Bus-reading - 3 Current Global Business Cycles This chapter studies the short-term economic fluctuations called business cycles A business cycle

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3. Current Global Business Cycles This chapter studies the short-term economic fluctuations called business cycles. A business cycle involves phases in which real gross domestic product (real GDP) is expanding or contracting. A period of expanding real GDP–a boom–is typically accompanied by increases in other macroeconomic variables, such as consumption, investment, and employment, and with decreases in the unemployment rate. Conversely, a period of contraction–a recession–tends to feature decreases in consumption, investment, and employment, along with rises in the unemployment rate. The economy's total output, real GDP, is the key indicator of whether the economy is in a phase of expansion or contraction. Thus, to understand the nature of economic fluctuations, we will look first at the behavior of U.S.real GDP during the post- World War II period. 3.1. Cyclical Behavior of Real GDP–Recessions and Booms Is a recession inevitable after a war? There is a tendency for the economy to weaken following a war for the simple reason that government spending ordinarily declines substantially. The U.S. economy did experience recessions after WWII and after the Korean and Vietnam conflicts. But recession did not follow the Gulf War of 1991 and 2001. Recession did begin several months before the U.S. military efforts to eliminate terrorism. So whether or not a recession occurs and its severity depend on the extent to which private sector spending fills the gap left by any decrease in government spending that might occur following war. The blue graph in Figure 3.1 shows U.S. real GDP on a quarterly basis from 1947.1 (the first quarter of 1947) to 2006.1 (the first quarter of 2006). Figure 3.1. U.S. Real GDP, 1947–2006 The graph shows U.S. real GDP from 1947.1 to 2006.1. The data are quarterly, seasonally adjusted, and measured in dollars from the base year, 2000. We use a proportionate (or logarithmic) scale. Therefore, each change along the vertical axis represents the same proportionate or percentage change in real GDP.
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If we look at the graph of real GDP in Figure 3.1 we can think of the movements as reflecting two forces. First, there is the overall upward movement or trend in real GDP from 1947 to 2006. We think of this trend as reflecting long-term economic growth, the subject of the previous. Second, there are shorter-term fluctuations of real GDP around its trend. We think of these economic fluctuations as stemming from the business cycle–that is, from booms and recessions. We imagine that real GDP has two parts: (3.1) To break down real GDP into trend and cycle, we start by estimating the trend. A good measure of the trend is a reasonably smooth curve fit to the data on real GDP. In Figure 3.2, the blue graph shows real GDP. Trend real GDP is the red curve. This graph is a smooth curve drawn through the blue graph.
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Figure 3.2. Calculating the Trend of U.S. Real GDP, 1947–2006 The blue graph shows U.S. real GDP from Figure 3.1. The red curve is a smooth trend
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This note was uploaded on 10/02/2010 for the course INTB 3353 taught by Professor Prodan during the Spring '10 term at University of Houston-Victoria.

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Bus-reading - 3 Current Global Business Cycles This chapter studies the short-term economic fluctuations called business cycles A business cycle

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