Download Mankiw 5/e Chapter 9: Intro to Economic Fluctuations

slide 0
Business Cycles
Business Cycles
– Business cycles are 2-year to 5-year
fluctuations around trends in real GDP and
other related variables
– A recession is a large fall in the growth of
real GDP and related variables
• A depression is an especially large
recession
slide 1
Business Cycles
slide 2
Real GDP Growth in the United States
10
Percent change
from 4 quarters
8
earlier
Average growth
rate = 3.5%
6
4
2
0
-2
-4
1960
1965
1970
1975
1980
1985
1990
1995
2000
slide 3
Recessions in the U.S. since World War II
Year and quarter Number of quarters
of peak in RGDP until trough in RGDP
Change in RGDP,
peak to trough (%)
1948:4
2
-1.7
1953:2
3
-2.7
1957:3
2
-3.7
1960:1
3
-1.6
1970:3
1
-1.1
1973:4
5
-3.4
1980:1
2
-2.2
1981:3
4
-2.9
1990:2
3
-1.5
No simple regular or cyclical pattern: output changes
very considerably in size and spacing
slide 4
Behavior of the Components of
Output in Recessions
Component of
GDP
Consumption
Durables
Nondurables
Services
Average
Share in
GDP (%)
Average Share in fall in GDP in
recessions relative to normal
growth (%)
8.4
25.8
29.5
15.6
11.2
9.1
4.7
10.7
0.7
20.9
11.7
40.6
Net Export
-0.4
-12.3
Gov’t Purchases
20.6
3.3
Investment
Residential
Business Fixed
Inventories
Fluctuations are distributed very unevenly over the
components of output
slide 5
Cyclical Behavior of
Key Macroeconomic Variables
Procyclical variable
– An economic variable that moves in the “same”
direction as aggregate economic activity
industrial production, consumption, investment,
employment, real wage, inflation, stock prices
Countercyclical variable
– An economic variable that moves in the
“opposite” direction as aggregate economic
activity
unemployment
slide 6
Cyclical behavior of the index of
industrial production
slide 7
Cyclical behavior of consumption
and investment
slide 8
Cyclical behavior of civilian
employment
slide 9
Cyclical behavior of the
unemployment rate
slide 10
Cyclical behavior of average labor
productivity and the real wage
slide 11
Supply shocks
A supply shock alters production costs,
affects the prices that firms charge.
(also called price shocks)
Examples of adverse supply shocks:
 Bad weather reduces crop yields, pushing up
food prices.
 Workers unionize, negotiate wage increases.
 New environmental regulations require firms to
reduce emissions. Firms charge higher prices to
help cover the costs of compliance.
(Favorable supply shocks lower costs and prices.)
slide 12
CASE STUDY:
The 1970s oil shocks
 Early 1970s: OPEC coordinates a reduction
in the supply of oil.
 Oil prices rose
11% in 1973
68% in 1974
16% in 1975
 Such sharp oil price increases are supply
shocks because they significantly impact
production costs and prices.
slide 13
CASE STUDY:
The 1970s oil shocks
The oil price shock
shifts SRAS up,
causing output and
employment to fall.
In absence of
further price
shocks, prices will
fall over time and
economy moves
back toward full
employment.
P
P2
LRAS
B
SRAS2
A
P1
SRAS1
AD
Y2
Y
Y
slide 14
CASE STUDY:
The 1970s oil shocks
70%
12%
Predicted effects of
the oil price shock:
• inflation 
• output 
• unemployment 
60%
…and then a
gradual recovery.
10%
50%
10%
40%
8%
30%
20%
6%
0%
1973
4%
1974
1975
1976
1977
Change in oil prices (left scale)
Inflation rate-CPI (right scale)
Unemployment rate (right scale)
slide 15
CASE STUDY:
The 1970s oil shocks
60%
Late 1970s:
As economy
was recovering,
oil prices shot up
again, causing
another huge
supply shock!!!
14%
50%
12%
40%
10%
30%
8%
20%
6%
10%
0%
1977
1978
1979
1980
4%
1981
Change in oil prices (left scale)
Inflation rate-CPI (right scale)
Unemployment rate (right scale)
slide 16
CASE STUDY:
The 1980s oil shocks
40%
1980s:
A favorable
supply shock-a significant fall
in oil prices.
As the model
would predict,
inflation and
unemployment
fell:
10%
30%
8%
20%
10%
6%
0%
-10%
4%
-20%
-30%
2%
-40%
-50%
1982
1983
1984
1985
1986
0%
1987
Change in oil prices (left scale)
Inflation rate-CPI (right scale)
Unemployment rate (right scale)
slide 17