Chapter 1 Introduction to Macroeconomics. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 8-2 Figure 1.1 Output of the U.S. economy, 1869–2002

Chapter 1

Introduction to Macroeconomics

Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 8-2

Figure 1.1 Output of the U.S. economy, 1869–2002


Figure 1.2 Average labor productivity in the United States, 1900–2002


Figure 1.3 The U.S. unemployment rate, 1890–2002


Figure 1.4 Consumer prices in the United States


Figure 1.5 U.S. exports and imports, 1869–2002


Figure 1.6 U.S. Federal government spending and tax collections, 1869–2002


The USA are, among the big countries, the area where p.c. GDP is highest. However, the share of world income produced in the USA has been steadily declining for the last fifty years.

GDP (PPP bill. dollars) in 2003 Share of World GDPChina 8,877 14%EU-25 12,079 19%JAPAN 4,168 6.5%USA 13,049 20%

The nations considered in the table above account for about 60% of world GDP. In 1950 the share of world GDP was 27.3% for the USA, 26.3% forWestern Europe and only 7.5% for China and Japan combined


The value of GDP is computed using current prices. However, GDP may grow over time both because more goods are produced or because prices have risen.

Real GDP is the value of the final goods and services producedin the economy during a given year (or quarter) using Constant Prices, i.e., prices prevailing in a pre-specified period (base year).

GDP Deflator is the ratio of nominal to real GDP, i.e.,

DE = GDP/GDPR

= price of aggregate production during a given year relative to the price of aggregate production in the base year.

A review of Nominal GDP, Real GDP and GDP Deflator


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Chapter 8

Business Cycles


Figure 8.1 A business cycle


Economic variables show comovement

(they have regular and predictable patterns of behavior over the course of the business cycle)

The business cycle is recurrent, but not periodic

(Recurrent means the pattern of contraction–trough–expansion –peak occurs again and again)

(Not being periodic means that it doesn’t occur at regular, predictable intervals)


The business cycle is persistent

a. Declines are followed by further declines; growth is followed by more growth

b. Because of persistence, forecasting turning points is quite important


All business cycles have features in common

The cyclical behavior of economic variablesdirection and timing

1. What direction does a variable move relative to aggregate economic activity?

Procyclical: in the same direction

Countercyclical: in the opposite direction

Acyclical: with no clear pattern


2. What is the timing of a variable’s movements relative to aggregate economic activity?

Leading: in advance

Coincident: at the same time

Lagging: after


durable goods production is more volatile than nondurable goods and services;

investment spending is more volatile than consumption

Volatility:

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Table 8.1 NBER Business Cycle Turning Points and Durations of Post–1854 Business Cycles


Great Depression of the 1930s

a. Real GDP fell nearly 30% from peak in August 1929 to trough in March 1933

b. The unemployment rate rose from 3% to nearly 25%

c. Thousands of banks failed, the stock market collapsed, many farmers went bankrupt, and international trade was halted

d. By May 1937, output had nearly returned to its 1929 peak, but the unemployment rate was high (14%)


The Great Depression ended with the start of World War II

a. Wartime production brought unemployment rate below 2%

b. Real GDP almost doubled between 1939 and 1944


Post–World War II business cycles

1. From 1945 to 1970 there were five mild contractions

2. The longest expansion on record was 106 months, from February 1961 to December 1969

3. Some economists thought the business cycle was dead

4. But the OPEC oil shock of 1973 caused a sharp recession, with real GDP declining 3%, the unemployment rate rising to 9%, and inflation rising to over 10%


5. The 1981–1982 recession was severe, with unemployment rate over 11%, but inflation declining from 11% to less than 4%

6. The 1990–1991 recession was mild and short, but the recovery was slow and erratic

The “long boom”

1. From 1982 to the present, only one brief recession, from July 1990 to March 1991

2. Expansion from 1991 to 2002 is longest in U.S. history


Figure 8.2 Index of industrial production, January 2000–April 2003

peak


Figure 8.3 Total nonfarm employment, January 2000–April 2003

peak


Figure 8.4 Cyclical behavior of the index of industrial production


Figure 8.5 Cyclical behavior of consumption and investment


Figure 8.6 Cyclical behavior of civilian employment


Figure 8.7 Cyclical behavior of the unemployment rate


Figure 8.8 Cyclical behavior of average labor productivity and the real wage


Figure 8.9 Cyclical behavior of nominal money growth and inflation


Figure 8.10 Cyclical behavior of the nominal interest rate


The cyclical behavior of key economic variables in other countries is similar to that in the United States

International aspects of the business cycle


Figure 8.11 Industrial production indexes in six major countries


A) What explains business cycle fluctuations?

2 major components of business cycle theories

a. A description of the shocksb. A model of how the economy responds to shocks

2 major business cycle theories

a. classical theoryb. Keynesian theory3. Study both theories in aggregate demand-aggregate supply (AD-AS) framework

Business Cycle Analysis: A Preview


Figure 8.12 The aggregate demand–aggregate supply model

Y = F(K,L)M = kpY

p


Figure 8.13 An adverse aggregate demand shock


Figure 8.14 An adverse aggregate supply shock


1. Should the Government Try to Prevent Recessions?

2. How long it takes to get to long-run?

3. Do Recessions Have Any Positive Economic Effects?

QUESTIONS

Documents

Chapter 1 Introduction to Macroeconomics. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 8-2 Figure 1.1 Output of the U.S. economy, 1869–2002