Download Measuring The Business Cycle

Chapter 1
What This Book Is
About
Introduction
• 1930s , Keynes, John Maynard
“The Theory of Employment Interest and
Money”
- Explain the working of the economy as a
whole.
- Employment vs Price
- Government Policies
This approach led to the development of two
separate subjects, macro- and microeconomics.
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The Modern Approach
• More recently, economists have recognized that
the methods used to study the behavior of
individual producers and consumers in marketsmicroeconomics- can be used to study the
working of the economy as a whole –
macroeconomics.
• This is so-called micro-foundation approach.
• Example : Labor Market- supply and demand
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Labor Supply and the Real Wage
Figure 4.3
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Labor Demand and the
Production Function
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Labor Market Equilibrium
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The Three Major Questions
• Business Cycle
- 1930, Great Depression (U ↑ 25%, Y↓ 20%)
which recovered until WWII.
- 1970-80, 1990-2000, Oil Price Shocks
- What causes economic booms and recessions?
- Chapter 12.
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Real GDP per Person 1890–2000
Great Depression
Figure 1.1
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Demand and Supply Shocks
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The Three Major Questions
• Real GDP Growth
- The most important determinant of living
standard.
- Capitalist economics have been experiencing
sustained growth for the past 200 years.
- The theory of growth focuses on why
economies produce more each year on average.
- Chapter 15, 16, 17.
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Real GDP per Person 1890–2000
Economic Growth
Business Cycle
Figure 1.1
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The Three Major Questions
• Inflation
- The average rate of increase of prices.
- Hyperinflation :
Germany at the end of WWI, Iseral in 1985,
Argentina in 1984.
- What causes inflation? How to control?
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Prices in the United States Since 1890
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Economic Growth
• Definition
- Economic growth is a sustained increase in a
nation’s standard of living.
- It is measured by the average rate of change of
the real gross domestic product per person.
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Sustained Economic Growth is a Recent
Phenomenon
• The U.S. has been experiencing economic
growth of about 1.9% per person for the past
100 years.
• It’s a relatively recent phenomenon in the span
of human civilization.
• See Figure 1-3.(capitalist)
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World Leaders in Output per Worker Since
1540
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Measuring Economic Growth
• Real GDP - a measure of the output available
to an entire community.
• Real GDP per person = Real GDP/ population
• It is a usual measure of the standard of living.
• It is highly correlated with a number of other
indices. (Table 1.1)
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Measuring Economic Growth
• One should note that real GDP is not a perfect
index.
• For example, two countries with the sample
real GDP per person but different in
- Income distribution
- Crime rate
- Etc.
i.e. this measure will miss quality-of-life.
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Real and Nominal GDP
• Nominal GDP measures the average dollar
value of the goods produced in any year.
• It can grow for either of two reasons:
- The country produces more goods and
services – increase growth.
- Goods and services cost more money on
average – inflation.
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Real and Nominal GDP
• To separate the increase in GDP that comes
from growth, we measure the value of GDP
in two consecutive years using a common
set of prices- the base-year price.
• GDP measured using the base-year price is
called real GDP.
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Comparing Standards of Living
Across Countries
•
•
Growth Rate
Most countries , 1%~2%
Some sub-Saharan African countries, -1%
Japan, South Korea, China, 7%~8%.
Cross-country differences in growth rates
may seen like small numbers, but they can
have quite a big impact – compounding.
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Comparing Standards of Living
Across Countries
• Rule of Seventy
- Used to gauge how fast a quantity will
double in size.
• Example
Suppose you put $100 into a bank account
with 5% annual interest.
In (70/5)=14 years, you will have $200 in
your account.
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GDP per Person as a Percentage of U.S. GDP
per Person in Four Selected Countries, 1960 to
1992
Figure 1.4
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The Business Cycle
• Definition
The business cycle is an irregular, persistent
fluctuation of real GDP around its trend
growth rate.
It is accompanied by the highly coherent comovements of many other economic variables.
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Measuring The Business Cycle
• Time series
• Trend
• When real GDP is below (above) trend for
a number of time periods , the economy is
in a contraction (boom) or a recession
(expansion).
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Trends and Cycles
• Many macro variables display upward
trends, like GDP, prices and consumption.
• In order to investigate the relationships
between the business-cycle fluctuations of
two or more time series, we need to
detrend the series.
• Detrending: see Figure 1-5.
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Random Fluctuations Around a Constant Trend
Figure 1.5
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Recession, Expansions and the NBER
• NBER defines a recession as a recurring
period of decline in total output, income,
employment and trade, usually lasting from
six months to a years, and marked by
widespread contractions in many sectors of
the economy.
• Sometimes growth may slow down but
GDP will not decline –
“Growth Recessions”.
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NBER Dating of Business Cycles Since 1948
Figure 1.6
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Coherence and the Business Cycle
• The business cycle has an important random
component.
• Although economic variables move in an
irregular way through time, many of them
move very closely in tandem - coherence.
• Variables move in the same direction as GDP
over the cycle are said to be procyclical.
• Variables move in the opposite direction to
GDP over the cycle are said to be
countercyclical.
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Procyclical and Countercyclical
Variables
Figure 1.7
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Persistence and the Business Cycle
• A second distinguishing feature of
economic variables is their high degree of
inertia through time - persistence.
• By identifying the reasons for the coherence
and persistence, economists hope to explain
why recessions occur and how they can be
controlled.
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The Social Dimension of Business Cycles
• There are many other social indicators that
have a business-cycle dimension.
- Violent crime, poverty, the unemployment
rate, and unemployment duration.
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Why Business Cycles Matter
Figure 1.8
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Inflation
• Definition:
Inflation is a sustained increase in the average
price level, measured by percentage rate of
change of one of several commonly used price
indices.
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Measuring Inflation
•
-
Different indices of the average price level:
The consumer price index (CPI)
The producer price index (PPI)
The GDP deflator
The GDP price index
The PCE price index (personal consumer
expenditure)
- A negative inflation rate - deflation
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Inflation and the Price Index
Figure 1.9
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Inflation and the Central Bank
• Inflation is widely accepted as being caused
when a country increases its money supply
faster than the rate of increase of money
demand.
• The control of inflation is viewed as a
problem for the central bank.
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The Benefits of Low Inflation
• When inflation is low, most prices do not
change very often.
• Then households and firms can easily estimate
future relative prices and make decisions.
• Interest versus Inflation
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Economic Theory and Economic Facts
• Classical Economics and the Quantity
Theory of Money
- Inflation and monetary system
- Chapters 4, 5, 6.
• Involuntary Unemployment and the
Great Depression (Keynes Model)
- Short run, IS-LM
- Chapter 7 - 12
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Economic Theory and Economic Facts
• The Resurgence of Growth Theory
- Neoclassical and Endogenous Growth
Theory
- Chapter 14-16
• Rational Expectations and Modern
Dynamic Theory
- Phillips curve, Dynamic AD-AS
- Chapter 17, 18
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Homework
Question 5, 6, 10
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END