1. MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT
1/3/2019
MACROECONOMICS AND THE GLOBAL BUSINESS ENVIRONMENT
2nd edition
Business Cycles
PowerPoint by Beth Ingram
University of Iowa
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved.

2. Key Concepts Business Cycle characterization
Recessions and Depressions
Frisch-Slutsky Paradigm
Real Business Cycle Theory

3. Business Cycle
Periodic fluctuations in macroeconomic variables, particularly GDP
Measurement … growth versus cycle
De-trend
Consider growth rate

4. 1/3/2019
Real GDP
Japan
US/EU15
OECD data, converted to 2000 US dollars based on year 2000 exchange rates.

5. Business Cycle US Growth Rate EU15 Japan OECD data, 2000 base year
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Business Cycle US
Growth Rate
EU15
Japan
OECD data, 2000 base year

6. US/EU15 US
EU15
OECD data, 2000 base year

7. Japanese Real GDP Growth
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Japanese Real GDP Growth
I added these slides in because I think it shows how the detrending method influences how one perceives the data.
Linear Trend Growth Rate
First Difference Growth Rate

8. Co-movement in Macro Variables

9. French GDP, Consumption and Investment

10. French Real GDP and Unemployment

11. Business Cycle Facts Expansions are longer than recessions
Recessions are sharper than expansions

12. Expansions last longer than recessions

13. Recessions are sharper

14. The Changing Business Cycle?
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The Changing Business Cycle?

15. Business Cycle Facts
Cycles are correlated across regions and across countries
GDP is less volatile in more industrialized countries

16. Output Correlation Across US States, 1978 - 1998
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Output Correlation Across US States,

17. Real GDP, Germany and Peru
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Real GDP, Germany and Peru

18. 1/3/2019
Cost of Recessions
While 57.7% of the population see consumption fall by less than 2% in a recession, 0.9% see a fall of 10% or more

19. Business Cycle Paradigm
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Business Cycle Paradigm
Impulse
Propagation
Business Cycle
What are the impulses? Money, trade, supply shocks (oil, agriculture), fiscal spending
Propagation – here’s the real controversy.

20. AD – AS Model Price Level AD = C + I + G + X - IM AS = production P0
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AD – AS Model
Price Level
AD = C + I + G + X - IM
AS = production P0
We’re going to use this simple framework to think about RBC and Keynesian views of the business cycle. Y0
Real GDP

21. Shift in AD Price Level AD = C + I + G + X - IM AS = production P1 P0
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Shift in AD
Price Level
AD = C + I + G + X - IM
AS = production P1 P0
Here, we have increase in price and output due to increase in demand for goods and services. Y0 Y1
Real GDP

22. Shift in AS Price Level AD = C + I + G + X - IM AS = production P0 P1
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Shift in AS
Price Level
AD = C + I + G + X - IM
AS = production P0
Here, we have decrease in price and increase in output due to increase in supply of goods and services. P1 Y0 Y1
Real GDP

23. Fluctuations Increase in demand Increase in supply Increase in C, I, G
Increases prices and output
Increase in supply
Increase in labor, capital, TFP
Decreases prices and increases output

24. Real Business Cycle
Both growth and business cycles are caused by supply shocks
Business cycles are outcome of market mechanism
No role for government in changing the nature of business cycles

25. Increase Supply
Price Level AD AS P0 P1 Y0 Y1
Real GDP

26. Decrease Supply
Price Level AD AS P2 P0 Y2 Y0
Real GDP

27. Role of labor RBC story depends on shifts in labor
Increase in supply requires increase in quantity of labor
Increase in labor demand
Increase in wage
Increase in quantity of labor

28. Labor Market Real Wage W1 W0 N0 N1 Employment Labor Demand
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Labor Market
Real Wage
Labor Demand
Labor Supply W1 W0
Note the large adjustment in wages and small adjustment in employment. This means small shift in AS. N0 N1
Employment

29. Labor Market Real Wage W1 W0 N0 N1 Employment Labor Demand
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Labor Market
Real Wage
Labor Demand
Labor Supply W1 W0
Note the small adjustment in wages and large adjustment in employment. This means large shift in AS. N0 N1
Employment

30. Keynesian View
Prices, wages or interest rates may be sticky … may not adjust to equilibrate markets
Recessions caused by low demand for goods and services
Government must step in to shore up demand … policy can alter the business cycle.

31. Increase Demand
Price Level AD AS P1 P0 Y0 Y1
Real GDP

32. Decrease Demand
Price Level AD AS P0 P2 Y0 Y2
Real GDP

33. Increase Demand Price Level AD P1 P0 AS Y0 Y1 Real GDP 1/3/2019
Note small change in price and large change in output. Y0 Y1
Real GDP

34. Increase Demand AS Price Level AD P1 P0 Y0 Y1 Real GDP 1/3/2019
Note large change in price, small change in output. Y0 Y1
Real GDP

35. Increase Demand AS Price Level AD P2 P1 P0 Y0 Y1 Y2 Real GDP 1/3/2019
Note large change in price, small change in output. Y0 Y1 Y2
Real GDP

36. Keynesian story Increase in output due to increase in demand
In long run
Supply curve is vertical
Increase in AD just increases prices

37. Summary Characteristics of the cycle Shocks and propagation
Explanations
Demand side (Keynesian)
Supply side (Real Business Cycle)
Copyright © 2005 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained therein.