Fiveable
Fiveable

or

Log in

Find what you need to study


Light

Find what you need to study

Unit 2 Overview: Economic Indicators and the Business Cycle

4 min readโ€ขnovember 18, 2021

Unit 2 Overview: Economic Indicators and the Business Cycle

Economic Indicators and the Business Cycle

So youโ€™ve survived Economics Basics - yay! But, now what? In Unit 2, we will dive into all of the fancy numbers that economists use to explain the health of the economy. An understanding of these statistics - or as we call them - - will make the financial report on the news make that much more sense.ย 

Before we get to the , it is important for us to understand the flow of the economy - which just so happens to make a nice and easy circle โญ•. Aptly named the , this helps us track both the money (in the form of payments, spending, wages, and income) in our economy and the goods/services/resources in a simplified and understandable way. Of course, the economy has a lot more variables than are presented here, but the circular flow gives us an easy way to understand the basics. Notice money ๐Ÿ’ฐ moves clockwise while goods/services ๐Ÿ› move counter clockwise!ย 

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2FScreen%20Shot%202021-05-27%20at%2011.52-Z95MMGq8uA9X.png?alt=media&token=34a94169-b04e-48fe-9227-6f9467b873ff

Image from Fiveable

From there we get to explore Gross Domestic Product (GDP) including what it is made up of, how it is calculated, and most importantly what it means. GDP gives us the opportunity to not only compare one economy to another but to see how our economy has changed over time. Of course, we donโ€™t want to compare apples to oranges so we will need to take some time to understand (the general rising of prices or when you feel like your money is worthless) and how we can use that to adjust GDP and make our comparisons more accurate. is calculated by keeping track of the prices of goods and services in an imaginary shopping cart ๐Ÿ›’ (this is called the Consumer Price Index). It includes items as inexpensive as bread ๐Ÿž and eggs ๐Ÿฅš but also includes bigger consumer purchases like cars ๐Ÿš— and computers ๐Ÿ’ป. Both the official GDP and rate are calculated by some very well-paid economists and statisticians at the Bureau of Labor Statistics. Comparing GDP to a base year is known as Real GDP (accounting for ), while your basic GDP calculation is referred to as Nominal GDP.ย  This all begs the question - how do we know the economy needs improving? As we are learning there are a lot of indicators to give us insight into the health of the economy. But, did you know that the economy tends to move in a cycle? The is our simplified model of how the economy tends to move. For you math and science nerds, it looks like a sine curve or sound waves, moving up and down over time. From its peak ๐Ÿ” (the highest point) our cycle contracts down to a ๐Ÿท (the lowest point) and then expands back up to another peak. It happens over and over. Bonus points if you noticed this cycle of boom and bust in the US Economy as APUSH students!

GDP is made up of four components (, , , and ) and is directly linked to the we will study in the next unit. With a simple formula based on expenditures (C + I + G + Nx), you too will be able to play around with GDP. This will put you in a great place to make decisions (you might even do a better job than Congress๐Ÿ’€). But in all seriousness, weโ€™ll learn more about in our next Unit and then youโ€™ll be able to write strongly worded letters ๐Ÿ“ฉ to your local representatives with suggestions on how to improve the economy ๐Ÿค‘. Note: GDP can also be calculated through the , but it is super complicated and unnecessary for us armchair economists (that being said you should know that it exists for your AP Exam).ย 

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2FScreen%20Shot%202021-05-27%20at%2011.53-xyihuSk7tsgc.png?alt=media&token=441bf7c6-41a7-48e0-bebb-2c1a15672f2c

Image from Fiveable

Weโ€™ve got all of our circles and cycles down, and we understand GDP and , but what about ? This is the economic indicator that we hear about the most, but likely donโ€™t understand. We will cover who is in the and who isnโ€™t. We will learn that some is actually quite natural, and we will learn about the good and bad types of . For example, being unemployed because you just moved across the country (frictional) to attend the college of your dreams is actually not a bad thing! On the other hand, losing your job because you donโ€™t have the skills to keep up with new technology is not great (structural). But, at the end of the day, as long as you arenโ€™t unemployed because the economy is in the toilet (cyclical), youโ€™re probably going to be ok!ย 

That was a lot - so letโ€™s recap! Thereโ€™s a circular flow to see how things move through the economy and a to see how the economy moves up and down. There are a host of indicators including GDP (both nominal and real), the Consumer Price Index (to calculate ), and .ย 

Key Terms to Review (19)

Aggregate demand

: Aggregate demand refers to the total amount of goods and services that all sectors of an economy are willing and able to purchase at a given price level and period of time.

Business cycle

: The business cycle refers to the fluctuations in economic activity that occur over time, including periods of expansion (economic growth) and contraction (recession).

Circular Flow Model

: The circular flow model is an economic concept that illustrates how money flows through an economy between households and firms. It shows how households supply factors of production to firms in exchange for income, which is then used to purchase goods and services from firms.

Consumer Price Index (CPI)

: CPI is a measure that tracks changes in prices paid by consumers for commonly purchased goods and services over time. It helps gauge inflationary trends and cost-of-living adjustments.

