As groundwork for the study of economic cycles, we will concentrate this week on some basic macroeconomic variables: gross domestic product (GDP), unemployment, and inflation.
These variables are all related in important ways. For example, business firms will produce the volume of goods and services they plan to be able to sell in the next period. GDP measures this flow of output of goods and services. However, if consumers do not choose to purchase all output that is produced, inventories of unsold goods will accumulate and business firms will cut back on output for the next period. This will result in an increase in the unemployment rate or even a recession. Conversely, consumers may desire to purchase more goods and services than the business sector is able to produce in a given period, and this excessive demand will lead to inflation.