Review_20100203

Review_20100203 - Econ 202 (Winter 2010): review Carl Walsh...

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Unformatted text preview: Econ 202 (Winter 2010): review Carl Walsh February 3, 2010 These notes are designed to brie&y summarize the main topics we have cov- ered in 202. 0.1 Overview of course and Measuring business cycles 1. What is a business cycle? (a) The term business cycle or economic cycle refers to the &uctuations of economic activity (business &uctuations) around its long-term growth trend. The cycle involves shifts over time between periods of rela- tively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These &uctuations are often measured using the real gross domestic prod- uct. Despite being termed cycles, these &uctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern. (Wikipedia, 1/9/09) 0.2 Data issues 1. Some aggregate data issues review denition of GDP and real GDP. 2. Chain-weighted GDP see lecture notes on chained GDP. 3. Detrending data we can think of most macroeconomic variables as con- sisting of a trend component and a cyclical component: x t = x T t + x C t (a) Examples: i. Deterministic trends: x T t = a + bt x T t = a + bt + ct 2 1 ii. Formula for the HP &lter: min T X t =1 & x t & x T t 2 + & T X t =1 h & x T t +1 & x T t 2 & & x T t & x T t & 1 2 i For quarterly data, standard value of & is 1600 , for annual & = 6 : 25 , for monthly & = 100000 . (b) Lots of ways of separating the observed variable x into its unobserved trend and cyclical components, and di/erent methods can potentially produce di/erent results an issue to keep in mind when you do empirical work. 4. Other data issues that can make it hard to assess the current state of the economy (see Davig reading): (a) Real time data issues. (b) Measurement error versus forecast error. 1 Output &uctuations 1.1 Business cycles in real time and costs of business cy- cles 1. Costs of business cycles Lucas asked how much consumption a rep- resentative household would be will to give up to eliminate the cyclical uctuations in consumption. (a) His answer was not much. Question: What is missing from the Lucas calculation? 2 Labor markets 2.1 Unemployment 1. Natural rate of unemployment the unemployment rate associated with full employment. 2. CBOs estimate, role of demographics (a) Composition e/ects. u t = U t LF t = P U i;t LF t = X LF i;t LF t U i;t LF i;t = X LF i;t LF t u i;t 2 (b) Overall unemployment rate can change if the composition of the labor force changes, even if the unemployment rates for each group remain unchanged. (c) See Brauer&s gure 2. Case 1 The rise and then fall of the natural rate of unemployment as the baby boom generation &rst began entering the labor force and then reaching middle age....
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Review_20100203 - Econ 202 (Winter 2010): review Carl Walsh...

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