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Everyday Economic Terms

Business Cycles-there are 4 stages in a business cycle: expansion, peak, contraction, and trough. Expansion is easy to understand. It refers to increasing business activity in the economy. After the economy reaches full productive capacity, and cannot expand further, it reaches its peak. Once business activity begins to decline from its peak, the economy begins to contract. When business activity stops declining, and tapers off, the economy transitions to the last stage of the business cycle: the trough.

Capital Market-refers to the market for securities such as stocks and long-term debt instruments such as bonds.

Consumer Price Index-generally referred to as CPI. It is computed monthly and is a measure of the change in the cost of living for consumers. The CPI tries to measure the rate of increase or decrease in the range of prices such as housing, food, transportation, clothing, medical care and various services (commodities used by consumers).

Economic Indicator-is a form of measurement that indicates the trends in the economic health of a country at a specific time. Economists refer to three types of indicators, leading, lagging, and coincident.

Leading indicators are present at the beginning of an economic advance or decline. Leading indicators include the following: (M2) money supply, building permits, new orders for consumer goods, average weekly initial claims for state unemployment compensation and changes in the inventories of durable goods.

Lagging indicators usually turn up several months after the economy has established a new trend. Lagging indicators include: average prime rate, change in the CPI, outstanding commercial and industrial loans, the unemployment rate and ratio of consumer installment credit to personal income.

Coincident indicators, generally as a rule, move in tandem with the existing trends in the overall economy. Examples of coincident indicators include industrial production, nonagricultural employment, manufacturing, and sales.

Nominal Interest Rate-the money rate of interest.

Real GDP- it is the monetary value of the Gross Domestic Product when it is adjusted for inflation.

Real Interest Rate-the interest rate computed by subtracting the rate of inflation from the nominal interest rate. If the nominal rate of interest is 8% and the rate of inflation is 5%, the real rate of interest is 3%.

Recession-it is one of the four phases of the business cycle. In a technical sense, it refers to a time period of two successive quarters during which the GDP registers a negative growth.

Unemployment Rate-refers to the ratio between the number of people who are considered or classified as unemployed to the total number of people in the labor force.

Yield Curve-shows in a graphical form the relationship between the yield (e.g., the rate of interest) and the maturity (term) of securities. The term may range from six months to 30 years. All the securities must be associated with the same degree of risk. Generally, securities issued by the U.S. Treasury are convenient instruments for representing the yield curve.

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