Transcript Chapter Goals

CHAPTER 6
ECONOMIC GROWTH, BUSINESS CYCLE
AND STRUCTURAL STAGNATION
CHAPTER GOALS
Explain the difference between the long-run framework and the
short-run framework
• Distinguish between Classical and Keynesian
Macroeconomics
• Distinguish cyclical unemployment from structural
unemployment
• Distinguish a Business Cycle from Structural Stagnation
• List four phases of the business cycle
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HISTORICAL
DEVELOPMENT OF
MACRO
Before doing covering the history let
us talk about an Old War.
A war of ideas!
Go to PowerPoint lecture on the war
of ideas.
TWO FRAMEWORKS:
THE LONG RUN AND THE SHORT RUN
• The long-run growth framework focuses on incentives
for supply
• Sometimes called supply-side economics
• Issues of growth are considered in a long-run
framework
• The short-run business cycle focuses on demand
• Sometimes called demand-side economics
• Business cycles are generally considered in
a short-run framework
• Inflation and unemployment fall within both frameworks
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GROWTH
• Economists measure growth as changes in real gross
domestic product (real GDP) which is the market value of
final goods and services produced in an economy, stated in
the prices of a given year
• The U.S. secular growth rate and the per capita real output
growth have been less than 2.5 to 3.5 percent per year
• Per capita real output is real GDP divided by the total
population
• Even if total output is increasing, the population may be
growing even faster, so per capita real output may fall
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GLOBAL EXPERIENCES
WITH GROWTH
Growth Rates
1820-1950
1950-2009
The world
0.9
2.1
W. Europe
1.1
N. America
Income Levels (in 1990 int’l $)
1950
2007
$675
$2,108
$7,300
2.6
1,202
4,578
21,200
1.6
2.0
1,253
9,463
31,000
Japan
0.8
4.8
660
1,921
22,500
E. Europe
1.1
2.2
683
2,111
7,600
Former USSR
1.8
1.5
700
2,600
6,800
Latin America
1.0
1.6
691
2,503
6,500
–0.2
4.4
600
448
6,050
East Asia
0.3
3.5
500
668
5,300
Africa
0.6
1.1
420
1,307
1,700
China
1820
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THE BENEFITS AND COSTS OF GROWTH
• Per capita economic growth allows everyone in society,
on average, to have more
• Growth, or the prediction of growth, allows governments
to avoid hard questions
• Growth comes with costs:
• Pollution
• Resource exhaustion
• Destruction of natural habitat
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BUSINESS CYCLES
• Sometimes GDP grows above the trend; at other times
GDP falls below the trend
• A business cycle is the upward or downward movement
of economic activity, or real GDP, that occurs around the
growth trend
• Economists debate the causes of business cycles
• Keynesians generally favor activist government
policy
• Classicals generally favor laissez-faire policies
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U.S. BUSINESS CYCLES
Business cycles have always been
a part of the U.S. economic scene
Percentage fluctuations
in real GDP around trends
20
World War II
Recovery
of 1895
10 Civil War
World War I
Korean Vietnam
War
War
0
-10
Panic
of 1863
-20
1860
1800
Panic
of 1907
1900
Great
Depression
1920
1940
1960
1980
2000
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THE PHASES OF THE BUSINESS CYCLE
• The four phases of the business cycle are:
• The peak
• The downturn
• The trough
• The upturn
• A recession is a decline in real output that persists for more
than two consecutive quarters of a year
• A depression is a large recession
• An expansion is an upturn that lasts at least two consecutive
quarters of a year
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BUSINESS CYCLE
PHASES
Total
Output
Boom
Peak
Secular
Growth
Trend
Trough
Expansion
Recession
Expansion
Quarters
1
2
3
4
1
2
3
4
1
2
3
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WHY DO BUSINESS
CYCLES OCCUR?
