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intro RSM part 2

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University of Toronto St. George
Rotman Commerce
Michael Szlachta

RSM Part 2 Examining the Present (Tracking current Business Cycle in US and Canada) Tracking the Current Cycle Introduce stabilization macro of ECO100 (how applies to current business cycle) What to watch out for and tools of analysis for short term macroeconomic environment Examine statements about how current cycle developed Boxes to understand eloements behind statement Statement 1 (The Recession) Late 2007 at least mid 2009, economy has undergone a slowdown in growth of GDP that then developed into serious recession Trend growth is usually positive, even positive, but below trend rate of growth counts as a SLOWDOWN. Generally, growth below trend unemployment eventually rises RECESSION period (2+ consecutive quarters) where GDP declines (negative growth) 81-82 and 90-91 downturns severity about same size, not larger Unemployment effect lags behind GDP effect Statement 2 (Sources of Recession) Several sources to slowdown and recession: Began with 1 key component of US GDP (namely residential construction). In Canada, initial impacts were net exports then inventories Details of GDP (Demand): o Consumption largest o Government Salaries + gs, not transfers o Investment Residential, Non-Residential Structures, Machinery & Equipment RSM Part 2 Page 1 nd o Exports 2 largest for Ca o Imports MINUS o Change in Inventories flows into or out of inventory stock (can be ve) Y (GDP) = C + I + G + X M + Invtry o = Consumption + Investment (includes housing) + Gov current spending + Exports Imports + Change in Inventories US initially chief weakness in GDP was in Residential Investment and in Inventories US net exports generally been +ve for GDP. Ca net exports been chief negative Ca Residential investment weak lately but not reduced GDP seriously Ca Inventories also started to become big negatives PAY ATTENTION TO DETAILS OF GDP! Source of slowdown (or boom) can give clues to how long may continue; also important for individual industries or sectors of the economy Statement 3 (US Slowdown Housing) Beginning of US economy was in REAL economy, not financial area (was centered in residential investment sector + was a standard and partly predictable stock adjustment effect due to previous over building. Inventories and automobiles also showed standard stock-adjustment behaviour Flows G & S purchased and used up very soon after o Called non-durables (also services) o Repeat expenditures (tastes may change) e.g. burgers, gas, movies Stock Some G and few S are durables (keeps adding) o Consumer durables (autos, TVs, DVDs, etc) o Residential Investment (+ renovations) RSM Part 2 Page 2
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