Transcript Document
Slide 12 - 0 Short-Term Economic Fluctuations: An Introduction Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 1 Long Run vs. Short Run The economic “climate” Long-run economic conditions are the ultimate determinant of living standards Changes in the economic “weather” Short-run fluctuations are important to our day-to-day existence Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 2 Recessions Recession [or Contraction] A period in which the economy is growing at a rate significantly below normal A period during which real GDP falls for at least 6 consecutive months Recent recessions have lasted between 6 and 16 months Depression A particularly severe or protracted recession Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 3 Recessions Duration Length of recessions Peak The beginning of a recession The high point of economic activity prior to a downturn Trough The end of a recession The low point of economic activity prior to a recovery Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 4 Fig. 12.1 Fluctuations in U.S. Real GDP, 1920-1999 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 5 Expansions Expansion A period in which the economy is growing at a rate significantly above normal Normally lasts longer than recessions Boom A particularly strong and protracted expansion Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 6 Cyclical? Cyclical fluctuations Business cycles Might imply that economic fluctuations are regular However, economic fluctuations are quite irregular in their length and severity Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 7 Fig. 12.2 U.S. Inflation, 1960-1999 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 8 Characteristics of SR Fluctuations Expansions and recessions are Felt throughout the economy and often globally Felt not just in a few industries The unemployment rate Typically rises sharply during recessions Rises because of cyclical unemployment Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 9 Characteristics of SR Fluctuations Recessions Tend to be preceded by inflation Tend to bring lower inflation rates Durable goods Cars, houses, capital equipment Sensitive to fluctuations Services and nondurables Food Much less sensitive to fluctuations Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 10 Potential Output Potential output or Potential real GDP Full employment output The amount of output (real GDP) that an economy can produce when using its resources, such as capital and labor, at normal rates Grows over time Y* Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 11 Causes of Recession A recession occurs when the economy is growing significantly below its normal rate Two possibilities Actual output equals potential output, but potential output is growing slowly Appropriate policy responses include long-run solutions (Part VI) Promote saving, investment, technological innovation, human capital formation Actual output does not always equal potential output (i.e., a recessionary gap) Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 12 Output Gaps Output gap (Y* - Y) The difference between the economy’s potential output and its actual output at a given point in time Y is actual real GDP Y* is potential real GDP Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 13 Gaps Recessionary gap (Y* > Y) A positive output gap, which occurs when potential output exceeds actual output A condition when an economy’s capital and labor resources may not be fully utilized Expansionary gap (Y* < Y) A negative output gap, which occurs when actual output is higher than potential output A condition when an economy’s resources are being over-utilized Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 14 Fig. 12.3 Actual and Potential Output in Japan, 1980-2000 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 15 Unemployment and Gaps During a recessionary gap Low utilization of resources occurs A high unemployment rate causes output to fall below potential During an expansionary gap Over utilization of resources occurs Low unemployment rate Hence, output is higher than potential Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 16 Types of Unemployment Frictional Short-term matching of workers and jobs Always present Structural Long-term chronic—mismatch of skills of workers and skills required for jobs Always present Cyclical Extra unemployment during periods of recession Only present during recessions Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 17 Natural Rate of Unemployment Natural rate of unemployment [u*] The part of the total unemployment rate that is attributable to frictional and structural unemployment The unemployment rate that prevails when cyclical unemployment equals zero The unemployment rate that exists when an economy has neither an expansionary gap nor a recessionary gap Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 18 Cyclical Unemployment Cyclical unemployment: u - u* Actual unemployment rate: u Natural rate of unemployment: u* Recession u – u* is positive (u > u*) Positive cyclical unemployment Expansion u – u* is negative (u < u*) Negative cyclical unemployment: Labor is being used more intensively than normal Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 19 Okun’s Law Okun’s Law Each extra percentage point of cyclical unemployment is associated with about a 2 percentage point increase in the output gap Measured in relation to potential output Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 20 Significant Costs Output gaps and cyclical unemployment have significant costs 1982 recessionary gap = $357 billion, in 1992 dollars 1982 U.S. population = 230 million Hence, the output loss was around $1,550 per person or about $6,000 per family Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Slide 12 - 21 Reasons for Output Gaps 1. Some prices adjust slowly Firms “meet the demand” at a preset price in the short run 2. Economy-wide spending changes Major cause of output gaps 3. Firms change prices Raise prices in response to expansionary gaps Lower prices in response to recessionary gaps 4. Economy self-corrects Tends to eliminate output gaps in the long run Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.