15. Principles of Economics (Brief Edition)_2e (17)

Chapter 17: Short-term Economic. . Identify the four phases of the business . Explain the primary characteristics of recessions. and . Define potential output, measure the output gap,. and analyze an economys position in the business. . Define the natural rate of unemployment and relate. it to cyclical . Apply Okuns law to analyze the relationship. between the output gap and cyclical . Discuss the differences between how the economy. operates in the short run and the long run. McGraw­Hill/Irwin Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved. Recessions and Expansions.• Business Cycles are short-term fluctuations in. GDP and other variables.• A recession (or contraction) is a period in. which the economy is growing at a rate. significantly below normal. – A period during which real GDP falls for two or more. consecutive quarters. – A period during which real GDP growth is well. below normal, even if not negative. – A variety of economic data are examined.• A depression is a particularly severe recession. 17­2 Recessions and Expansions.• A peak is the beginning of a recession. – High point of the business cycle.• A trough is the end of a recession. – Low point of the business cycle.• An expansion is a period in which the economy. is growing at a rate significantly above normal.• A boom is a strong and long lasting expansion. 17­3 Calling the 2007 Recession.• NBER declared a recession December 2007. – Previous recession ended November 2001. – 73 month expansion.• Four important monthly indicators used to date. recessions:. – Industrial production. – Total sales in manufacturing, wholesale, and. retail. – Non-farm employment. – Real after-tax household income.• Coincident indicators move with overall. economy 17­4 Short-Term Economic. Fluctuations.• Economists have studied business cycles for at. least a century. – Recessions and expansions are irregular in their. length and severity. – Contractions and expansions affect the entire. economy. • May have global impact. – Great Depression of the 1930s was worldwide. – US recessions of 1973 – 1975 and 1981 – 1982. – US recession that began in 2007 17­5 Symptoms of Business Cycles.• Cyclical unemployment rises sharply during. recessions. – Decrease in unemployment lags the recovery. – Real wages grow more slowly for those employed. – Promotions and bonuses are often deferred. – New labor market entrants have difficulty finding. work.• Production of durable goods is more volatile. than services and non-durable goods. – Cars, houses, capital equipment less stable 17­6 Potential Output.• Potential output, Y* , is the maximum sustainable. amount of output that an economy can produce. – Also called full-employment output. – Use capital and labor at greater than normal rates and. exceed Y* – for a period of time.• Potential output grows over time.• Actual output grows at a variable rate. – Reflects growth rate of Y*. • Variable rates of technical innovation, capital. formation, weather conditions, etc – Actual output does not always equal potential output 17­7 Output Gaps.• The output gap is the difference between the. economy’s actual output and its potential output,. relative to potential output, at a point in time. Output gap = [(Y – Y*)/Y*]x100. – Recessionary gap is a negative output gap; Y* > Y. – Expansionary gap is a positive output gap; Y* <