The Business Cycle

Economic growth

• Measured in 2 ways

1. increase in real GDP over a specific time period

OR

2. increase in real GDP per capita over a specific time period

Growth as a goal

• Economic growth is a basic goal, especially if you have a growing population

• Growth lessens the burden of scarcity

The math

• Rule of 70

Approximate no. 70

of years required = _____________

to double real GDP annual percentage

rate of growth

Calculate China’s Potential Growth

• In the last quarter of 2011, the growth of China’s GDP was 9 %

• How long will it take China to double it’s current GDP?

• In the last quarter of 2011, the growth of our GDP was 2.3%. How long would it take to double our GDP at that rate?

What is the business cycle?

• Systematic ups and downs of real GDP, marked by periods of recession and expansion

Two main phases :

•RECESSION

•EXPANSION

Recession

• A recession is defined as 2 or more consecutive quarters with negative GDP growth

• As of March 2009, we have been in a recession for about 1 year

What does the business cycle look like?

Business cycle in extreme

• Great Depression : 1929-1945

-between 1929 and 1933, GDP fell by 50%

- unemployment increased 800%, from

1.6 million to 12.8 million

-avg. wage dropped from .55/hr to .05/hr

Since WW2

• Short recessions/contractions

• Long recoveries/expansions

Predicting Business Cycles

• Use ECONOMETRIC MODELSC+I+G+(X-M)

Figures updated each quarter, then again within each quarter

• Leading indicators

monthly statistical series usually turns down before a recession

Possible Causes

• Innovation

• Productivity

• Level of spending

Impact

• Production of capital goods/durable goods hardest hit

• Service industries and nondurable goods not impacted as much