The Economic Cycle, Output Gaps, Changes to the Economic cycle

Recession

negative economic growth for 2 or more quarters

Depression

A sustained period of recession, probably of 2 years or more

4-12 years

Generally an economic cycle might last between…

1longer and more muted, 2economic growth, 3stagnation, 4high, 5growth, 6interest rates

However, over time economic cycles appear to have got 1________ ___ ____ _______. For example, since 2008 there has been relatively little 2____________ _______ with 3___________ being seen in many 4____ income countries. Low 5______ and low 6_______ _____ have become commonplace with little change.

38.7 months

Since 1854, the economic cycle has averaged

58.4 months

Since 1945, the economic cycle has averaged

130 months

The current economic cycle which began in March 2009, has now been going for almost …

120, 1991-2001

The longest lasting period of economic growth on record is:

106, months 1961-69

the third longest period of economic growth:

output gap

the difference between the actual level of GDP and its estimated potential level

positive output gap

output gap where the actual GDP exceeds the estimated potential level

Negative output gap

output gap where the actual GDP falls below the estimated potential level

factors of production overutilised, demand-pull inflation, cost-push inflation

Causes for positive output gap

factors of production underutilised, unemployment, over-supply running the risk of deflation

Causes for negative output gap

level of unemployment, utilisation of capacity, productivity growth, inflation

What can determine the size of the gap?

1. Displacement

2. Boom

3. Euphoria

4. Profit taking

5. Panic

5 stages of a bubble(Hyman Minsky)

Displacement

This stage of a speculative bubble takes place when investors start to notice a new paradigm, like a new product or technology, or historically low interest rates — basically anything that gets their attention.

Boom

In this stage of a speculative bubble prices start to rise at first then get momentum as more investors enter the market. This sets up the stage for the boom. There is an overall sense of failing to jump in, causing even more people to start buying assets.

Euphoria

During this stage of a speculative bubble asset prices skyrocket, caution is thrown out the window

Profit taking

Figuring out when the bubble will burst isn’t easy; once a bubble has burst, it will not inflate again. But anyone who look at the warning signs will make money by selling off positions.

Panic

In this stage of a speculative bubble assets price change course and drop as quickly as they rose. Investors and others want to liquidate them at any price. Asset prices decline as supply outshines demand.

a spontaneous urge to action rather than inaction

What was Keynes’ animal spirit?

Herding

• Described as the bandwagon effect or groupthink.

• In short, herd behaviour is about making a decision based on the behaviour of others

social pressure to conform and be accepted, belief that large groups can’t be wrong

What is herding?

Changes in inventories

Stocks of raw materials, finished and unfinished goods.

Firms build up stock when demand is high but must quickly sell out their surplus when demand drops and reduce output more than demand suggests

What multiplies a slowdown in an economy and pushes it into a recession?