Transcript The Business Cycle - McGraw Hill Higher Education

Chapter 10
The Business Cycle
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Macroeconomics
• Macroeconomics is the study of aggregate
economic behavior, of the economy as a
whole.
• A basic purpose of macroeconomic theory
is to explain the business cycle.
• Macro policy tries to control the business
cycle.
10-2
Assessing Macro
Performance
• There are three basic measures of macro
performance:
– Output (GDP) growth.
– Unemployment.
– Inflation.
10-3
GDP
• GDP is the total value of output (goods
and services) produced in an economy
during a given time period.
10-4
GDP Growth
• An economy’s potential output is reflected in
its production possibilities curve (PPC):
– Production possibilities – the alternative
combinations of goods and services that
could be produced in a given time period
with all available resources and technology.
• When there is GDP growth, the PPC shifts
outward.
10-5
The Business Cycle
• The business cycle is the alternating
periods of economic growth and
contraction experienced by the economy.
• It shows the rise and fall of the economy
over time.
10-6
Figure 10.1
10-7
Real GDP
• Business cycles are measured by changes
in real GDP:
– Nominal GDP is measured in current prices.
– Real GDP is the inflation-adjusted value of
GDP, the value of output measured in
constant prices.
10-8
Figure 10.2
10-9
The Great Depression
• This was the most prolonged departure
from our long-term growth path.
• Real GDP fell 30 percent from 1929 to
1933.
• The economy grew moderately from 1934
to 1936.
• Another decline occurred in 1936–1937.
10-10
The Great Depression
• Real GDP in 1939 was virtually the same as
in 1929.
• GDP per capita was lower in 1939 than in
1929, meaning that Americans had a lower
standard of living in 1939 than they did 10
years earlier.
10-11
Recession
• A recession is a decline in total output
(real GDP) for two or more consecutive
quarters.
• It is a slump or downturn in the economy.
10-12
Recent Recessions
• 1981–1982: Lasted 16 months, with an
unemployment rate of 10.8 percent, the
highest since the 1930s.
• 1990–1991: A brief 8-month recession.
• 2001: Another 8-month recession.
• 2008–2009: Failures in financial and real
estate markets led to a significant decline
in real GDP and 10 percent
unemployment.
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Unemployment
• Unemployment is the inability of labor
force participants to find jobs.
• When output declines, jobs are
eliminated.
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The Labor Force
• The labor force consists of everyone over
the age of 16 who is actually working, plus
all those who are not working but are
actively seeking employment.
• This includes about half of the total
population.
10-15
Figure 10.3
10-16
The Unemployment
Rate
• The unemployment rate is the proportion of the
labor force that is unemployed:
Unemployment rate = Number of unemployed
Number in labor force
10-17
Figure 10.4
10-18
The Policy Goal
• The goal is to avoid as much cyclical
unemployment as possible.
• To try to achieve full employment.
• Full employment is the lowest rate of
unemployment compatible with price
stability:
– It is estimated to be between 4 and 6 percent.
10-19
Inflation
• The biggest fear as an economy reaches
full employment is inflation.
• As an economy reaches its production
possibilities, prices will begin to rise as:
– Demand for goods outstrip supply.
– Costs of production rise.
10-20
Relative versus
Average Prices
• The relative price is the price of one good
in comparison with the price of other
goods.
• It is possible for individual prices to rise or
fall continuously without changing the
average price level.
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Relative versus
Average Prices
• Relative changes can occur in a period of
stable average prices.
• Changes in relative prices are market
signals that help reallocate resources in
the economy.
• In a general inflation – when all prices are
rising – prices do not help to reallocate
resources.
10-22
Figure 10.5
10-23
Measuring Inflation
• Consumer Price Index (CPI) – a measure of
changes in the average price of consumer
goods and services.
• Inflation rate – the annual rate of increase
in CPI.
10-24
Measuring Inflation
• CPI relates current prices to prices that existed
in 1982–1984, when CPI was set to 100.
• A current CPI of 230 in 2013 means that it
takes $230 to buy what $100 could buy in
1983.
10-25
Price Stability and
Policy Goal
• Price stability is the absence of significant
changes in the average price level.
• The Full Employment and Balanced
Growth Act of 1978 establishes a goal for
economic policy to hold the rate of
inflation at under 3 percent.
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The Policy Goal
• Congress weighs the tradeoff between
inflation and full employment.
• Zero percent inflation might harm the goal
of full employment.
• Three percent inflation was determined to
be a safe target.
10-27