DM

Part 12

Business Cycle Roller Coaster

  • Definition: Alternates between economic growth and contraction.

  • Dated by changes in output, income, sales, and employment measures.

  • Inherent to market economies.

Two Phases of the Business Cycle

  • Expansion:

    • Upturn in the business cycle when aggregate economic activity rises.

    • Between the trough and the peak.

  • Recession:

    • Decline in output, sales, and employment.

    • Between the peak and the trough.

Business Cycle Indicators

  • Indicators that provide insight into the country's position within the business cycle.

  • Types of indicators:

    • Leading Indicators

    • Coincident Indicators

    • Lagging Indicators

Details on Indicators

  • Leading Indicators:

    • Change direction prior to economic shifts.

  • Coincident Indicators:

    • Change concurrently with economic shifts.

  • Lagging Indicators:

    • Change following economic phase changes.

Types of Business Cycle Indicators

  • Leading Indicators egs:

    • Average work week, new businesses, building approvals, material prices, stock prices, money supply, gross operating surplus, GDP deflator ratio.

  • Coincident Indicators egs:

    • Unemployment rate, civilian employment, household income, industrial production, retail sales, GDP for non-farm products.

Total Spending and the Business Cycle

  • Changes in total spending (aggregate demand) are the main cause of GDP variations.

  • Formula: GDP = C + I + G + (X - M)

The GDP Gap

  • GDP gap: Difference between actual real GDP and full employment real GDP.

    • Full employment doesn't mean zero unemployment rate.

    • Formula: GDP gap = cost of cyclical unemployment = potential real GDP − actual real GDP.

Long-term Economic Growth Determinants

  • Understanding growth determinants helps governments create effective policies.

  • Economic growth results from both demand growth and supply growth.

The Solow Model of Economic Growth

  • Explains how consumption, saving, capital, labor, and technology influence long-term growth.

  • Technological change is considered exogenous in this model.

Determinants of Growth

  • Output growth is driven by increases in land, labor, and capital over time.

  • Output per labor unit (real GDP) increases with higher capital per labor unit.

  • Household savings affect investment levels.

Increasing Production Factors

  • production factor accumulation.

  • Effects of technological change.

  • endogenous growth model

Production Factor Accumulation

  • Investment per person impacts national output.

  • Output is divided into consumption and capital accumulation.

  • Higher personal savings promote higher investment levels.

The Impact of Technological Change

  • New capital likely includes technological advancements that improve real output per capita.

Endogenous Growth Model

  • Suggests that technological progress frequently occurs alongside economic growth.

Goals of Macroeconomic Policy

  • Aim to reduce business cycle severity:

    • Diminishing recession impact helps limit unemployment rise.

    • Controlling rapid growth reduces inflation risks.

  • Strive for sustainable long-term growth trajectory.