Duration (in months)
Pre-World War II
(1854 – 1945)
Post-World War II
(1945 – 2006)
Number
22
11
Average duration
50
67
Length of longest cycle
99 (1870-79)
128 (1991-2001)
Length of shortest cycle
28 (1919-21)
28 (1980-82)
29
28
Length of shortest expansion
10 (1919-20)
12 (1980-81)
Length of longest expansion
80 (1938-45)
120 (1991-2001)
21
10
Length of shortest recession
7 (1918-19)
6 (1980)
Length of longest recession
64 (1873-79)
16+ (2007-)
Business Cycles
Ave. length of expansions
Ave. length of recessions
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LOOK AT PHASES
Go to Phases of Business
Cycle power points before going to the
leading indicators.
LEADING INDICATORS
• Average work week
• Unemployment claims
• New orders for consumer
goods
• New orders for capital
goods
• Building permits
• Stock prices
• Vendor performance
• Interest rate spread
• Index of consumer
expectations
• Money supply, M2
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GDP, CYCLES, WHO
CARES?
15
Why do we care about all of
this fancy verbiage?
UNEMPLOYMENT
• The unemployment rate is the percentage of people
who are willing and able to work but who are not
working
• Cyclical unemployment is that which results from
fluctuations in economic activity
• Structural unemployment is that caused by the
institutional structure of an economy or by economic
restructuring making some skills obsolete
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UNEMPLOYMENT AS A SOCIAL PROBLEM
• The Industrial Revolution changed the nature of work
and introduced unemployment as a problem for society
• There was a shift to wage labor and to a division of
responsibilities
• The Industrial Revolution created the possibility of
cyclical unemployment and changed how families dealt
with unemployment
• Early capitalism had an unemployment solution:
the fear of hunger
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UNEMPLOYMENT AS GOVERNMENT’S
PROBLEM
• As capitalism evolved, the fear of hunger was no longer
an acceptable answer to unemployment
• In the Employment Act of 1946, the U.S. government
took responsibility for unemployment
• Full employment is an economic climate where nearly
everyone who wants a job has one
• Frictional unemployment is unemployment caused
by people entering the job market and people quitting
a job just long enough to look for and find another job
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TARGET RATE OF UNEMPLOYMENT
• The target rate of unemployment is the lowest
sustainable rate of unemployment that policy makers
believe is achievable under existing conditions
• The appropriate target rate of unemployment is
debatable, but most economists place it around 5%
• The target rate of unemployment changes due to:
• Inflation rates
• Demographics
• Social and institutional structures
• Changing government institutions
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WHOSE RESPONSIBILITY IS
UNEMPLOYMENT?
• Classical economists believe that individuals are
responsible for their own jobs
• If people really want a job, they will find one
• Keynesian economists tend to say that society owes
people jobs commensurate with their training or past
job experience
• Jobs should be close enough to home so that
people don’t have to move
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UNEMPLOYMENT RATE
SINCE 1900
Percentage of labor force
unemployed
30
In the mid-1940s, the U.S. government
started focusing on the unemployment rate
as a goal, and initially chose 2%, but it was
gradually increased to around 5%
20
Target rate
10
0
1900
1920
1940
1960
1980
2000
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CHAPTER SUMMARY
• Economists use two frameworks to analyze
macroeconomic problems:
• The long-run growth framework focuses on supply
• The short-run business cycle framework focuses
on demand
• Growth is measured by the change in:
• Real gross domestic product (GDP)
• Per capita real GDP
• The secular trend growth rate of the economy is 2.5% to
3.5%
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CHAPTER SUMMARY
• Business cycles are fluctuations of real output around
the secular growth trend
• Phases of the business cycle are peak, downturn,
trough, upturn
• Unemployment is calculated as the number of
unemployed people divided by the labor force
• Unemployment rises during a recession and falls during
an expansion
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CHAPTER SUMMARY
• The target rate of unemployment is the lowest sustainable
rate of unemployment possible under existing institutions
• The lower the target rate of unemployment, the higher an
economy’s potential output
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