ECON-2120 Lecture Notes - Lecture 3: Procyclical And Countercyclical, Great Moderation, Transfer Payment

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8 Feb 2017
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Lecture 3
Chapter 6 cont.
Econ 2120 - Macroeconomics
Recession “a significant, widespread decline in economic activity spread across the
economy, lasting for more than a few months, normally visible (as a decline) in the real
GDP, real income, employment, industrial production, and wholesale-retail sales” –
National Bureau of Economic Research
Great moderation for U.S. was from 1982-2007, period of stable economy
There is no regularity in the amplitude and frequency of fluctuations in the real GDP
Procyclical when growth rates of a macroeconomic variable are positively correlated
with the real GDP
Countercyclical when growth rates of a macroeconomic variable are negatively
correlated with the real GDP
Acyclical when growth rates of a macroeconomic variable are neither procyclical or
countercyclical
Expenditure approach adds up the “final purchases” by different categories of society
o Consumption (C) by households
o Investment (I) by businesses
o Government (G) by government
o Net Exports (NX) by foreign sector
Economic meaning of investment purchase of new capital, machine, or equipment
o includes purchase of new-built homes
o new inventory (what we newly produced and purchased)
o does not include financial activities
Economic meaning of consumption purchase of new final goods and services by
households; does not include purchase of new homes
Expenditure Approach Equation:
o Y = C + I + G + NX (EX-IM)
Consumption and GDP
o Consumption is 2/3 of real GDP
o Consumption growth and real GDP growth are positively correlated
o Consumption growth is less volatile than real GDP growth
Investment and GDP
o Investment is 15% of real GDP
o Investment growth and real GDP growth are positively correlated
o Investment growth is more volatile than real GDP growth
Government Expenditures and GDP
o Government expenditures is 20% of real GDP
o There is no strong correlation between government expenditure growth and real
GDP growth acyclical
o Transfer payment is not government spending
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