Download Chapter 31 The business cycle

Chapter 31
The business cycle
David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,
6th Edition, McGraw-Hill, 2000
Power Point presentation by Peter Smith
The business cycle:
short-term fluctuations of total output around its trend path
Trend output grows steadily as productive potential increases.
Actual output fluctuates
around this trend.
A – slump
C
Actual
output
E
D
Trend output
B – recovery phase
has begun
C – Boom
A
D – recession under way
B
Time
E – slump again
31.1
UK: growth of real GDP
8
% change p.a.
6
4
2
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
-2
-4
Source: Economic Trends Annual Supplement
31.2
The political business cycle
Some commentators have suggested
that there is a political business
cycle
 whereby governments adopt tight
monetary and fiscal policy soon after
an election
 but then adopt more expansionary
policies as the election approaches
to encourage a ‘feel-good’ factor

31.3
Theories of the business cycle

The multiplier-accelerator theory:
–
–

the multiplier communicates the effects
of changing investment to aggregate
demand
the accelerator assumes that firms
gauge future demand by reference to
past output growth
this model can produce fluctuations
in output level in response to a
shock
31.4
Fluctuations in stock-building
Stockbuilding may also be a cause of
fluctuations in output
 Firms tend to use stocks to smooth
production in the face of fluctuating
demand
 Output per worker tends to rise in
times of boom, and fall in times of
recession.

31.5
Real business cycles

In this view of the world, fluctuations in
actual output are fluctuations in potential
output

… so there is no point in trying to stabilize
output over the business cycle.

Although some swings in potential output
do occur, many short-run fluctuations are
more likely to reflect Keynesian
departures from potential output.
31.6
16
14
12
10
8
6
4
2
0
-2
-4
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
% p.a.
Is there an international business cycle?
Growth in GDP, selected countries
USA
UK
France
Italy
Source: International Financial Statistics
31.7