Download Business Cycles

Economic Growth, Business
Cycles, Unemployment, and
Inflation
Chapter 6 – Part 1
McGraw-Hill/Irwin
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Laugher Curve
An Indian-born economist once explained
his personal theory of reincarnation to his
graduate economics class.
McGraw-Hill/Irwin
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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
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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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