CPA Business Notes - Chapter 2

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CPA Business Notes - Chapter 2 http://www.scribd.com/doc/20861821/CPA-Business-Notes-Chapter-2
Chapter 2
Business Cycles and Reasons for Business Fluctuations
Business cycle: rise and fall of economic activity relative to its long-term growth trend.
Macroeconomics: study of economy as a whole – National income, unemployment, inflation.
Microeconomics: studies consumers, producers, and suppliers operating in a narrowly defined market.
Gross Domestic Product (GDP): most common measure of economic activity or output of an economy
- Total market value of all final goods and services produced within the borders of a nation
Nominal GDP: measures the value of all final goods and services in current prices. No inflation
adjustment.
Real GDP: measures the value of all final goods and services in current prices. Adjusted for inflation by
using a price index.
Price index (GDP Deflator): used to calculate real GDP.
Real GDP = Nominal GDP x 100

GDP Deflator
Business cycles
Expansionary phase: rising economic activity (Real GDP) and growth.
Peak: high point of economic activity.
Contractionary phase: falling economic activity and growth and follows a peak.
Trough: low point of economic activity.
Recovery phase (expansionary phase): follows a trough and economic activity begins to increase
Recession: economy experiences negative real economic growth.

- Two consecutive quarters of falling national output.
- Resources are underutilized and unemployment is high
Depression: a very severe recession.
Leading indicators (Before)

- New unemployment claims
- Building permits for residences
- Average length of the workweek
- Money supply
- Prices of selected stocks
- Orders for goods
- Price changes of materials
- Index of consumer expectations
Becker – 2008 Edition Chapter 2 Page 1 of 13
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Business Cycles and Reasons for Business Fluctuations

Price index (GDP Deflator): used to calculate real GDP.

Real GDP = Nominal GDP x 100

Recession: economy experiences negative real economic growth.

Depression: a very severe recession.

Leading indicators (Before)

Becker – 2008 Edition Chapter 2 Page 1 of 13

National Income Prices Increase Price Level