Consumer Spending

: Consumer spending refers to the total amount of money spent by individuals on goods and services in an economy. It is a crucial component of aggregate demand and plays a significant role in driving economic growth.

Cyclical Unemployment

: Cyclical unemployment refers to the type of unemployment that occurs due to fluctuations in the business cycle. It is caused by a decline in aggregate demand, leading to a decrease in production and layoffs.

Economic Indicators

: Economic indicators are statistical data that provide insights into the overall health and performance of an economy. They help economists and policymakers assess the current state of the economy, predict future trends, and make informed decisions.

Fiscal Policy

: Fiscal policy refers to the government's use of taxation and spending to influence the economy. It involves decisions on how much money the government should collect in taxes and how much it should spend on public goods and services.

Frictional Unemployment

: Frictional unemployment occurs when individuals are temporarily between jobs or are searching for their first job.

Government Spending

: Government spending refers to expenditures made by federal, state, or local governments on goods, services, infrastructure projects, social programs, defense, etc., using taxpayer funds.

Gross Domestic Product (GDP)

: Gross Domestic Product (GDP) measures the total value of all final goods and services produced within a country's borders during a specific period (usually annually). It serves as an indicator of economic growth or contraction.

Income Approach

: The income approach is one method used to calculate a country's gross domestic product (GDP). It measures GDP by adding up all incomes earned within an economy, including wages, rents, profits, and interest.

Inflation

: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It means that, on average, prices are rising and the purchasing power of money is decreasing.

Investment Spending

: Investment spending refers to expenditures made by businesses and individuals on capital goods such as machinery, equipment, and buildings. It is one of the components of aggregate demand and contributes to economic growth.

Labor force

: The labor force refers to the total number of people who are employed or actively seeking employment. It includes both employed individuals and those who are unemployed but looking for work.

Net Exports

: Net exports represent the difference between a country's total exports (goods and services sold abroad) and its total imports (goods and services purchased from abroad). It indicates whether a nation has a trade surplus (exports exceed imports) or a trade deficit (imports exceed exports).

Structural Unemployment

: Structural unemployment occurs when there is a mismatch between the skills possessed by workers and the requirements of available jobs in the economy.

Trough

: The trough is the lowest point in a business cycle, representing the end of a period of economic contraction and the beginning of an expansion. It marks the bottom of a recession or depression.

Unemployment

: Unemployment refers to the state of being without a job, actively seeking employment, and available to work. It is an important economic indicator that measures the percentage of the labor force that is jobless.

Unit 2 Overview: Economic Indicators and the Business Cycle

4 min readโ€ขnovember 18, 2021

Unit 2 Overview: Economic Indicators and the Business Cycle

Economic Indicators and the Business Cycle

So youโ€™ve survived Economics Basics - yay! But, now what? In Unit 2, we will dive into all of the fancy numbers that economists use to explain the health of the economy. An understanding of these statistics - or as we call them - - will make the financial report on the news make that much more sense.ย 

Before we get to the , it is important for us to understand the flow of the economy - which just so happens to make a nice and easy circle โญ•. Aptly named the , this helps us track both the money (in the form of payments, spending, wages, and income) in our economy and the goods/services/resources in a simplified and understandable way. Of course, the economy has a lot more variables than are presented here, but the circular flow gives us an easy way to understand the basics. Notice money ๐Ÿ’ฐ moves clockwise while goods/services ๐Ÿ› move counter clockwise!ย 

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2FScreen%20Shot%202021-05-27%20at%2011.52-Z95MMGq8uA9X.png?alt=media&token=34a94169-b04e-48fe-9227-6f9467b873ff

Image from Fiveable

From there we get to explore Gross Domestic Product (GDP) including what it is made up of, how it is calculated, and most importantly what it means. GDP gives us the opportunity to not only compare one economy to another but to see how our economy has changed over time. Of course, we donโ€™t want to compare apples to oranges so we will need to take some time to understand (the general rising of prices or when you feel like your money is worthless) and how we can use that to adjust GDP and make our comparisons more accurate. is calculated by keeping track of the prices of goods and services in an imaginary shopping cart ๐Ÿ›’ (this is called the Consumer Price Index). It includes items as inexpensive as bread ๐Ÿž and eggs ๐Ÿฅš but also includes bigger consumer purchases like cars ๐Ÿš— and computers ๐Ÿ’ป. Both the official GDP and rate are calculated by some very well-paid economists and statisticians at the Bureau of Labor Statistics. Comparing GDP to a base year is known as Real GDP (accounting for ), while your basic GDP calculation is referred to as Nominal GDP.ย  This all begs the question - how do we know the economy needs improving? As we are learning there are a lot of indicators to give us insight into the health of the economy. But, did you know that the economy tends to move in a cycle? The is our simplified model of how the economy tends to move. For you math and science nerds, it looks like a sine curve or sound waves, moving up and down over time. From its peak ๐Ÿ” (the highest point) our cycle contracts down to a ๐Ÿท (the lowest point) and then expands back up to another peak. It happens over and over. Bonus points if you noticed this cycle of boom and bust in the US Economy as APUSH students!

