Download The R-Word Short paper for Bryon Gaskin

Gaskin 1
Bryon Gaskin
Professor Steven Scheer
Principles of Macroeconomics
6 December 2002
The R-Word
INTRODUCTION
Shakespeare wrote “That which we call a rose, by any other name would smell as
sweet.” The “R” word spoken about here is not a rose and it is not sweet. The “R” word
is “recession”. In the article concerning the “R” word, the author looks at and tries to
define what actually constitutes a recession. He looks at what has been traditionally used
to measure when a recession is a recession. He also looks to develop some new and
coming measurements and guidelines that are being considered for the future
measurement of what a recession is. Also compared are some of the implications in how
a recession is measured.
THE OTHER GUY.
There is a popular joke among some economists that says, when your neighbor loses
his or her job then the economy is experiencing an economic slowdown. When that
economic slowdown causes you to lose your job, then it becomes a recession. Finally
when the recession causes an economist to lose his or her job, that recession becomes a
depression. (Word 8). True this an over simplification of what really takes place,
however; it does have some merit of truth to it. Part of that truth, is that there is some
subjectivity involved in calling a recession a recession and the degree to which a
Gaskin 2
recession is classified, and that recessions affect people in different locations and
industries in different ways.
Under most circumstances the time and tested rule of thumb for defining a recession
are at least 2 back to back quarters of declining GDP (Word 8). When the author is
speaking of “declining GDP”, he is talking about real GDP not potential GDP. A revised
measure of recession has been put forth by the National bureau of Economic Research.
The National Bureau of Economic Research, also known as NBER, considered
America’s arbiter of recessions, has a more elevated approach to in defining what
constitutes a recession. Under the NBER’s vision, a recession is marked by “a significant
decline in activity spread across the economy, lasting more than a few months, visibile in
industrial production, employment, real income and wholesale retail trade” (Word 8).
One of the interesting aspects of the measure that NBER has set forth is the fact that it
does not take into consideration GDP figures. The main reason for this departure away
from using GDP is due to the way GDP is reported. GDP is reported on a quarterly basis
and are constantly being revised (Word 8). Under the standard definition of a recession,
last year, for example, showed initially, that economic output fell in only one quarter,
however; after the figures were revised, the results showed a decline occurring in three
consecutive quarters (Word 8).
Clearly there is a difference between how the word recession is defined, but why does
this exist? As stated earlier, most economists define a recession as two consecutive
quarters of declining economic growth, however; NBER has defined a recession as a
decline in economic activity that is absolute (Word 8). Going beyond the definition put
forth by NBER, some economists subscribe to the view that a recession occurs when
Gaskin 3
growth falls below it long term potential (Word 8). This scenario of actual growth and
potential growth as a measure of a recession has some serious implications towards the
definition of a recession. Already it is has been stated that under the popular meaning, it
is consecutive quarters of declining growth. According to Stanford University
economist and professor John B. Taylor’s book, The Principles of Macroeconomics, a
recession is defined as “a decline in real GDP that lasts for at least six months” (Taylor
431).
To fully understand the implications of how these definitions change whether or not a
country is in recession, take the following in mind. If a country has a potential GDP of
4%, and has 4 consecutive quarters in which growth is 1.2% in quarter one, 1.9% in
quarter two, 2.4% in quarter three, and in quarter four has an economic growth of 3.5%,
under the definition presented by Taylor and many of economists who share is thought of
a recession, none of those four quarters would be considered a recession, because each
quarter growth was continuing to rise. If one measures a recession by periods when
actual growth falls below potential growth, or real GDP below potential GDP, then all
four of the quarters would be considered periods of recession.
Defining recessions as periods of actual growth below potential growth has been the
standard that the Japanese have long used as the definition. Through the years of 1950
and 1992 Japan went through several recessions, however; their country’s GDP fell in
only one of those 42 years (Word 8). In the 1990s, the average annual growth rate for
Japan was 1%, compared with 4% average annual growth rate in the 1980s, places their
recession in the deep category, in fact, it was as deep as many economies of the great
Gaskin 4
depression (Word 8). Obviously, there is quiet a difference in the definition of a
recession.
CONCLUSION
Macroeconomics is like many other sciences, in that, it is constantly evolving in
thought and structure. The actual definition of the “R” word “recession” merits some
serious consideration. Although changing the definition of the word recession, does not
change what is actually taking place, or what has already taken place, no more than does
changing the name of the Hoosier Dome to the RCA Dome, the types of events that take
place and that have taken place has not changed, because of the name change. However;
what changing the definition might do is allow for better information to be made in the
future. If it will or if it won’t is still a question. That is the nature of forecasting; it is
difficult when it concerns the future. Changing the definition will not change the fact that
real GDP was above potential GDP in 1998 or that real GDP was below potential GDP in
1980. All of the methods of their advantages and drawbacks towards the definition of a
recession, which one is best, again it probably depends upon your prospective, more than
likely a it is a combination of all of them in varying degrees.
Gaskin 5
Works Cited
“Inflation Index Inches Up.” Indianapolis Star 20 Nov 2002:C1-8.
Taylor, John B. Principles of Macroeconomics 3rd ed. Boston/New York: Houghton
Mifflin Company, 2001.