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University of Balamand

Faculty of Business & Management

Survey of Economics

Measuring Output:

 GDP (Gross Domestic Product): is the value of all final goods and services (beer, cars,
books, health care, concerts…) produced in a country during a year.

 Nominal GDP: is measured in actual market prices.

 Real GDP: is calculated in constant prices.

 Potential GDP: is the long-run trend in real GDP. It represents the long run productive
capacity of the economy. It is the maximum amount of output an economy can
produce while maintaining stable prices. It is also called “the high-employment level
of output.” When an economy is operating at its potential, unemployment is low,
production is high and inflation is under control.

 Actual GDP: is the current level of GDP.

 The difference between potential and actual GDP is called the GDP Gap.

 GNP (Gross National Product): is the total output produced with labor and capital
owned by residents of a country during a year, while GDP is the output produced
with labor and capital located inside the country.

 GDP per capita: the portion of GDP that goes to each resident. It gives an idea about
the standard of living in each country.
GDP / capita =

 The Business Cycle:

Business cycles occur when economic activity speeds up or slows down.

More precisely, we define a business cycle as follows:
A business cycle is a swing in total national output, income and employment, usually
lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in
most sectors of the economy.

Typically, economists divide business cycles into 2 main phases: recession and expansion.
Peaks and troughs mark the turning points of the cycles.

The downturn (contraction) of a business cycle is called a recession, which is often

defined as a period in which real GDP declines for at least 2 consecutive quarters.
The recession begins at a peak and ends at a trough.
University of Balamand
Faculty of Business & Management
Survey of Economics

Note that the pattern of the cycles is irregular. No 2 business cycles (expansion – peak –
recession – trough) are quite the same. The cycles are like mountain ranges, with
different levels of hills and valleys. Some valleys are very deep and broad (big decrease
and for a long period), as in the Great Depression; others are shallow and narrow, as was
that of 1970.

While business cycles are not identical twins, they often have a familial similarity. If a
reliable economic forecaster announces that a recession is about to arrive, are there any
typical phenomena that you should expect to accompany the recession?

The following are few of the customary characteristics of a recession:

 Often, consumer purchases decline sharply while business inventories of

automobiles and other durable goods increase unexpectedly. As businesses react
by decreasing production, real GDP falls. Shortly afterward, business investments
in plant and equipment also fall sharply.

 The demand for labor falls – first seen in a drop in the average workweek,
followed by layoffs and higher unemployment.

 As output falls, inflation shows. As demand for crude materials declines, their
prices tumble. Wages and prices of services are unlikely to decline, but they tend
to rise less rapidly in economic downturns.

 Business profits fall sharply in recessions. In anticipation of this, common-stock

prices usually fall as “investors” sniff the scent of a business downturn.

We have spoken in terms of recessions.

Expansions are the mirror image of recessions, with each of the above factors operating in
the opposite direction.

Taken with modifications from P. Samuelson’s Economies (551-553)