GDP is made up of four components (, , , and ) and is directly linked to the we will study in the next unit. With a simple formula based on expenditures (C + I + G + Nx), you too will be able to play around with GDP. This will put you in a great place to make decisions (you might even do a better job than Congress๐Ÿ’€). But in all seriousness, weโ€™ll learn more about in our next Unit and then youโ€™ll be able to write strongly worded letters ๐Ÿ“ฉ to your local representatives with suggestions on how to improve the economy ๐Ÿค‘. Note: GDP can also be calculated through the , but it is super complicated and unnecessary for us armchair economists (that being said you should know that it exists for your AP Exam).ย 

https://firebasestorage.googleapis.com/v0/b/fiveable-92889.appspot.com/o/images%2FScreen%20Shot%202021-05-27%20at%2011.53-xyihuSk7tsgc.png?alt=media&token=441bf7c6-41a7-48e0-bebb-2c1a15672f2c

Image from Fiveable

Weโ€™ve got all of our circles and cycles down, and we understand GDP and , but what about ? This is the economic indicator that we hear about the most, but likely donโ€™t understand. We will cover who is in the and who isnโ€™t. We will learn that some is actually quite natural, and we will learn about the good and bad types of . For example, being unemployed because you just moved across the country (frictional) to attend the college of your dreams is actually not a bad thing! On the other hand, losing your job because you donโ€™t have the skills to keep up with new technology is not great (structural). But, at the end of the day, as long as you arenโ€™t unemployed because the economy is in the toilet (cyclical), youโ€™re probably going to be ok!ย 

That was a lot - so letโ€™s recap! Thereโ€™s a circular flow to see how things move through the economy and a to see how the economy moves up and down. There are a host of indicators including GDP (both nominal and real), the Consumer Price Index (to calculate ), and .ย 

Key Terms to Review (19)

Aggregate demand

: Aggregate demand refers to the total amount of goods and services that all sectors of an economy are willing and able to purchase at a given price level and period of time.

Business cycle

: The business cycle refers to the fluctuations in economic activity that occur over time, including periods of expansion (economic growth) and contraction (recession).

Circular Flow Model

: The circular flow model is an economic concept that illustrates how money flows through an economy between households and firms. It shows how households supply factors of production to firms in exchange for income, which is then used to purchase goods and services from firms.

Consumer Price Index (CPI)

: CPI is a measure that tracks changes in prices paid by consumers for commonly purchased goods and services over time. It helps gauge inflationary trends and cost-of-living adjustments.

Consumer Spending

: Consumer spending refers to the total amount of money spent by individuals on goods and services in an economy. It is a crucial component of aggregate demand and plays a significant role in driving economic growth.

Cyclical Unemployment

: Cyclical unemployment refers to the type of unemployment that occurs due to fluctuations in the business cycle. It is caused by a decline in aggregate demand, leading to a decrease in production and layoffs.

Economic Indicators

: Economic indicators are statistical data that provide insights into the overall health and performance of an economy. They help economists and policymakers assess the current state of the economy, predict future trends, and make informed decisions.

Fiscal Policy

: Fiscal policy refers to the government's use of taxation and spending to influence the economy. It involves decisions on how much money the government should collect in taxes and how much it should spend on public goods and services.

Frictional Unemployment

: Frictional unemployment occurs when individuals are temporarily between jobs or are searching for their first job.

Government Spending

: Government spending refers to expenditures made by federal, state, or local governments on goods, services, infrastructure projects, social programs, defense, etc., using taxpayer funds.

Gross Domestic Product (GDP)

: Gross Domestic Product (GDP) measures the total value of all final goods and services produced within a country's borders during a specific period (usually annually). It serves as an indicator of economic growth or contraction.

Income Approach

: The income approach is one method used to calculate a country's gross domestic product (GDP). It measures GDP by adding up all incomes earned within an economy, including wages, rents, profits, and interest.

Inflation

: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It means that, on average, prices are rising and the purchasing power of money is decreasing.

Investment Spending

: Investment spending refers to expenditures made by businesses and individuals on capital goods such as machinery, equipment, and buildings. It is one of the components of aggregate demand and contributes to economic growth.

Labor force

: The labor force refers to the total number of people who are employed or actively seeking employment. It includes both employed individuals and those who are unemployed but looking for work.

Net Exports

: Net exports represent the difference between a country's total exports (goods and services sold abroad) and its total imports (goods and services purchased from abroad). It indicates whether a nation has a trade surplus (exports exceed imports) or a trade deficit (imports exceed exports).

Structural Unemployment

: Structural unemployment occurs when there is a mismatch between the skills possessed by workers and the requirements of available jobs in the economy.

Trough

: The trough is the lowest point in a business cycle, representing the end of a period of economic contraction and the beginning of an expansion. It marks the bottom of a recession or depression.

Unemployment

: Unemployment refers to the state of being without a job, actively seeking employment, and available to work. It is an important economic indicator that measures the percentage of the labor force that is jobless.


ยฉ 2024 Fiveable Inc. All rights reserved.

APยฎ and SATยฎ are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.


ยฉ 2024 Fiveable Inc. All rights reserved.

APยฎ and SATยฎ are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.