Eco 6351 Economics for Managers Chapter 10a. The Business Cycle Prof. Vera Adamchik

Macroeconomics Macroeconomics is the study of aggregate economic behavior, of the economy as a whole.

Chapter Outline The most important macroeconomic indicators: Output (GDP) Unemployment Inflation

Gross Domestic Product is the total value of all final goods and services produced for the marketplace during a given time period (usually a year) within the nation’s borders

How Much Output

Nominal GDP The total value of each good produced is determined by multiplying the physical output of each good by its current price.

Real GDP Nominal GDP has shortcomings in that either prices or an increase in physical output can cause nominal GDP to increase. Real GDP is the inflation-adjusted value of GDP. Inflation adjustments delete the effects of rising prices by valuing output in constant dollars.

Inflation Adjustments

Business cycles The business cycle is the alternating periods of economic growth and contraction experienced by the economy. Every business cycle has two phases: (1) a recession and (2) an expansion; and two turning points: (1) a peak and (2) a trough.

Very often a business cycle is associated with the up-and-down movements in production, that is, with fluctuations in real GDP around potential GDP.

Erratic growth Real GDP doesn’t increase in consistent, smooth increments. It has been a series of steps, stumbles and setbacks.

Expansions and recessions An expansion is a period during which real GDP increases. A recession is a period during which real GDP decreases. As a short-hand definition of a recession, some economists use the rule of thumb that it usually involves at least two consecutive quarters of declining real GDP.

Trough Growth trend Peak REAL GDP (units per time period) TIME Peak Trough The business cycle

Annual growth GROWTH RATE (percent per year) Long-term average growth (3%) Recession Zero growth The business cycle in U.S. history

A broader view on a business cycle The National Bureau of Economic Research (NBER) uses a more nuanced approach to defining a business cycle. It avoids using GDP as an indicator because it is a quarterly, not a monthly, series and because it is revised frequently. Instead, it looks at four factors: payroll employment trends, real income, industrial production and wholesale-retail sales, with special emphasis on employment.

The US business cycles identified by the NBER