Download Decrease in GDP growth

Peak
Peak
Trough
The Business Cycle and
Economic Activity
1. What is the difference between a decrease in GDP and a
decrease in GDP growth?
2. Explain the cyclical pattern of economies using the
business cycle diagram
3. Explain the concept of potential output and its
relationship to the “output gap”
Remember:
• Economic growth-increases in the quantity of output
produced over a period of time (year) and expressed
as:
– %change in real GDP/GNI over period of time
– %change in real GDP/GNI per capita over a period of time
– i.e., real GDP in 2004 was $50bil and increased to $51bil in
2005, rate of growth is ((new-old/old)*100), so rate of
growth was +2%
• Remember, %change representing growth is not
always positive value; if real GDP has fallen, it will
be negative
– real GDP in 2006 was $60bil and decreased to $57bil in 2007,
rate of growth is ((new-old/old)*100), so rate of growth was
-5%
Remember…
The same information shown
on the business cycle can
be shown on a production
possibilities curve:
–
–
–
Full employment
Unemployment
Inflation
The shifters of the PPC affect
GDP:
–
–
–
Change in
quantity/quality of
resources
Changes in technology
Changes in trade
Why is economic growth
the goal of every
society?
• Provides better goods
and services
• Increases wages and
standard of living
• Allows more leisure
time
• Economy can better
meet wants
Decrease in GDP vs. GDP growth
• Decrease in GDP-fall in
the value of output
produced, such as ex.
#2 on last slide
• Decrease in GDP
growth- falling rates of
growth, though rates of
growth may be positive
(see ex )
Year
Real GDP
($bil)
Real GDP
growth
2007
210.0
---
2008
215.5
2.6%
(increasing
GDP)
2009
219.5
1.9%
(increasing
GDP, falling
GDP growth)
2010
223.1
1.6%
(increasing
GDP, falling
GDP growth)
2011
217.0
-2.7%
(decreasing
GDP, negative
GDP growth)
Business Cycles
(aka economic fluctuations)
•Real output in most countries grows over long
periods of time, but output growth is uneven and
irregular
•business cycle -recurrent fluctuations in growth of
real output (“ups and downs”) in the level of economic
activity
• Alternating periods of expansion (increasing real
output) and contraction (decreasing real output)
• Individual business cycles may vary greatly in duration
and intensity
• All display a set of phases
THE BUSINESS CYCLE
Phases of the Business Cycle
Expansion
• Expansion occurs when
there is positive growth
in real GDP (upward
sloping parts of curve)
• During these periods:
– Employment of resources
increases
– General price level
(average overall prices)
begins to rise rapidly
– Beginning of inflation
Level of business activity
PEAK
Time
Peak (prosperity phase):
•Real output in the economy is at a high level
(max real GDP)
• Marks end of expansion
• Unemployment is low
• Domestic output may be at capacity
(price level increases rapidly)
• Inflation may be high
Level of business activity
RECESSION
Contraction (recession) phase:
Time
•Recession – government determinant of two consecutive quarters
(6 months) of declining output
• Real output is decreasing (falling real GDP, negative growth)
• If the recession is prolonged, price may decline (deflation)
• As contraction continues, inflation pressure fades
• Unemployment rate is rising
Level of business activity
TROUGH
Trough (depression) phase:
Time
• Minimum (lowest) point of real GDP
• end of contraction
• Widespread unemployment; output at lowest point
• may be short- or long-term
• no precise way to tell where decreased output
(serious recession) becomes a depression
Real GDP
per year
Business Cycle-one cycle through 4 phases
Peak
Peak
Trough
One cycle
Time
Recessions since 1950 show that duration and
depth are varied:
Period
1953-54
1957-58
1960-61
1969-70
1973-75
1980
1981-82
1990-91
2001
Duration in months
10
8
10
11
16
6
16
8
8
Depth
(decline in real GDP)
— 3.0%
— 3.5%
— 1.0%
— 1.1%
— 4.3%
— 3.4%
— 2.6%
— 2.6%
app. —3.3%
Causes of Fluctuations
Innovation
Political events
Random events
Wars
Level of consumer spending
Seasonal fluctuations
Cyclical Impacts — durable and non durable
An Actual Business Cycle
1981 - 1990 ($ billion, 1992 dollars)
Real GDP
Peak
6000
5200
Peak
4600
Trough
‘80
82
‘85
One Cycle
‘90
Case study (extra info):
The Great Depression
The Great Depression
The Great Depression [continued]
Great Depression Stats
Global Depression, 1929-1932
Ave. Unemployment Rate, 1925-1928
Ave. Unemployment Rate, 1929-1933
Percent Decrease in Prices, 1929-1932
Six Million “Rosie the Riveters”
World War II Production of these items brought us out
of the Great Depression.
300,000 warplanes
124,000 ships
289,000 combat vehicles and tanks
36 billion yards of cotton goods
41 billion rounds of ammunition
2.4 million military trucks
111,527 tank guns and howitzers
•$288 billion was spent on the war,
•$100 billion in the first six months.
Unemployment hit an all-time low of 1.2%
and personal savings were 25.5%.