Bài giảng Macroeconomics - Chapter 17: Short-Term Economic Fluctuations

Chapter 17: Short-term Economic FluctuationsIdentify the four phases of the business cycleExplain the primary characteristics of recessions and expansionsDefine potential output, measure the output gap, and analyze an economy's position in the business cycleDefine the natural rate of unemployment and relate it to cyclical unemploymentApply Okun's law to analyze the relationship between the output gap and cyclical unemploymentDiscuss the differences between how the economy operates in the short run and the long runRecessions and ExpansionsBusiness Cycles are short-term fluctuations in GDP and other variablesA recession (or contraction) is a period in which the economy is growing at a rate significantly below normalA period during which real GDP falls for two or more consecutive quartersA period during which real GDP growth is well below normal, even if not negativeA variety of economic data are examinedA depression is a particularly severe recessionRecessions and ExpansionsA peak is the beginning of a recessionHigh point of the business cycleA trough is the end of a recessionLow point of the business cycleAn expansion is a period in which the economy is growing at a rate significantly above normalA boom is a strong and long lasting expansionCalling the 2007 RecessionNBER declared a recession December 2007Previous recession ended November 200173 month expansionFour important monthly indicators used to date recessions:Industrial productionTotal sales in manufacturing, wholesale, and retailNon-farm employmentReal after-tax household incomeCoincident indicators move with overall economyShort-Term Economic FluctuationsEconomists have studied business cycles for at least a centuryRecessions and expansions are irregular in their length and severityContractions and expansions affect the entire economyMay have global impactGreat Depression of the 1930s was worldwideUS recessions of 1973 – 1975 and 1981 – 1982US recession that began in 2007Symptoms of Business CyclesCyclical unemployment rises sharply during recessionsDecrease in unemployment lags the recoveryReal wages grow more slowly for those employedPromotions and bonuses are often deferredNew labor market entrants have difficulty finding workProduction of durable goods is more volatile than services and non-durable goodsCars, houses, capital equipment less stablePotential OutputPotential output, Y* , is the maximum sustainable amount of output that an economy can produceAlso called full-employment outputUse capital and labor at greater than normal rates and exceed Y* – for a period of timePotential output grows over timeActual output grows at a variable rateReflects growth rate of Y*Variable rates of technical innovation, capital formation, weather conditions, etc.Actual output does not always equal potential outputOutput GapsThe output gap is the difference between the economy’s actual output and its potential output, relative to potential output, at a point in timeOutput gap = [(Y – Y*)/Y*]x100Recessionary gap is a negative output gap; Y* > YExpansionary gap is a positive output gap; Y* u*Expansionary gaps have u < u*Okun’s LawOkun's law relates cyclic unemployment changes to changes in the output gapOne percentage point increase in cyclical unemployment means a 2 percentage point increase in the output gapSuppose the economy begins with 1% cyclical unemployment and an recessionary gap of 2% of potential GDPIf cyclical unemployment increases to 2%, the recessionary gap increases to 4% of Y*Importance of the Output GapThe 1982 output gap was $402 billionUS population was 230 million$402 billion/230 million = $1,748 for a family of fourIn 2000 dollars it equals $7,000 for a family of fourPolicy makers pay attention to output gaps because of the impact it has on our standard of livingWhile average impact is $7,000 for a family of four, the distribution of costs are not evenConcentrated in households of workers laid offCauses of Short-Term FluctuationsThe economy has self-correcting mechanismsFirms eventually adjust to output gapsIf spending is less than potential output, firms will slow the increase of their pricesIf spending is more than potential output, firms increase pricesPotential inflationary pressureCauses of Short-Term FluctuationsThe economy has self-correcting mechanismsEventually, prices reach equilibrium and eliminate output gapsProduction is at potential output levelsOutput is determined by productive capacity Spending influences only price levels and inflation