Econ 1021 Chapter 10: Chapter 10

5 Pages
Unlock Document

Washington University in St. Louis
University College - Economics
University College - Economics Econ 1021
Bandyopadhay Sudeshna

Chapter 10: Short-Term Economic Fluctuations I. Economic Changes A. Basics 1. Short vs. Long Term a. Long Term Economic “Climate” • Small changes in the rate of economic growth has enormous effects on the living standards of individuals b. Short Term Economic “Weather” • However it is the short-term economic fluctuations that people mostly react to 2. Short Term Economic Fluctuations a. Recession (or contraction) is a period in which the economy is growing at a rate significantly below normal (informally a fall in real GDP for 2 consecutive quarters; NBER’s method is more complex) b. Depression is a particularly severe or protracted recession c. Expansion is a period in which the economy is growing at a rate significantly above normal d. Boom is a particularly strong and protracted expansion 3. Recessions and Expansions a. Peak • The beginning of a recession, the high point of economic activity prior to a downturn b. Trough • The end of a recession, the low point of economic activity prior to a recovery c. The Business Cycle Dating Committee (several economists) of the NBER call the shots and determine when we are in a recession or expansion d. They look at the following coincident indicators • Industrial Production (output of factories and mines) • Total sales in Manufacturing, wholesale and retail trade • Non-farm employment (number of people at work outside agriculture • Real after-tax income received by households, excluding transfers like Social Security 4. Recessions History a. Aug. 1929 - March 1933: 43 month economic collapse called the Great Depression (unemployment rate 25%) b. The worst postwar recessions were: • 1973-75, 16 months, 8.5% unemployment rate • 1981-82, 16 months, 9.7% unemployment rate • 2007-09, 18 months, 10.1% unemployment rate c. Two mild recessions in recent times • 1990-91 (8 months) • March - Nov., 2001 (8 months) d. The Great Recession • Dec 2007 to June 2009, 18 months • The last recession began in Dec 2007 (peak) and ended in June 2009 (trough) – a duration of 18 months. • Trough dates for some of the coincident indicators were: i. Real manufacturing and trade sales (June) ii. Index of Industrial Production (June) iii. index of monthly Real Gross Domestic Income GDI (July) iv. Real personal income less transfers (October) v. Aggregate hours of work in the total economy (October) vi. Payroll survey employment (December) vii. Household survey employment (December) • GDI includes undistributed corporate profits while Real personal income less transfers does not. Given that GDP and GDI were growing strongly by 4 th quarter of 2009, June 2009 was chosen as the end of the last recession 5. Expansions History a. Expansions have been longer than recessions. Strong expansions occurred during b. 1933-37 c. 1961-69, 106 months d. 1982-90, 96 months e. 1991-2001, 10 years, 120 months with exceptionally strong growth during 1995- 2000 f. Nov 01 – Dec 07, 6 years, 73 months g. July 2009 – present (Mar 2017) B. Short-Term Economic Fluctuations 1. Basics a. Short-term economic fluctuations are called business cycles or cyclical fluctuations b. They are irregular in length and severity c. They are felt throughout the economy and may have a global effect • Great Depression of the 1930s was worldwide • US recessions of 1973 – 1975 and 1981 – 1982 • East Asian slowdown in the late 1990s d. Unemployment is a key indicator of short-term economic fluctuations. Cyclical Unemployment is associated with recessions. • Unemployment rate rises sharply during recessions and recovers more slowly during expansions • Real wages grow more slowly during recessions and may even fall • Workers are less likely to receive promotions or bonuses • New labor market entrants have a much tougher time finding attractive jobs e. Industries that produce durable goods (cars, houses) are more affected than non- durable & service industries f. Recessions are usually followed by a decline in inflation and many have been preceded by an increase in inflation 2. Potential Output a. Potential Output, Y* (or potential real GDP or full-employment output) is the amount of output (real GDP) that an economy can produce when using its resources, such as capital and labor, at normal rates. It is the maximum sustainable output b. It is not maximum output as a nation’s resources can be used at a greater-than- normal-rate, at least for short periods of time c. Potential output typically grows over time reflecting increases in both the amount and productivity of L and K d. May be possible in very short run to be outside the PPF shortly (ie overtime), but not possible in the long run • When Y < Y* (output less than potential output)  actual GDP < potential GDP  recessionary period • The output gap = Y – Y* (negative if recessionary, positive if expansionary) 3. Reasons for Short-Term Output Fluctuation a. Two reasons • Changes in potential output (US expansion of 1990s, Japanese recession of the 1990s) • The fact that actual output may not equal potential output. b. The rate of output growth may reflect changes in the rate at which the country’s potential output is increasing • Changes in Technology, Capital Investment, Immigration can all affect Y . * • When a recession results from slow
More Less

Related notes for University College - Economics Econ 1021

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.