Transcript ECON-3.23-4.2.12 Business Cycles

Chapter 14
Business Cycles and Economic
Growth
AGENDA Fri 3/23 & Mon 4/2
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QOD # 23: Economic Growth
Review HW
Business Cycles
Economic Indicators
HW: R& R
QOD #23: Economic Growth
• Suppose you heard on the nightly news that the
United States economy is experiencing growth.
– What do you think this means?
– How might you see this in observable reality? In
other words, what evidence would there be of the
growth?
– How might this impact your life? Would it be for the
better or the worse?
Business Cycles
• If real GDP is on a roller-coaster – rising and
falling - the economy is said to be on a
business cycle.
– business cycles – recurrent swings (up and down)
in real GDP
– recession – a slowdown in the economy marked by
real GDP falling for two consecutive quarters
• The typical business cycle is four to five years.
Business cycle
Here are the typical 5 phases of
the business cycle:
1. Peak: When the real GDP is temporarily
high.
2. Contraction: If the real GDP decreases,
the economy is said to be in a contraction.
If real GDP declines for two consecutive
quarters (four in per year), the economy is
in a recession.
Here are the typical 5 phases of
the business cycle:
3.Trough: The low point in real GDP, just
before it begins to turn up.
4.Recovery: The period when real GDP is
rising.
5.Expansion: Refers to increases in real
GDP beyond the recovery
Business cycle
Questions?
1. How many business cycles has the
United States gone through since WWII?
2. How long did the contraction period of
the Great Depression last?
3. When did the latest contraction begin?
Answer
1. 10 cycles (last peak 2007)
2. 43 months
3. Dec 2007 (GDP ↑ July 2009, but end TBD)
• between 1854 and 1991 the US has been
through thirty-one business cycles
– average business cycle was fifty-three months
– average time from peak to trough is 18 months
– average time from trough to next peak was 35
months
Can you Forecast Business Cycles?
• A fever can be called a coincident indicator of
the flu; it coincides with the upturns and
downturns of the illness.
• Similarly, in the economy coincident indicators
coincide with economic upturns and downturns.
Forecasting business cycles
• Economists have devised a few indicators of the
health and sickness of the economy
• Leading indicators -lead economic upturns and
downturns, will rise before an upturn and fall before a
downturn
• stock market, money supply, consumer confidence
• Coincident indicators- coincide with economic
upturns and downturns, reaches its high point with
peak and low point with the trough
• unemployment rate
• Lagging indicators- lag behind economic upturns
and downturns, reaches its peak after the peak and its
low after the trough
• personal income
Stock prices
• Are stock prices a leading, coincident, or a
lagging indicator of the economy?
Here are 10 Leading Economic
Indicators:
1) Average weekly hours, manufacturing.
2) Average weekly initial claims for unemployment
insurance.
3) Manufacturers’ new orders, consumer goods and
materials.
4) Vendor performance, slower deliveries, diffusion index.
5) Manufacturers’ new orders, nondefense capital goods.
6) Building permits, new private housing units.
7) Stock prices
8) Money supply
9) Interest rate spread, 10-year Treasury bonds
10) Consumer price index
What Causes The Business Cycle?
Different economists identify different causes of the business
cycle.
• Money Supply
– changes in the money supply cause contraction and expansion
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Business Investment
Residential Construction and Government Spending
Politics
Innovation
– seeds of business cycles
• Supply Shocks
– changes affect the capacity to produce
• e.g. WW II, ME conflict
What Causes Economic Growth
• Natural Resources: With more natural resources a
country can produce more goods and services.
• Labor: With more labor, it is possible to produce more
output.
• Capital: This can lead to increases in labor productivity
and therefore to increase in output or real GDP.
• Technological Advances: This can make it possible to
obtain more output from the same amount of
resources.
• Incentives: Economic growth developed where people
were given the incentive to produce and innovate.
Economic Growth
• Economic Growth refers to either absolute
real economic growth or per-capita
economic growth.
• Absolute real economic growth- an
increase in real GDP from one period to
the next.
• Per-capita economic growth- an increase
from one period to the next in per-capita
real GDP, which is divided by population.
References
• Arnold, R (2001). Economics in our times,
2nd edition. Chicago, IL: National
Textbook Company .