Unemployment that arises from a downturn in the business cycle, such as a recession, where there is insufficient demand for labor.
Example:
Factory workers laid off during a recession because consumers are buying fewer cars are experiencing Cyclical Unemployment.
Expansion
A phase of the business cycle where economic activity grows, characterized by increasing GDP, falling unemployment, and rising consumer spending.
Example:
When new businesses are opening, jobs are plentiful, and people are spending more, the economy is in an Expansion.
Frictional Unemployment
Temporary unemployment that occurs when people are voluntarily between jobs, entering the labor force for the first time, or re-entering it.
Example:
A college graduate spending a few months searching for their ideal first job is experiencing Frictional Unemployment.
Gross Domestic Product (GDP)
The total monetary value of all final goods and services produced within a country's borders in a specific time period, typically a year.
Example:
If the U.S. produced $27 trillion worth of goods and services last year, that would be its Gross Domestic Product.
Inflation
A general increase in the prices of goods and services over time, leading to a decrease in the purchasing power of money.
Example:
If a candy bar cost 1.25, that's an example of inflation affecting consumer prices.
Labor force
The sum of all individuals who are employed and those who are unemployed but actively seeking employment.
Example:
A country's labor force includes everyone from software engineers to retail clerks, as long as they are working or looking for work.
Nominal GDP
GDP measured in current prices, without adjusting for the effects of inflation.
Example:
If a country's Nominal GDP increased by 10% but prices also rose by 10%, there was no real economic growth.
Peak
The highest point of economic activity in the business cycle, marking the end of an expansion and the beginning of a contraction.
Example:
During a Peak, unemployment is typically low, and businesses are operating at or near full capacity.
Real GDP
GDP adjusted for inflation, providing a more accurate measure of economic growth by removing the effect of price changes.
Example:
Economists prefer to use Real GDP to compare economic output over different years because it accounts for changes in the purchasing power of money.
Structural Unemployment
Unemployment caused by a mismatch between the skills workers possess and the skills employers need, often due to technological advancements or changes in industry structure.
Example:
Coal miners losing their jobs as the economy shifts towards renewable energy sources are experiencing Structural Unemployment.
Trough
The lowest point of economic activity in the business cycle, marking the end of a contraction and the beginning of an expansion.
Example:
At the Trough of a recession, unemployment is usually at its highest, and consumer confidence is very low.