Business Cycles
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Economic Growth, Business Cycles, Unemployment, and Inflation Chapter 6 – Part 1
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Laugher Curve An Indian-born economist once explained his personal theory of reincarnation to his graduate economics class.
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Laugher Curve “If you are a good economist, a virtuous economist,” he said, “you are reborn as a physicist.” “But if you are an evil, wicked economist, you are reborn as a sociologist.”
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Introduction Macroeconomics is the study of the aggregate states of the economy. The four central problems are growth, business cycles, unemployment, and inflation.
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Two Frameworks: The Long Run and the Short Run Issues of growth are considered in a longrun framework. Business cycles are generally considered in a short-run framework. Inflation and unemployment fall within both frameworks.
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Growth The primary measurement of growth is changes in real gross domestic product. Real gross domestic product (real GDP) – the market value of final goods and services produced in the economy stated in the prices of a given year.
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Growth The U.S. historical or secular growth rate is between 2.5 to 3.5 percent per year. Per capita real output is real GDP divided by the total population. The U.S. capita real output growth has been 1.5 to 2.5 percent per year since 1950.
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Global Experience with Growth Today's growth rates are high by historical standards. The range of growth rates among nations is wide. African countries have consistently grown below the world average.
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Global Experience with Growth The growth trend we now take for granted started at the end of the of the18th century. At about the same time, markets and democracies became the primary organizing structures of society.
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The Benefits and Costs of Growth Per capita economic growth allows everyone in society, on average, to have more. Growth, or predictions of growth, allows governments to avoid hard questions. The costs of growth include pollution, resource exhaustion, and destruction of natural habitat.
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Business Cycles The business cycle is the upward and downward movement of economic activity or real GDP that occurs around the growth trend. See Figure 6.1 for the U.S. historical experience.
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U. S. Business Cycles 20 Recovery of 1895
Civil 10 War
World War I
World War II Korean War Vietnam War
0 Panic of 1893
–10
Panic of 1907
Great Depression
–20 1860 ‘70
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‘80
‘90
1900
‘10
‘20
‘30 ‘40 ‘50 ‘60
‘70 ‘80 ‘90 2000 ‘10
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Business Cycles There are a number of policies regarding business cycles. Classical economists generally favor laissez-faire or noninterventionist policies. Keynesians generally favor activist or interventionist policies.
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The Phases of the Business Cycle A peak is the top of the business cycle. A trough is the bottom of the business cycle. A boom is a very high peak. A downturn is when economic activity starts to fall from a peak. A upturn is when economic activity starts to rise from a trough.
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The Phases of the Business Cycle A recession is a decline in output that persists for more than two consecutive quarters in a year. A depression is a large recession. A trough is also the bottom of the recession or depression. An expansion is an upturn that lasts at least two consecutive quarters of a year.
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The Phases of the Business Cycle Expansion
Recession
Expansion
Total Output
Peak
0
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Trough
Secular growth trend
Jan.- Apr.- July- Oct.- Jan.- Apr.- July- Oct.- Jan.- Apr.Mar June Sept. Dec. Mar June Sept. Dec. Mar June © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Why Do Business Cycles Occur Recessions and expansions are caused primarily by demand-side of the economy. A debate exists about whether these fluctuations can and should be reduced. Most economists believe that potential depressions can and should be offset by economic policy.
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Why Do Business Cycles Occur
Since the late 1940s, compared to prior years: Downturns and panics have generally been less severe. The duration of business cycles has increased. The average length of expansions has increased while the average length of contractions has decreased.
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Why Do Business Cycles Occur
Most economists believe that business fluctuations have become less severe because of the stronger role of government in the economy.
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Leading Indicators Leading indicators tell us what's likely to happen in the economy 12 to 15 months from now. The are indicators rather than predictors because they are only rough approximations of what’s likely to happen in the future.
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Leading Indicators
Leading indicators include the following: Average workweek for production workers in manufacturing. Unemployment claims. New orders for consumer goods and materials.
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Leading Indicators
Leading indicators include the following: Vendor performance, measured as a percentage of companies reporting slower deliveries from suppliers. Index of consumer expectations. New orders for plant and equipment.
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Leading Indicators
Leading indicators include the following: Number of new building permits issued for private housing units. Change in stock prices. Interest rate spread. Changes in the money supply.
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