Download national economy notes

The Business Cycle
What is the business cycle?

Periodic fluctuation in the rate of
economic activity, as measured by
levels of employment, prices, and
production. Economists have long
debated why periods of prosperity are
eventually followed by economic crises
(stock-market crashes, bankruptcies,
unemployment, etc.).
b.c.=peak to peak of
equal value

The only real constraint in the
definition is that if you define a
business cycle, say, from peak to
peak, you should not be able to find
another cycle of equal amplitude
between those two peaks. If so, you
did it wrong.
4 Phases of the Cycle

Expansion
– Consumer demand forces producers to use plant capacity
more fully & hire more workers

Recovery
– When an economy goes from a negative to a positive rate
of growth, it is said to have reached a "trough" and
entered a "recovery.“ It is in recovery until it reaches the
previous peak (at that point it becomes expansion again).

Recession
– Decline in real GDP for 2 consecutive quarters (6 months).

Contraction
– Decline in GDP. Loss of jobs, less consumer spending, &
less production
Contraction of
6 months or
longer
Contraction
From one peak to
another, is considered
“1 business cycle”.
Time
Factors that cause
fluctuations

Business Investment
– High investment = expansion (creates demand which encourages
production).
– Low investment = contraction
How does this relate to Pres. Obama’s view of corporations & the taxes
that they pay?

Money & Credit
– People & businesses borrow $ when IR are low, thus, total output
changes as the availability & affordability of credit rise & fall.
Think about the housing & car industry & the amounts of jobs they
supply.

Public Expectations
– If people believe a recession is coming, they will spend
less

External Factors
– War: a lot of government $ goes to fight it
– OPEC decisions: low oil prices = expansion
Predicting the Cycle


Business & the government need to
predict the business cycle for various
reasons.
Business
– Build/expand/modernize plants , hiring
practices, production goals, etc.

Government
– Develop taxation & spending policies
Indicators

Leading
– Changes in the # of building permits, # of orders for new
capital & consumer goods, & price of stock prices

Coincident
– Personal income, sales volume, & industrial production
levels

Lagging (how long will the phase last?)
– Consumer installment credit & size of business incomes

What do these 3 have in common?
– It involves…. CALCULATED GUESSING!
Gross Domestic Product
GDP = C + I + G + (X-M)

Total $ value of all goods and services
produced, within a country, during a
given year.
Personal Consumption

The purchase of a
good or service;
rent for an
apartment.
C
Business Investment



Capital goods
The purchase of
residential houses
Inventory
Investment


If Ford builds a
$50,000 car in 2008
this counts towards
“I” in 2008.
Once they sell the
car in 2009, “C”
goes up by
$50,000, and “I”
decreases by $50k.

Reason:
– The car adds to
GDP during the year
it’s produced, not
during the year it is
sold.
Government spending

Total $ value of all
goods and services
that the
government buys.
X-m

Exports - imports
GDP Exclusions



Used goods
Financial Assets (Stocks/Bonds)
Double Counting
– (final good vs. intermediate good)


Non-market activities
Transfer payments
– (Nothing is being produced)
All About GDP
1.
A monthly check received by an
economics student who has been
granted a government scholarship.
Excluded,
Transfer payment
from government to student
All About GDP
2.
A farmer’s purchase of a new tractor.
Included,
I,
tractor is a capital good
Components of GDP
(Expenditure Approach)
[C]
[I]
[G
]
[X]
Consumption
e.g., durables and nondurables
Investment
e.g., business investment in
equipment and factories
Government Spending
e.g., government purchases of
goods and services
16% [I] = $2.57
Net Exports
18% [G] = $2.90
e.g., U.S. exports to other
countries, less imports
-3% [X] = $-0.41
Sources: Bureau of Economic Analysis &
FRBSF Calculations
DataPost
http://www.frbsf.org/education/teachers/datapost/index.html
Group
FRBSF Economic Education
U.S. Real GDP
by major spending category
Source: Bureau of Economic Analysis
DataPost
http://www.frbsf.org/education/teachers/datapost/index.html
Group
FRBSF Economic Education
U.S. Real GDP by Quarter
(Trillions of chained 2009 dollars, SAAR)
Source: Bureau of Economic Analysis
DataPost
http://www.frbsf.org/education/teachers/datapost/index.html
Group
FRBSF Economic Education
Annotated Chart Notes
U.S. Real GDP by Quarter
(Trillions of chained 2009 dollars, SAAR)
An inflation-adjustment
method using 2005 dollars
as the base year of
comparison
Seasonally
adjusted annual
rate
Grey bars indicate periods of economic
recession according to the NBER
Business Cycle Dating Committee
2013:Q
4
$15.97
2001:Q4
$12.71
2009:
Q2
$14.36
Source: Bureau of Economic Analysis
DataPost
http://www.frbsf.org/education/teachers/datapost/index.html
Group
FRBSF Economic Education
Measuring Changes in GDP: Yearly % Change
Real Gross Domestic Product (GDP)
Q4/Q4 Percent Change
Source: Bureau of Economic Analysis & FRBSF Calculations
Note: Values are percent change using trillions of chained 2009 dollars (SAAR)
DataPost
http://www.frbsf.org/education/teachers/datapost/index.html
Group
FRBSF Economic Education
Annotated Chart Notes
Measuring Changes in GDP: Yearly % Change
Real Gross Domestic Product (GDP)
Q4/Q4 Percent Change
% change from
2001:Q4 to
2002:Q4
Real GDP dropped
nearly 3% between
2007:Q4 and 2008:Q4
The “Great Recession” is
the 18-month period
between Dec 2007 to June
2009, according to the NBER
Source: Bureau of Economic Analysis & FRBSF Calculations
Note: Values are percent change using trillions of chained 2009 dollars (SAAR)
DataPost
http://www.frbsf.org/education/teachers/datapost/index.html
Group
FRBSF Economic Education
What do you think?
1.
2.
3.
4.
How has consumer spending changed since
1950? How have net exports changed since
1980? (See slide 4)
What was the lowest level of real GDP
during the Great Recession? (See slide 5)
How does real GDP growth in the Great
Recession compare to early 2000s
recession? (See slide 6)
Why is GDP considered a good measure of
the “health” of the economy?
DataPost
http://www.frbsf.org/education/teachers/datapost/index.html
Group
FRBSF Economic Education
Top World GDP leaders
Entire World: 72,689,734,000,000
USA = 22%
1.USA: (+ $3.5 trillion since ‘07)
2007:
2008:
2009:
2010:
2011:
2012:
2013:
2014:
13,961,800,000,000
14,219,300,000,000
13,863,600,000,000
14,447,100,000,000
15,094,000,000,000
15,684,800,000,000
16,244,600,000,000
17,418,925,000,000
China: (+6.9 trillion since ‘07)
11% of the world’s economy
2007: 3,494,055,944,791
2008: 4,521,827,288,304
2009: 4,991,256,406,735
2010: 5,930,529,470,799
2011: 7,298,096,609,545
2012: 8,227,103,000,000
2013: 8,358,400,000,000
2014: 10,380,380,000,000
2.
Comparing 2013 to 2014
USA = $17,000,000,000,000 (1.2)
2.
China = $10,300,000,000,000 (2.0)
3.
Japan 4,600,000,000,000 (-1.3)
4.
Germany 3,400,000,000,000
5.
France 2,600,000,000,000
11. Canada 1,800,000,000,000
15. Mexico 1,200,000,000,000
1.
21. Iran
39. Egypt
65. Cuba
551,588,000,000 (billions)
254,286,000,000 (257)
71,017,000,000

In 2011-12

In 2011-12