ECON 203 Lecture 8 Outline of Last Lecture I Main Idea II GDP III Issues with GDP Outline of Current Lecture I Main Idea II Business Cycle III Keynesian Theory Current Lecture Main Ideas Business Cycle refers to the ups and downs of the GDP Up in GDP is called Expansion Extreme Up is a Boom Down in GDP is called Recession Contraction Extreme Down is a Depression GDP is correlated with production jobs and income GDP is used to understand define the Business Cycle ups and downs of the Economy Positive objective Economists Analyze Economics then act on statistics non judgmental they look at the bare facts the economy went down because this happened Normative moral Economists Approach Economics from a moral judgmental view jeans shouldn t be this high of a price it s not fair The Business Cycle In capitalism there is a general trend upward however in theory it suggests that the more you expand the more you go back down the economy balances itself Spending is related to the short run business cycle of the economy Ups and Downs fluctuations of the Economy reflect the ups and downs of spending fluctuations Economists are interested in spending specifically by breaking down spending to its sources There are 3 Spending Sources 1 Consumers Buy Consumer Goods food clothes etc 2 Investors The person who buys Production Goods Oven for a restaurant they buy goods for businesses or goods that contribute to the production of a final good 3 Federal Government Expenditures He didn t Explain these in class said to hold for a later date We can analyze consumer spending and from it conclude why GDP moves up or down Consumers follow a predictable pattern with respect to GDP showed by Keynesian Cross Keynesian Economics To Keynes limiting the up was as important as limiting the down have some expansion limit it then have some depression to stabilize and not inflate the economy with the economy having a gradual trend upward as opposed to booms and then recessions Today we focus on limiting the down but not the up we want boom but no depression recession Keynesian Economics focused only on the Short Term Business Cycles Keynes believed in a recession as long as you continue to spend you will help the economy Keynesian Theory of Consumer Planned Expenditure on Consumption C 1 2 3 GDP 1 A 45 degree line that sets spending equal to GDP income 2 The Amount of a good planned to be consumed 3 Equlibrium of The Graph Everything Produced is consumed This graph also known as the Keynesian Cross is used to plan for consumption when related to income GDP The more GDP increase the more your planned consumption increases